Putting the TPP on the Right Track

Mar 17, 2015 Issues: Trade

The Trans-Pacific Partnership is a major potential trade agreement between the United States and 11 countries at very different levels of economic development, including Japan, Mexico and Vietnam. Will the agreement boost U.S. growth, address wage stagnation, help our strategic partners and create legitimate rules for international trade in the 21st century? The answer hangs in the balance.

With negotiations reported to be entering the final stages, it is critical that Congress focus at this point not on how to “fast track” approval of an agreement — through passing Trade Promotion Authority — but on making sure the TPP itself is on the right track.

There is a real choice to be made between two different approaches to international trade.

The first approach is based on the unbridled free-market view that more trade is necessarily better. The focus here is on eliminating regulatory barriers to exports and foreign investment. It is claimed that market forces will not just increase economic efficiency, but also improve governance in developing countries. Similarly, trade imbalances between nations will work themselves out.

The second approach is that rules matter — so the details of labor standards, investor protection, intellectual property rights, permissible subsidies and environmental safeguards help determine who gains from trade. This approach recognizes that, without good rules, higher potential profits associated with new export and investment opportunities increase the temptation to pollute the environment and suppress worker rights.

History is on the side of this second view. In “Why Nations Fail,” Daron Acemoglu and James Robinson document case after case in which growth falters and countries collapse because the political regime was oppressive and corrupt. There are precisely no cases in which these underlying issues were fixed simply by being able to increase exports.

And it now seems completely out of date to insist that big current account surpluses — when a country sells a lot more to the world than it imports — are of no consequence. U.S. and other government officials emphasize that such “global imbalances” have affected and still undermine the stability of financial systems.

Trade agreements are not just about exports — imports also matter. The surge in imports to the U.S. in the early 2000s damaged the manufacturing sector, leading to job losses and harming the long-term health of our economy. Employment in this important sector fell from about 17 million in the 1990s to under 13 million today.

In recent years, U.S. trade policy has better recognized that standards and rules matter, although progress was sometimes intermittent and often too slow — and frequently weakened by a lack of vigorous enforcement.

The bipartisan agreement reached on May 10, 2007, to ensure better access to affordable medicines and to incorporate strong enforceable labor and environmental standards into free-trade agreements stands out as a major breakthrough. This agreement, negotiated by House Democrats and accepted by the Bush administration and other congressional leaders, was a recognition that the value of trade agreements depends on the quality — not the quantity — of such agreements.

The U.S. trade representative calls the TPP the most progressive trade agreement in history, but this remains to be seen. Success should not be measured relative to the status quo. The question rather is: Are the agreement’s rules sufficiently forward-looking and strong enough to bring about meaningful lasting improvements to people’s lives, by enhancing the positive aspects and addressing the negative impacts of globalization?

Our leverage is based largely on other countries’ interest in gaining greater access to the U.S. market. Once the U.S. eliminates tariffs on virtually all products, as contemplated in TPP, we will no longer have that leverage.

Improved transparency is essential to understanding key components of TPP and to ensure it has positive impact. The public needs to see that its elected representatives are fully informed about all the details and understand the bigger picture.

Here are some of the salient challenges to getting TPP right.

First, on the incorporation of international labor standards, recent experience in Guatemala, Honduras and Colombia illustrates how important oversight and enforcement are — and how difficult progress can be when enforcement is weak and follow-through is slow. For TPP, the main concerns are Vietnam and Mexico.

Vietnam represents the first time the U.S. is negotiating a broad trade agreement with a command economy. As a country that has never allowed workers to choose their own representatives and where the single labor union is part of the Communist Party, Vietnam will require not only major changes to its laws and practices, but also regular monitoring of compliance by a panel of experts.

And if TPP is to serve as a renegotiation of the North American Free Trade Agreement, Mexico will need to change its labor laws and practices to properly implement its TPP obligations.

Second, some of the environmental obligations as currently drafted are too weak. We have learned the hard way that the precise choice of words matters a great deal.

Third, we must preserve the sovereign right of governments to develop legitimate regulations under the TPP’s investment rules. The investor-state dispute settlement mechanism creates an arbitration process, through which companies can claim that a country has broken those rules and seek monetary compensation — and a proliferation of such cases in recent years serves as a wake-up call.

One of several important changes would be to ensure that, in the event of a dispute, both governments involved — the host and the home country for the company — can jointly agree that a case is inappropriate and should be dismissed.

Fourth, we must provide the appropriate balance between fostering innovation and providing access to medicines. We need to share the benefits of all life-enhancing technologies as quickly as possible with our trading partners — and on reasonable terms, including as countries transition from being “developing” to becoming “more developed.” The May 10th Agreement of 2007 got this balance right, and we must not retreat.

Fifth, we must meaningfully address currency manipulation — direct government intervention in the currency markets to weaken one’s currency for the purpose of boosting exports and limiting imports. Currency manipulation has cost the United States millions of jobs over the past decade and a half. China manipulated its currency most dramatically in this time period — accumulating the largest stock of foreign exchange reserves the world has ever known. In earlier episodes, Japan, South Korea and others manipulated their currencies.

Japan’s manipulation and other trade-distorting practices kept its auto and other markets closed, while Japan enjoyed a very open U.S. market. This one-way trade decimated the U.S. tool-and-die industry and other segments of the automotive industry.

The International Monetary Fund has up-to-date guidelines that define currency manipulation and are intended to prevent it. Unfortunately, the IMF cannot enforce those guidelines because currency manipulators are able to essentially stall action in that forum.

Arguments that prohibiting currency manipulation in TPP is impossible, for political or technical reasons, remind us of previous claims about trade agreements not being able to help defend forests or discourage child labor. It is simply not true that a well-designed currency chapter — such as one based on existing IMF guidelines — would impede U.S. monetary policy.

TPP should address instances in which countries buy large amounts of foreign assets over long periods of time to prevent an appreciation of their exchange rate despite running a large current account surplus. The Federal Reserve does not engage in such practices. That is why the U.S. already agreed to and even insisted upon what is in the current IMF guidelines.

In the months ahead, one indicator of whether the TPP negotiations have effectively resolved these issues will be the level of bipartisan support that emerges. Congressional Democrats helped shape trade agreements in the past. With the “May 10th” provisions included in the Peru Free Trade Agreement, 109 House Democrats voted in favor. Just a few years earlier, only 15 Democrats voted for the Central America Free Trade Agreement, in which there were no meaningful standards.

Current resistance over proceeding with trade promotion authority is not driven by an aversion to trade expansion but rather by a determination to get the right rules and standards in the TPP.

Simon Johnson is a professor at MIT Sloan and previously chief economist at the International Monetary Fund.  Sander Levin is the ranking Democrat on the House Ways and Means Committee.


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