The Trans-Pacific Partnership: What You Need To Know

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While many of us head to beaches or backyard barbeques this weekend, negotiating teams from twelve nations will be busy working on perhaps the most important trade deal of our generation – the Trans-Pacific Partnership (TPP). On Friday, TPP Chief Negotiators begin a four-day meeting (in Hawaii…so hard to really feel bad for them!) to resolve the open issues before a four-day meeting of Trade Ministers begins next Tuesday. Many are optimistic that negotiations will conclude next week.

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The mega-treaty involves twelve countries that combine to 40% of the world’s GDP and 25% of global exports. Building on a four-country agreement between Singapore, Brunei, Chile and New Zealand that had been signed in 2006, the TPP expands the bloc to include the United States, Australia, Peru, Vietnam, Malaysia, Mexico, Canada, and Japan. Not on the list? China.

Much has been written about China’s “exclusion” from the TPP. Some describe an American plan to encircle China’s increasing power by strengthening economic connections, political ties, and military relationships with other Asian nations. While there is undoubtedly an element of truth in this suggestion, there may be another possibility that hasn’t received much attention: China may not want to join.

Having joined the WTO as a developing nation, China enjoys semi-protected status in a host of industries. Joining the TPP might erode some of those barriers. Oh, let’s also not forget that China is quietly pursuing its own agenda, having secured the support of more than 50 nations (including Iran) in setting up the Asia Infrastructure Investment Bank – notably without US involvement.

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It’s also worth noting that China is also pivoting towards The Middle East at precisely the time America is pivoting away from it. “Over the past year, Chinese leaders have been flocking to the Middle East,” notes Foreign Policy’s David Rothkopf. The recently proposed Iran nuclear deal has also spurred a strengthening of already improving China-Israel relations, despite the fact that Beijing remains Tehran’s most important customer.

Despite the media attention and focus, is it possible that the TPP is not about China? In fact, there’s good reason to believe that it’s focused on rolling back the protectionist pressures that arose following the global financial crisis. Like all trade deals, TPP targets expanding the pie rather than fighting over slice sizes. Increased military and political cooperation in Asia may simply be whipped cream on the pie. (Sorry, really wanted to say icing on the cake…but had started with the pie analogy!)  With that said, it’s also clear that the biggest beneficiaries of a faster growing global economy are the largest economies – meaning the United States and Japan will likely capture a lion’s share of gains.

According to Huffbauer and Cimino, economists expect the TPP to boost exports of member countries by $440 billion or 7% and real GDP by ~1% indefinitely, with the possibility of bigger gains if more nations join. South Korea has expressed interest, as have others.  Further, the mechanics of the TPP may emerge as the new model for economic liberalization and globalization, and has the potential to ultimately serve as the foundation of a more-constructive trade agreement between the United States and China.

Let’s not also forget that if successfully implemented (and admittedly big “if”), the TPP will affect many people both within and outside of the member countries. How’s that? Let’s consider three possibilities.

First, given the prominence of agricultural subsidies in the negotiations, food prices will move both up and down, depending upon where you live. If you’re in a major food-producing nation like the United States, prices may rise as more domestic production heads to export markets. On the flip side, if you live in a food-importing nation like Japan, you may see lower prices. (Lovely, just what Japan needs…more deflationary forces!). And if you’re a farmer producing protected products (such as dairy in Canada), beware! Foreign competition may be headed your way.   In aggregate, however, lower tariffs should produce lower prices for member countries as a whole. Countries outside of the TPP may face shifting trade patterns. Consider palm oil. Might Colombia lose potential markets to Malaysian producers?

Second, jobs are likely to shift between countries. Given that Vietnam has a trade agreement with China, it’s possible that Chinese companies may outsource their production to Vietnam where labor prices are materially lower and a successfully implemented TPP would offer more desirable export markets. This might slow China’s job creation and economic growth. (Great, just what China needs…more slowdown pressure!). In general, low wage countries will see higher wages and high wage countries will see lower wages. Again, these impacts might ripple beyond TPP member countries. If Vietnamese wages rise, might some of their labor-intensive manufacturing shift to Bangladesh or Laos?

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Third, intellectual property protection may result in infinitely higher prices for drugs and copyrighted material (if you pay anything for something that was previously stolen that’s an infinite increase!) in countries in which piracy was commonplace. But the flip side is it may mean lower prices for countries with strong IP protection as companies no longer need high prices for their products in those countries to subsidize losses elsewhere. This may mean lower music, movie, and medicine prices in the US, for instance.   How might that affect the profitability of Bollywood or Thailand’s medical tourism industry?

The blunt reality is that gains from trade are not spread evenly, and although some may believe the global benefit makes trade agreements such as TPP as easy as pie, political realities have an uncanny ability to derail even the most likely of deals. And if TPP negotiations fail to make progress next week, the only dish being served to the twelve Trade Ministers may be humble pie.

 

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