The Trans-Pacific Partnership covers an enormous amount of ground and has important strengths and multiple weaknesses. Claims of its broad magnificence or awfulness are not credible.
The view here stems from reading all 30 chapters, the four bulky annexes, and various side letters. The first read (a longer paper will follow) says the Trans-Pacific Partnership (TPP) offers a net gain to the US but has too many long-term flaws to be considered a high-quality free trade agreement at this point.
Twelve nation members of the TPP hold a meeting in Lahaina, Maui, Hawaii July 28, 2015. REUTERS/Marco Garcia.
The key issues in reaching this conclusion:
Agriculture
Agriculture market access unquestionably improves under the TPP. Soybeans, a key American export and global foodstuff, would see open trade. This is also true for other products and, if TPP terms were extended globally, there would be hefty gains.
Most American agriculture producers will be understandably happy but, in the long term, the TPP may be seen as a lost opportunity. A number of countries, led by Japan, retain barriers that can in part be traced to retention of America’s own agriculture trade barriers. This is self-defeating behavior for the world’s largest agriculture exporter.
Intellectual Property (IP)
The IP chapter also constitutes a substantial improvement over current global treatment. In a much-needed step, the TPP extends explicit protection to digitized information and trade. And it updates IP protection elsewhere, for example with regard to geographical indications.
IP advances are unavoidably uneven and areas that lag will be keenly felt in the US, the top innovator. For instance, host countries can take up to five years to consider a patent application while protection of technical data can last as little as five years. This combination can undercut the incentive to innovate.
New Areas
The TPP breaks new ground on a number of fronts. The most obvious is e-commerce, which deservingly and beneficially gets its own chapter.
More subtle are the TPP’s broad accomplishments on transparency, which appear in a variety of chapters. With 12 economic and regulatory systems involved that can confuse individuals, companies, and even governments, transparency is the grease for progress from the TPP. This has been recognized in the terms.
Rules of Origin (ROO)
The one vital area where transparency is in question is ROO, which determine what is covered by the agreement. The ROO are generally loose, which fits with the free trade goal of promoting more exchange, not diverting existing exchange into a new bloc.
The problem is complexity. The content requirement to automatically qualify for the TPP is high and extensive rules for certain sectors look politically motivated. Some complexity is unavoidable but the TPP risks rendering firms uncertain how to take advantage of treaty terms and confusing customs agents charged with administering those terms.
State-Owned Enterprises (SOEs)
The SOE chapter sees a sharp tradeoff between present and future. It is a major step forward, especially on transparency, compared to essentially non-existent obligations for SOEs now. But it sets a dangerous precedent. There are too many ways to organize a state sector immune from TPP disciplines.
Sovereign wealth funds are immune, sub-national enterprises are largely immune, and national SOEs can fairly easily organize their subsidiaries to be immune, because a crude 50-percent rule is employed for ownership or board membership. Along these lines, the chapter erodes the argument that the US must set rules so China does not. China could game rules the US just set.
Non-conforming Measures (NCM)
The enormous amount of material on NCMs – where countries are allowed to ignore the agreement – make a case for the TPP overreaching in membership or issues or both. Non-conforming measures are unavoidable to some extent, but it is unwise to introduce new topics then allow precedents of non-compliance.
Vietnam, for example, should have been given long phase-in periods rather than outright protection from so many TPP requirements. The chapter on financial services is largely neutered by the annex on financial services NCMs. Transport services see a huge number of exemptions, possibly driven by America’s own harmful protectionism in shipping.
Two issues will receive more attention than they deserve:
Investor-state dispute settlement (ISDS)
Both sides of the debate exaggerate the importance of the ISDS chapter. It will not protect American companies from foreign governments if the latter wish to be predatory and it will not lead to meaningful change in American law. It matters, but not very much.
Exchange Rates
Currency is still more overblown. Japan has not been a currency manipulator for years. China is not a TPP member. Moreover, in 1994, China devalued the yuan 45% yet US unemployment fell to 4.6%. In 2005, China slowly revalued the yuan 30% and US unemployment rose. Exchange rates do not work the way protectionists insist.
There are groups loudly opposed to the TPP for whom the terms are a detail. For everyone else, the TPP comes down to a better trade environment in the short term versus long-term problems created by provisions that do not promote genuinely free trade.
In particular, innovation and agriculture are America’s main comparative advantages and the TPP offers notable improvement in both. It is sensible to argue these gains matter most. Against that are the painfully extensive non-conforming measures, badly inadequate treatment of state-owned enterprises, and risky rules of origin warping the future trade environment.
This may indeed have been close to the best agreement possible given the parties. But the outcome is a bronze-standard free trade agreement. The US must do better than bronze-standard free trade agreements.
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