Evan Katz

*This post is a modified version of my INTL 4250 research paper, Free Trade in the Twenty-First Century: Why the United States Should Ratify the Trans-Pacific Partnership

Since the end of World War II, the United States has worked to establish and maintain a liberal international order, promoting democratic principles, free markets and trade, and strong institutions as a means of engendering peace in the international system. Specifically, free trade has played a central role in America’s foreign policy, from the creation of the General Agreement on Tariffs and Trade in 1948 to the creation of the World Trade Organization in 1995. Today, free trade has returned as a major topic of discussion once more, as the contentious, twelve-state Trans-Pacific Partnership Agreement (TPP) awaits ratification.

The United States Senate should ratify the Trans-Pacific Partnership as soon as possible. The economic and geopolitical benefits, including the removal of trade barriers in most of the Asia-Pacific to give American businesses access to huge markets, the ability for the U.S. to establish and maintain a foothold in the region, and the creation and enforcement of more stringent labor and environmental standards in developing states, far outweigh the potential costs of the agreement.

Background

History of the Trans-Pacific Partnership

The origins of the TPP can be traced back to as early as 1999, when Singapore and New Zealand began negotiations for a bilateral free trade agreement (Dominion 2008). The Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP), which removed tariffs on most goods travelling between the two states, streamlined government regulations, enabled greater access to critical sectors, and ensured easier entry into both countries, was signed in 2000 and went into effect at the beginning of 2001 (New Zealand 2014).

The success of the ANZSCEP helped pave the way for broader trade agreements with other states in the Pacific Rim. New Zealand, Singapore, and Chile initiated talks on the Pacific Three Closer Economic Partnership during the 2002 Asia-Pacific Economic Cooperation (APEC) Leader’s Meeting, which, after Brunei joined negotiations in 2005, morphed into the Trans-Pacific Strategic Partnership Agreement (TPSEP), also known as the Pacific-4 (P-4). The agreement entered into effect in 2006 for three of the four states; however, it did not take effect in Brunei until 2009 (New Zealand n.d.).

The P-4 states gave others the opportunity to accede to the TPSEP, with the ultimate goal of achieving full trade liberalization throughout the Asia-Pacific region. Later rounds of negotiations over certain chapters of the agreement by the P-4 states left room for the U.S. to enter into the picture in March 2008 under President Bush, who saw enormous economic and geopolitical opportunity in potential trade agreements in the Asia-Pacific. By September 2008, offers to accede were extended to Australia, Peru, and Vietnam, and in 2010, Malaysia joined talks despite having stalled negotiations with the U.S. over a bilateral free trade deal (Rajamoorthy 2013). Canada and Mexico, the other two states party to NAFTA, signed on in 2012, and Japan, the final member, joined talks in 2013. Also targeted by the group of states, South Korea showed interest in joining the TPP, but is not a party to the current agreement due to hurdles in the negotiation process (Reuters 2010).

After years of negotiation, trade representatives from each of the twelve states signed the TPP in Auckland on February 4, 2016, and the agreement will take effect as soon as all twelve signees ratify the agreement. Should some states not ratify the agreement by February 4, 2018, the agreement would take effect once ratified by at least six states that combined account for more than 85 percent of the GDP of all signatories (BBC 2016).

All members of APEC not party to the current agreement have the ability to join the TPP. This would include states such as China, Russia, South Korea, Indonesia, the Philippines, Taiwan, and Thailand. Of those states, South Korea, Indonesia, the Philippines, Taiwan, and Thailand have all expressed interest or intent to join. Outside of APEC, Colombia, Laos, India, Bangladesh, and Sri Lanka have all indicated some form of interest and may look to join in the near future (Rajamootry 2013, Trading 2016).

Relevance to American Foreign Policy

The TPP encompasses twelve states that span across the Pacific Rim. These states account for nearly 800 million people, 36 percent of global gross domestic product (GDP), and 23 percent of world exports, making the TPP the largest free trade agreement in existence if ratified. For reference, NAFTA, which is America’s largest current free trade agreement, accounts for approximately one-fifth of global GDP (Petri 2016, 2).

The TPP has become the subject of much political discourse surrounding the 2016 presidential election. Candidates from both sides of the aisle, including Senator Bernie Sanders of Vermont and President-elect Donald Trump, focused much of their campaign time railing against the agreement. Sanders and other politicians on the left, like Senator Elizabeth Warren of Massachusetts, have opposed the TPP on the grounds that it allows large corporations to set the rules of the game in international trade at the expense of American workers. They also take issue with the investor-state dispute settlement mechanism, which gives corporations the ability to sue states over discriminatory trade practices; they argue the process is hugely undemocratic (Seitz-Weld 2016). On the right, Trump has turned the traditionally pro-free trade Republican Party into a protectionist, anti-trade party. The President-elect has claimed that the U.S. has been “ripped off” by bad trade deals that hurt both American businesses by allowing foreign competition in domestic markets and American workers who have lost jobs because big corporations move operations overseas as a means of cutting costs (Savransky 2016).

Following his victory in the November election, Trump announced that he would withdraw the U.S. from the TPP on his first day in office, casting doubt on the future of the agreement. Additionally, President Barack Obama, a huge proponent of the TPP, has backed off of pushing the agreement through Congress during the lame-duck session. Assuming the U.S. no longer remains a party to the TPP, Obama’s goal to pivot America’s foreign policy toward East Asia will likely remain unfinished (Trading 2016).

China stands to gain the most from the U.S.’s imminent withdrawal from the TPP. China was deliberately excluded from the agreement to allow the U.S. to remain in control of writing the rules of international trade despite boasting the world’s second largest economy. But in the wake of Trump’s victory, President Xi Jinping has already moved forward with plans for the Regional Comprehensive Economic Partnership (RCEP), an alternative to the TPP (Carney 2016). RCEP talks involve 16 states, including all ten members of the Association of Southeast Asian Nations (ASEAN) as well as states excluded from the TPP like India, China, and South Korea, but RCEP notably excludes the U.S. RCEP would give China the opportunity to take a leadership role in trade and set the rules of the game (Gracie 2016).

Furthermore, the U.S. backing out of the TPP sends mixed signals to allies in the Asia-Pacific region. The U.S. has already committed, and Obama has lobbied hard for other states to commit, to the TPP, assuring allies that it wants to remain an active player in East Asia. However, with Trump’s announcement, American resolve has come into question, creating vast uncertainty and the opportunity for China to become the regional hegemon. States like Japan that depend on the U.S. security umbrella may instead look to their own devices if they feel America’s commitment waiver (CNBC 2016).

Defending the TPP

Free Trade and Economic Growth

Enormous economic opportunity awaits the U.S. should it ratify the TPP. On a theoretical level, free trade allows states to specialize in sectors where they possess a comparative advantage, leading to a more efficient use of resources, lower costs of production, and, ultimately, lower prices on goods and services for the consumer. Free trade also increases competition by allowing foreign firms to enter domestic market, which helps drive innovation and offers consumers a greater variety and volume of choices (Petri 2016, 2-3).

The TPP specifically would streamline regulations, lower trade barriers among signatory states, and set rules for international trade, including new rules on state-owned enterprises, coherent rules of origin, and standardization of intellectual property rights. American firms, particularly export-oriented small and medium-sized enterprises, could expand by taking advantage of the new regulatory environment and increasing export services to the fastest growing economies in the world, bringing billions more in revenue back into the U.S. economy. More productive sectors, chiefly ones where the U.S. possesses a comparative advantage, would stand to gain the most from the agreement. This would include the manufacturing sector, which is among the most competitive and productive in the world (Meltzer 2012). A January 2016 Working Paper by the Peterson Institute for International Economics estimates that the TPP could increase real incomes by more than $130 billion per year and exports by more than $350 billion per year—roughly 9 percent growth over current projections. In fact, the agreement represents such huge economic promise that delaying ratification would cost the U.S. economy nearly $80 billion in potential gains (Petri 2016, 2).

Additionally, the TPP promises to remedy the slow recent growth in trade. The Economist reports that growth in global trade may fall below global GDP growth for the first time in nearly two decades. For example, Asian export growth will struggle to reach 0.5 percent after averaging roughly 8 percent over the last two decades (Trading 2016). Part of the reason for why trade growth has slowed can be traced to the World Trade Organization. Big international trade deals need unanimous support from all 164 member-states, which can empower rogue actors to use the threat of veto as leverage to extract concessions. A flawed international trade regime encourages states to pursue deals amongst each other, leading to hundreds of bilateral and regional free trade agreements. On the surface, those agreements seem like they supplement for gridlock in the WTO, but the inconsistent and conflicting rules and regulations that result from those hundreds of deals create a nightmare scenario for anyone looking to conduct business internationally (Suominen 2014).

Instead, bigger multilateral “mega-deals” that span large swaths of the globe offer the best solution to trade woes that take place in the status quo. The TPP, an example of such a mega-deal, would integrate the economies of twelve states that account for more than a third of global GDP, lowering any remaining barriers to trade, synchronizing standards, and lowering the cost of doing business (Suominen 2014). Unlike RCEP, which excludes the U.S., the TPP offers the U.S. the ability to not only participate in and reap the economic benefits of such a massive deal, but also take the lead in writing the rules for how these states go about conducting international trade, ensuring Americans benefit the most from the agreement.

Pivot to Asia and Containment of China

While the TPP offers plenty of economic benefits, the geopolitical implications of the agreement may be even larger. As the Asia-Pacific region becomes more economically integrated, the U.S. increasingly sees itself on the outside looking in. President Obama spent the majority of his two terms in office seeking to expand U.S. economic, political, and strategic engagement in the region in order to maintain and expand influence as China rises. China, which looks to establish itself as the regional superpower, has sought to undermine American interests by pushing American allies to question Washington’s resolve and striving to create an economic framework outside of the U.S.-led global order (Kennedy 2015).

The TPP would help the U.S. to strengthen its position in the region by facilitating economic integration and reassuring allies of Washington’s commitments to them. Stronger economic ties with regional allies would go a long way in allowing the U.S. to influence regional politics and keep China in check. Moreover, because China is excluded from the current agreement, the TPP would either prevent China from receiving a share of the gains made by increased integration, negatively impacting its economic growth and ability to rise, or would force China to accede to a rules-based global order shaped by the U.S (Kennedy 2015).

Should the TPP be a massive success, China would have every incentive to join the agreement, and its prospective participation would benefit all states involved. Participation would not only be an economic boon for the U.S. because of the sheer size of China’s economy; it would also lend legitimacy to the Western-led international order. The TPP would give the U.S. the latitude to set the rules for trade in the Asia-Pacific, including more stringent labor and environmental standards, protections for intellectual property, and rules on the role of state-owned enterprises in international trade, areas that China routinely exploits for its own gain (Collapse 2016). China following those rules as a member of the TPP would be a win for the world’s institutions and would go a long way to enshrine global peace and stability.

Stronger Environmental and Labor Standards

As mentioned previously, the TPP forces its signatories to implement some of the strictest environmental and labor standards. While important from an economic standpoint because states with weaker standards can no longer use that to lure businesses away from states with stronger standards, strong environmental and labor standards are benefits in their own right.

Perhaps one of the most underrated elements of the agreement, the environmental standards built into the TPP play an important role in mitigating the impact of pollution and environmental destruction across the Pacific Rim. Unlike other trade agreements where environmental protection is generally treated as an afterthought, the TPP has specific provisions dedicated to the environment (Summary 2015). As part of the agreement, states commit to not weaken their environmental laws as a means of attracting businesses. While free trade more generally can lead states to weaken their environmental laws as a means of encouraging businesses to relocate, the TPP introduces an enforcement mechanism—trade sanctions on that state—to deter that kind of behavior. The agreement also leverages the threat of sanctions to force member states to abide by multilateral environmental agreements (MEA’s), including ones on sustainable fisheries management and cooperation over preventing illegal wildlife trade (Prickett 2016).

Similarly, in line with prior trade agreements like NAFTA, the TPP specifically addresses concerns about labor (NYT 2015). Currently, many of those states lack minimum wage laws and regulations on working hours and occupational safety. Vietnam specifically, as one of the few remaining Communist countries, does not allow its people to form independent unions, which denies workers freedom of association and collective bargaining (Massmann 2016). The TPP, by threat of sanctions, would enforce the implementation of strict labor laws to ensure the protection of the rights of workers (Summary 2015).

Weaknesses of the TPP

Job Loss

While the TPP promises hundreds of billions of dollars in growth added to the U.S. economy, some sectors would stand to suffer. From a theoretical standpoint, while trade may lead to absolute net gains for states, some people and sectors lose out due to a lack of sector competitiveness and offshoring. When corporations move operations overseas because of the promise of cheaper labor or other factors of production, jobs are lost back home while wages sink. And, not all sectors of the American economy hold a comparative advantage over those of other countries; free trade undermines the strength and growth of those sectors (Bivens 2015).

These concerns have merit, but the effect of trade on job loss may be overstated. First of all, because of the enforcement of stricter standards, American firms would have less of an incentive to move operations, keeping more jobs at home. Second, the Peterson Institute for International Economics projects that more than 50,000 jobs would be affected by the agreement per year, including jobs added and lost. That number may seem large, but the TPP’s effect on labor movement between industries, a phenomenon known as churning, would actually be minimal; 55.5 million Americans switched jobs in 2014. And, most people that do lose their jobs would still be able to find alternative employment in more productive sectors (Petri 2016, 3).

Corporate Power and Influence

Among the most criticized elements of the TPP, the investor-state dispute settlement (ISDS) mechanism established in the agreement gives corporations the unidirectional right to sue governments in international tribunals for discriminatory trade practices or failure to follow rules set in trade agreements. The process for those legal battles is also bizarre in that both parties appoint arbitrators on a case-by-case basis to issue a ruling rather than turning to established courts who base decisions on precedent and norms. Once arbitrators rule, the corporations and investors in question can receive money from the governments they sue, which could place a burden on states with smaller treasuries, and domestic courts have the power enforce the rulings (Tucker 2015).

The ISDS can seem scary to those that oppose giving corporations more power and influence, but the practice has existed in trade deals for decades. For example, Argentina, Australia, and Costa Rica have all lost cases using this mechanism, and each has had to make policy changes that positively impact global trade. Notably, the U.S. has never lost a case in front of one of these tribunals; a strong legal system and safeguards in the TPP discourage foreign investors from attempting to challenge the U.S. Even further, the ISDS is necessary to ensure impartial and neutral arbitration because domestic courts, the alternative to the ISDS, exhibit bias toward governments against whom investors have legitimate grievances (FACT 2015).

Conclusion

Though unlikely to enter into effect with the election of Donald Trump, the Trans-Pacific Partnership would be a boon for the United States. It would add hundreds of billions of dollars to the U.S. economy, would remedy the conflicting and incoherent rules and regulations brought about by hundreds of separate bilateral free trade agreements, would allow the U.S. to reassure allies in the Asia-Pacific and set the rules of international trade, forcing China to either comply or miss out on huge gains, and would extend protections to some of the world’s poorest workers and most critical environmental areas.

References

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Bivens, Josh. “No, the TPP Won’t Be Good for the Middle Class.” Economic Policy Institute. April 22, 2015. Accessed November 25, 2016. http://www.epi.org/blog/no-the-tpp-wont-be-good-for-the-middle-class/.

Carney, Matthew. “China Seizes Opportunity after Trump Threatens to Dump TPP.” ABC News. November 24, 2016. Accessed November 24, 2016. http://www.abc.net.au/news/2016-11-24/china-seizes-opportunity-after-trump-threatens-to-dump-tpp/8056086.

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Savransky, Rebecca. “Trump: TPP Will Make NAFTA ‘look like a Baby'” The Hill. June 30, 2016. Accessed November 25, 2016. http://thehill.com/blogs/ballot-box/presidential-races/286186-trump-on-tpp-it-will-make-nafta-look-like-a-baby.

Seitz-Weld, Alex. “Ahead of Democratic Platform Meeting, Warren Urges Opposition to TPP.” NBC News. July 7, 2016. Accessed November 23, 2016. http://www.nbcnews.com/politics/2016-election/ahead-democratic-platform-meeting-warren-urges-opposition-tpp-trade-deal-n605151.

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Tucker, Todd. “The TPP Has a Provision Many Will Love to Hate: ISDS. What Is It, and Why Does It Matter?” Washington Post. October 6, 2015. Accessed November 25, 2016. https://www.washingtonpost.com/news/monkey-cage/wp/2015/10/06/the-tpp-has-a-provision-many-will-love-to-hate-isds-what-is-it-and-why-does-it-matter/.