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Op-Ed

Pass Trade Promotion Authority and enable conclusion of the Trans-Pacific Partnership negotiations

Joshua P. Meltzer

Since 2008, the U.S. has been negotiating the Trans-Pacific Partnership (TPP) agreement with 11 other countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. This agreement is highly significant, as the total gross domestic product (GDP) of the current TPP parties is approximately $27.7 trillion—comprising 40 percent of global GDP and one-third of world trade. The TPP will produce economic and broader strategic gains for the U.S.

The TPP negotiations are now at the point where most of the issues have been resolved save for the most difficult ones. Now, in order for the United States Trade Representative (USTR) to complete the TPP will require Congress to first pass Trade Promotion Authority (TPA). Under TPA Congress determines the administration’s negotiating objectives and agrees to refrain from seeking to amend a signed agreement and instead to limit itself to an up or down vote on the entire TPP agreement. The president is also required to consult Congress during the negotiations and notify Congress 90 days prior to signing an agreement.Without TPA, following presentation of the signed TPP agreement to Congress, Congress could require USTR to seek additional concessions from other TPP parties. Therefore, the TPP parties are unlikely to put their last best offer on the table in the absence of TPA.

Globalization and the development of regional economic arrangements in the Asia-Pacific region will occur whether or not Congress passes TPA.

TPA was most recently granted by the 2002 Trade Act, which expired in 2007.
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The negotiating objectives in the 2002 Trade Act were updated by the 2007 Bipartisan Trade Deal. USTR continues to follow the terms of the Trade Act and Bipartisan Trade Deal in the TPP negotiations and their consultations with Congress. 

As Congress considers whether to pass TPA and thereby determine the success of the TPP, the stakes for the U.S. in terms of global economic leadership are real. Globalization and the development of regional economic arrangements in the Asia-Pacific region will occur whether or not Congress passes TPA. The real issue is whether the U.S. is going to lead how globalization proceeds, ensuring that it reflects U.S. values and underpins U.S. economic growth, or instead whether others are going to determine how the global economy develops.

The economic significance of the TPP

The TPP will produce economic gains for the U.S. According to Peter Petri and Michael Plummer, concluding a comprehensive TPP agreement will boost U.S. income by $77 billion annually. Expanding the TPP to an Asia-Pacific Economic Cooperation (APEC)-wide agreement would generate annual gains for the U.S. of over $266 billion.
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Despite these benefits, passing TPA in Congress remains controversial. Much of this reflects concern about the impact on jobs from international trade. As the U.S. has become an increasingly open country, the impact of globalization has led to job losses for some, particularly those working in manufacturing: Since 2000, the U.S. has lost around 5 million jobs in the manufacturing sector. While this number is significant, U.S. manufacturing represents about 12 percent of U.S. GDP and 12 percent of employment and involuntary worker displacement in the U.S. economy is typically on the order of 20 million layoffs per year.

At the same time, demand for goods in the U.S. has not kept pace with rising productivity and lower prices, with the result that the U.S. spends less on goods.

Some of these jobs losses have been due to trade: The estimates of job losses in the manufacturing sector attributable to trade range from 15-25 percent of the total.
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The rest has been due to long-term, above-average productivity gains in the manufacturing sector that have allowed companies to produce the same quantities of goods with less labor, which has reduced the relative price of manufactured products. At the same time, demand for goods in the U.S. has not kept pace with rising productivity and lower prices, with the result that the U.S. spends less on goods. For instance, in 1960, U.S. consumers spent approximately 50 percent of their income on goods, compared with 33 percent in 2010.
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U.S. manufacturing’s share of employment also has been declining since the 1950s, well before the World Trade Organization (WTO), North American Free Trade Agreement, or China’s entry into the world economy. Moreover, manufacturing as a share of employment has been declining in all OECD countries, including in Germany and Japan, which run trade surpluses.  

It is also the case that passing TPA and finalizing the TPP will not change U.S. openness to trade and investment in significant ways. The U.S. is already an open economy with tariffs averaging around 4 percent. There are tariffs peaks in some industries and reducing these in the TPP is subject to intense negotiations and any movement here will be balanced with gains elsewhere in the TPP agreement. The main costs to the U.S. of failing to pass TPA, and thus enabling USTR to complete the TPP, will be a lost opportunity to reduce the trade barriers in other TPP markets that are often much higher than in the U.S.   

The limited impact that the TPP will have on the already open U.S. economy underlines the point that a vote on TPA should not be seen as allowing globalization. Even in the absence of TPA or TPP, businesses will continue to trade and invest, people will travel and study, and international interaction will continue. What TPP will affect is the type of international environment that U.S. businesses and people confront. Completing TPP will underpin further development of the international economic system towards one that is open and rules-based, that addresses often rampant IP theft, supports foreign investment, and prioritizes market-led development.

In addition, TPP is not a deregulatory agenda. It is about getting the right rules in place and will require TPP governments to adopt appropriate labor and environmental protections. In short, the TPP will ensure an international economic system that continues to reflect U.S. values and supports U.S. economic growth.  

The TPP will be a comprehensive economic agreement. It will include commitments on goods, services, and investment as well as detailed rules that affect how economies are regulated. For instance, the TPP will require that countries allow for competition and enforce anti-trust laws, create rules that facilitate access to telecommunications infrastructure and financial services, commit to enabling e-commerce, and institute forms of governance and dispute settlement that are transparent and follow norms of due process.

On the goods side, over time the TPP will reduce tariffs to zero on almost all goods in the U.S. and the TPP trading partners whose tariffs are generally higher than ours. It will also include disciplines addressing non-tariff barriers to trade, such as domestic regulations that are unnecessarily burdensome on trade or that target imports only. Reducing barriers on trade in goods will improve the competitiveness of U.S. exports in TPP markets. Around 60 percent of U.S. imports are intermediate goods that are used to make other goods for domestic sale and further export. And the TPP will support this central position of the U.S. in global value chains by reducing the costs of imports for U.S. producers.

The TPP will also go a long way in reducing barriers to services exports. This is clearly important given that services comprise 69 percent of U.S. private sector GDP and 68 percent of employment growth. The U.S. runs a growing trade surplus in services, which in 2013 was $213 billion. The U.S. has a competitive advantage in a range of services such as engineering, legal, consulting, software, information technology, education, and the list goes on. These services can increasingly be traded, and the services sector, particularly in Asia, tends to be where trade barriers are often highest.
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Creating new market access opportunities in TPP countries for U.S. services providers will be an important gain for the U.S. from the TPP. It will create jobs in the services sector and spur further innovation and opportunity across the U.S.

The TPP rules

The TPP is also about developing rules for international trade and investment that will be the key framework in the Asia-Pacific region. In many cases the TPP will also build and deepen rules that are already in the WTO, such as those on intellectual property and standards. The TPP will also include new rules that address modern economic developments such as supply chains, state-owned enterprises, the Internet and cross-border data flows. All these rules will be backed by a dispute settlement mechanism.

For many TPP countries, complying with these rules will require significant economic reform. For instance, Japan’s Prime Minster Abe sees the TPP as a key driver of structural reform for the Japanese economy. For Vietnam, commitments on labor will require it to allow labor unions for the first time and raise labor conditions, and the rules on state-owned enterprises will introduce crucial reforms to strengthen the private sector. New rules in the TPP environment chapter will start addressing overfishing caused by subsidies and help to reduce trade in illegal lumber.

The strategic importance of the TPP

Trade agreements have always had important foreign policy impacts, and this is true for the TPP. The U.S. administration has made the TPP part of the U.S. rebalancing towards Asia. Completing the TPP will build closer economic ties among TPP countries at a time when China has become the main trading partner for most of these countries. This shift, in turn, will help underpin broader U.S. strategic commitments in the region.
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The aim of the TPP is for it to become an Asia-Pacific free trade agreement open to all APEC economies and fulfilling the APEC Bogor goal of a free trade area by 2020.
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Of the approximately $14 trillion in world trade, $9 trillion is within the APEC region. Already, South Korea, Thailand, and Taiwan have expressed interest in joining the TPP.  

China is also undertaking important economic reforms and is looking closely at what the TPP will mean for it.

China is also undertaking important economic reforms and is looking closely at what the TPP will mean for it. At the same time, China is negotiating another Asia-focused trade agreement that excludes the U.S.—the Regional Comprehensive Economic Partnership Agreement (RCEP)—with the Association of Southeast Asian Nations countries plus Japan, Korea, Australia, New Zealand, and India, as well as pursuing the Silk Road Initiative with Central Asian economies.

A successful TPP will influence the RCEP, particularly as those participants in the RCEP that are also TPP parties—Japan, Australia and New Zealand—use the TPP to guide the development of RCEP. This will increase the likelihood of using TPP and RCEP to build a broader Asia-Pacific agreement and will avoid RCEP becoming an exclusive economic framework.

The TPP has ramifications outside the region as well: Concluding the TPP this year will make it the framework to guide the U.S.-EU Transatlantic Trade and Investment Partnership (TTIP) negotiations. It will also give the EU further incentive to complete the TTIP in order for EU businesses to use the U.S. as production base to access markets in Asia.

Finally, the successful conclusion of TPP and its effects on RCEP and TTIP will lead to broader trade liberalization and help build common ground on new trade issues among a group of countries representing that majority of world GDP and world trade. This should create opportunities to multilateralize these outcomes at the WTO.

Conclusion

Globalization is here to stay, and failure to pass TPA or to conclude the TPP will not change this. However, TPP is a key opportunity for the U.S. to continue to determine the terms of globalization and to ensure that its development supports U.S. growth and welfare.

The TPP is an agreement that will support a U.S. economic future that is geared towards innovation in high-end manufacturing and services. The TPP will also underpin a global economic system that is rules-based, consistent with U.S. values, and strengthens the ability of U.S. businesses to compete in TPP markets. Such a system will ensure that the U.S. benefits more fully from the global economy—and the opportunities here are significant. Currently, 95 percent of the world’s population lives outside the United States. Global middle-class consumption is projected to grow from $21 trillion in 2009 to over $56 trillion in 2030, with most of the growth happening outside the U.S. in the Asia-Pacific region.
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The TPP will also support other strategic goals of the U.S. in the region. As noted, the TPP is a central part of the U.S. rebalancing towards Asia. In this way, the TPP will underpin U.S. alliances with TPP parties such as Japan and Australia and provide opportunities for the U.S. to deepen its relationship with emerging strategic partners such as Vietnam.

Thus, the TPP is an important trade agreement that will produce economic and broader strategic gains for the U.S. The TPP negotiations can be concluded this year but achieving this will require Congress to pass TPA. It is time for Congress to act.  



[1] HR 3009 Trade Act of 2002 (the ‘Trade Act’)

[2] Peter Petri, Michael Plummer and Fan Zhai (2014) “The TPP, China and the FTAAP: The Case for Convergence”, in New Directions in Asia-Pacific Integration (Tang, Guoqiang and Petri, eds), Honolulu East-West Center.

[3] Timothy J. Kehoe, Kim J. Ruhl and Joseph B. Steinberg, “Global Imbalances and Structural Change in the United States”, NBER Working Paper 19339, August 2013, 23; David H. Autor, David Born and Gordon H. Hanson, “ The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, American Economic Review 2013, Vol. 103, No. 6, 2140

[4] Lawrence Edwards and Robert Z. Lawrence (2013), “Rising Tide, Is Growth in Emerging Economies Good for the United States?” Peterson Institute for International Economics (Washington D.C. 2013), 67

[5] Ingo Borchert, Batshur Gootiiz & Aaditya Mattoo (2012) “Policy Barriers to International Trade in Services, Evidence from a New Database”, World Bank Policy Research Paper 6109, June 2012, 21

[6] Ashley J. Tellis 2015, “The geopolitics of the TTIP and the TPP” in Power Shifts and New Blocs in the Global Trading System (Sanjaya Baru and Suvi Dogra eds.) International Institute for Strategic Studies

[7] APEC (1994), 1994 Leaders’ Declaration at http://www.apec.org/Meeting-Papers/Leaders-Declarations/1994/1994_aelm.aspx. Taiwan joined APEC in 1991.

[8] Homi Kharas (2010), “The Emerging Middle Class in Developing Countries”, OECD Working Paper 285, 26

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