In June 2015 the U.S. Congress granted fast track authority to President Barack Obama, clearing the way for final negotiations of the Transpacific Partnership (TPP). The completion of the 12-member TPP would create a mega-regional zone representing 40 percent of global GDP and 26 percent of world trade.

The ambition, complexity, and scale of TPP far surpasses earlier regional agreements such as the North American Free Trade Agreement (NAFTA). As a template for a 21st century trade and investment pact, TPP would catalyse movement on other regional agreements in Asia-Pacific and impart momentum to the even larger Transatlantic Trade and Investment Partnership (TTIP) in negotiation by the European Union and United States (see: RSM Talking Points, Transatlantic Trade and Investment Partnership, November 2014).

Structure of TPP 

The Transpacific Partnership began in 2005 as a sub-regional initiative of four countries (Brunei, Chile, New Zealand, Singapore). Australia, Peru, U.S, and Vietnam joined in 2008, followed by Canada, Malaysia and Mexico. Japan formally entered the negotiations in March 2013, significantly enlarging the size of the regional pact. Four other countries (Colombia, Philippines, South Korea, and Taiwan) have declared their potential interest in joining TPP, whose charter envisages the future accession of other countries.

Notably absent from TPP is China, which is spearheading parallel negotiations for a Regional Comprehensive Economic Partnership (RCEP) between the ten members of the Association of Southeast Asian Nations (ASEAN) and six countries that have existing free trade agreements with ASEAN. China’s exclusion reflects (1) TPP’s structure as a rules-based regional pact exhibiting a deeper level of integration than RCEP, and (2) efforts by the United States to use TPP as a geo-strategic counterweight to China in the Asia-Pacific theatre.

TPP builds on an existing network of free trade agreements (84 in total) linking the 12 member countries. In this way, the mega-regional pact would promote cross-border exchanges between like-minded countries that have already committed to neoliberal principles on foreign trade and investment.

The overlapping membership of TPP and RCEP (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, Vietnam) raises the prospect of the eventual formation of a super-regional pact (FTAAP: Free Trade Area of Asia Pacific) that would include the world’s four largest economies (U.S., China, Japan and India) and surpass the European Union as the biggest regional trade zone. By positioning TPP as the fulcrum of such a pan-regional system, the Obama Administration aims to assert American over Chinese norms on international economic governance.  

 Economic Benefits of TPP

The Transpacific Partnership offers a range of economic benefits for member states:

Tariffs and Non-Tariff Barriers: Owing to the plethora of existing free trade agreements between the TPP members, tariffs are already low in many product categories. The United States has an average applied tariff of just 1.4 percent, and the country enjoys zero duties in bilateral trade with its two NAFTA partners (Canada and Mexico) that comprise 70 percent of overall U.S. trade with the TPP-12. But TPP would boost American trade with Japan, with which the U.S. has no bilateral agreement. TPP would also open trade markets of member countries with comparatively high tariffs (e.g., Malaysia and Vietnam) and lower tariffs and non-tariff barriers in specific industries (agriculture, automotive, food and beverages, footwear, machinery, etc.).

Rules of Origin: TPP would simplify the ‘spaghetti bowl’ of current agreements by accumulating the rules of origin governed by bilateral pacts. Rather than determining the country of origin along each step of the regional value chain, exporting companies would operate under a single, uniform rule of origin. Streamlining rules of origin would yield particular benefits to small and medium enterprises, which play an increasingly important role in exports of specialised components and sub-assemblies in the Asia-Pacific region.

Regulatory Convergence: TPP would lower regulatory barriers to trade by promoting harmonisation, transparency, and mutual recognition of national-level regulations governing health and safety, environmental protection, phytosanitary standards, government procurement, intellectual property, and other areas.

Economic Development: TPP aims to spur economic development in low- and middle-income member countries (Brunei, Chile, Peru, Malaysia, Mexico, Vietnam) by boosting foreign trade and investment and facilitating the insertion of local companies into regional value chains. As a state-of-the art international agreement anchored to developed market norms, TPP also promises to improve labour and environmental standards in authoritarian states like Vietnam.

Income Gains and Export Increases: A study by the Washington-based Peterson Instituteestimates that the 12 members of TPP would generate nearly $287 billion additional income per year by 2025 under the regional pact. Exports would increase by $440 billion annually by the same year. Non-participants in TPP (China, India, Indonesia) would incur modest income/export losses as a result of trade diversion to member states. (Peter Petri and Michael Plummer, “The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications”, June 2012)

 Labour Market Effects

Trade economists believe that the Transpacific Partnership will generate net positive effects in the labour markets of member countries. The International Trade Administrative estimates that exports directly support 11.7 million jobs in the United States. Between 2009-14, American jobs supported by exports to the TPP member states grew by over 500,000. These figures exclude jobs indirectly supported by exports (e.g., increased employment at local providers of goods and services to export companies benefiting from trade liberalisation).

Furthermore, the new jobs created by international trade pacts like TPP tend to be high-paying, high-quality positions. According to the Peterson Institute, export jobs in the U.S. on average pay nearly 20 percent more than jobs in import-competing industries. Service-related export industries (which stand to reap major gains from TPP in developed member countries like Australia, Canada, Japan, New Zealand, Singapore, and United States) are especially inclined to create high-paying jobs demanding strong skill sets.

Proponents of free trade acknowledge that TPP will cause labour market dislocations, particularly older workers in manufacturing industries with outdated skills. However, job losses directly attributable to the trade agreement represent a minuscule share of the overall employment churn that naturally occurs in developed market economies. Moreover, workers adversely affected by trade liberalisation can obtain governmental support to facilitate reemployment (e.g., the U.S. Trade Adjustment Assistance programme, which was extended as part of the complex legislative manoeuvers attending Congress’ granting of fast-track authority to President Obama).

Despite the empirical evidence regarding the labour market benefits of TPP, trade unions are fiercely resisting the regional trade pact. Leading the opposition in the United States is the the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), which claims that TPP will seriously harm American workers–notwithstanding the fact that just 10 percent of unionised workers represented by that organisation are employed in industries subject to foreign import competition.

The intensity of opposition to TPP by the AFL-CIO and other union organisations reflects (1) the overselling of the projected economic gains of previous trade pacts like NAFTA, and (2) the anxieties of many unionised workers over globalisation, heightened by the stagnant wages and weak labour markets of the post-Great Recession period.

 Conclusion: The Politics of Foreign Trade

The ferocity of the TPP debate in Washington dramatises the political dimensions of global trade liberalisation, foreshadowing equally sharp conflicts over other regional pacts like the Transatlantic Trade and Investment Partnership (which is already facing mounting opposition by anti-free trade organisations in the EU and U.S.).

The current skirmishes illustrate the classic problem of diffuse benefits versus concentrated costs that has long underpinned the politics of free trade: The ‘winners’ of trade liberalisation are large in number, but dispersed across the whole economy and hence poorly organised. By contrast, the ‘losers’ of trade liberalisation are small in number, but incur direct economic costs that trigger political mobilisation against free trade agreements. Navigating the political shoals of trade liberalisation will therefore require skillful and far-sighted leadership in Brussels, Tokyo, Washington, and other capitals.

 

David Bartlett
Economic Advisor
RSM International

 

This article was written by David Bartlett

Executive in Residence
Director of Global and Strategic Projects
Kogod School of Business
American University
Washington, D.C.

 

The publication is not intended to provide specific business or investment advice. No responsibility for any errors or omissions nor loss occasioned to any person or organisation acting or refraining from acting as a result of any material in this publication can, however, be accepted by the author(s) or RSM International. You should take specific independent advice before making any business or investment decision.

RSM International is the brand used by a network of independent accounting and consulting firms. Each member of the network is a legally separate and independent firm. The brand is owned by RSM International Association. The network is managed by RSM International Limited. Neither RSM International Limited nor RSM International Association provide accounting or consulting services. The network using the brand RSM International is not itself a separate legal entity of any description in any jurisdiction. RSM International Limited is a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM International are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug. © RSM International Association, 2015