By Lawrence Katzenstein
Since the 12 member states signed the TPP text agreement at the beginning of October we are still within the mandated 90 day period during which interested parties in the U.S. can offer their assessments and Congress can evaluate this document.
The document will have to be approved by Congress and by the other 11 member legislatures. Despite significant disagreements the TPP will likely be passed by Congress.
Similarly, other states will face approval contests with the opposition led by those likely to sustain loses with the abolition or lowering of existing tariff regimes. While there remain questions about passage in all 12 states it is likely the text will be approved and the agreement implemented.
However it is likely that U.S. manufacturers and labor, agricultural supporters of the ruling Liberal Democratic Party in Japan, and members of the new Liberal Party government in Canada will demand additional revisions. The new Trudeau government in Canada should be particularly interesting since he opposed the TPP during his recent election.
This article focuses on the major drivers behind the agreement and the likely impact of this trade pact if it is implemented.
Since the member countries account for 40% of the global GDP and the agreement will eliminate roughly 18,000 tariffs that these countries currently levy on U.S. exports implementation will clearly result in a very different business environment.
While a formal forecast would require an assessment of the power and influence of all domestic interest groups supporting and opposing the agreement in each country this level of detail may be misleading.
The very fact that an agreement has been reached by member governments who view the TPP as being in their national interests is a strong indicator of the current power behind ratification. One driver behind this agreement is the simple rationale afforded by neoclassical economics: The reduction or elimination of tariffs will allow companies to create value in different locations in accord with the comparative advantage or even absolute advantage offered by these locations.
When entire products are produced in low cost locations they can then be shipped with lower prices to consumers. When components of production are created in different countries they can be synthesized into products by intra-corporate trade and then delivered to consumers.
Having production and trade determined by comparative advantage has been an essential of globalization since the fall of the Soviet Union in the 1990s. The institutional change from GATT self regulation to the WTO enforcement regime followed the IMF and World Bank framework started after WWII to help prevent the competitive protective tariffs, and competitive currency devaluations.
These deepened the Great Depression and helped lead to WWII.
Participation in subsequent free trade pacts and other elements of globalization have been expanding ever since. The failure to create an even more comprehensive WTO agreement at Doha shifted the forum to the TPP.
The other major impetus behind the TPP is China’s rise. The TPP has been part of the Obama administration’s “Pivot to Asia.”
It is intended to offer member states an alternative to trade and even regional hegemony organized solely by China. Moreover, the improved environmental and labor standards serve as correctives to China’s weakness in both areas. As with NAFTA this agreement offers strategic as well as economic purpose.
Likely winners and losers
The eventual likelihood of passage is also helped by the relatively open architecture of the agreement designed precisely to enhance passage.
The Labor Advisory Committee on the TPP, made up of the leaders of America’s leading unions has come out strongly against the TPP.
They offer evidence that their objectives in labor standards, inbound FDI screening, currency regulation, market access assurances abroad and regulation of state owned industries falls short. As a result they hold that American manufacturing companies would lose business and labor would lose jobs.
The LAC’s position is consistent with labor’s opposition to the TPP during the Fast Track debate. At that time they and their supporters made frequent reference to the loss of manufacturing jobs from NAFTA.
While comparative labor costs in the U.S. and other developed countries certainly support this position there are some problems. Much of this depends on the enforcement of TPP labor regulations, and the expansion in manufacturing through new U.S. access to the Japanese market.
If foreign labor costs are raised through higher standards it could make U.S. labor more competitive especially when factoring shipping costs.
U.S. Pharma companies will benefit from the intellectual property provisions. They will be protected from generic drug copies of new patents for 5 years and biologics for 8 years rather than the 12 years they currently enjoy in the U.S.
U.S. financial companies will have increased access to member states could be lucrative in advanced markets like Japan. U.S tobacco companies will face regulation but have some due process on disputes.
U.S. agriculture will now have greater access to the Japanese market where they had nearly none before. Australian dairy goods will enjoy the access without tariffs to the U.S. and Canada. Agricultural prices for consumers should be sharply reduced in Japan.
Japan will be able to obtain more car parts from Asian countries to lower their production costs. However some U.S. tariffs on Japanese cars and trucks will continue into the first years of the agreement. Some U.S. produced cars and trucks currently prohibited by Japan will now have access.
The bottom line
This pact does favor big business since it facilitates production in areas with comparative advantage. It facilitates exports, but also facilitates market entry through FDI protected by new IP regulations. Lower prices do seem likely in previously heavily protected domestic markets like Japan.
We will revisit this agreement to discuss further revisions in response to strong domestic interests.