Washington’s Dangerous New Consensus on China
Don’t Start Another Cold War
The United States may be on the verge of walking away from a trade pact, the Trans-Pacific Partnership (TPP), that it virtually wrote. When President Barack Obama said that “the TPP means that America will write the rules of the road in the twenty-first century,” he was not speaking metaphorically. Scholars Todd Allee and Andrew Lugg have documented the incredible extent to which the TPP draws on past U.S. Free Trade Agreements (FTAs)—around 45 percent of the language in previous U.S. FTAs can be found copied verbatim in the TPP, and that figure rises to 80 percent for the TPP’s investment chapter, which is of particular interest to the United States.
Yet the United States did not offer to open its market very much in return for the concessions that it was able to wrest from others. According to the U.S. International Trade Commission (USITC), by 2032 the TPP would boost U.S. imports by a negligible 0.2 percent of GDP compared to baseline projections. The pact does even less for U.S. exports.
In short, the United States has gained more on its priorities, such as investment, finance, and intellectual property, than it has given to its negotiating partners on theirs. And yet, after years of arduous negotiations, the normally pro-trade Republican leadership in Congress is now pushing to reopen settled issues, largely to please special interest groups such as pharmaceutical and tobacco firms. No wonder, then, that U.S. trade partners, after resisting some of their own domestic interest groups to reach a deal, are expressing outrage.
Senate Majority Leader Mitch McConnell (R-Ky.), for instance, has voted for every free trade agreement in the last two decades, but has said that he’d rather see TPP fail than allow it to pass in its current form. His major objection is over the exemption of cigarettes from the Investor State Dispute Settlement system, which allows investors to sue governments in special arbitration panels for, among other things, changes in regulations. Senator Orrin Hatch (R-Utah), chair of the Senate Finance Committee and longtime free trader, is blocking TPP due to its compromise on data exclusivity for a special class of pharmaceuticals called biologics. U.S. law currently protects companies’ regulatory test data for 12 years, compared to eight in the TPP. Speaker of the House Paul Ryan declared, “they [the Obama administration] have to fix this agreement and renegotiate some pieces of it if they have any hope or chance of passing it.” He added, “I don’t see how they'll ever get the votes for it.”
On the Democratic side, the ranking member on the Senate Finance Committee, Ron Wyden of Oregon—who last year corralled 13 Senate Democrats to vote for Trade Promotion Authority (TPA), which was meant to ease the TPP’s passage through Congress—says he is still studying the TPP to decide whether he’s for or against it. Unions and environmentalists have come out in force against the deal, and Democrats have made opposition to the TPP a top election issue in several close Senate races. Republicans in those races have therefore withheld their support for the agreement, even if they voted for TPA in 2015. If the Democrats retake the Senate, they will likely introduce their own renegotiation demands, such as enforceable rules on alleged currency manipulation, a favorite demand of labor unions and the auto and steel lobbies. The House, meanwhile, will remain in GOP hands and stick with its own demands, leaving the other TPP countries unsure about which house of Congress they are supposed to placate.
The politicization of the trade deal doesn’t mean that all criticisms of TPP are simply special interest favoritism. The agreement has myriad flaws and a fundamental shortcoming: because the TPP does not expand America’s trade very much, it won’t expand growth much either. According to the USITC, the TPP would increase U.S. GDP by only 0.2 percent after fifteen years. (The most optimistic projection, by the Peterson Institute for International Economics, says that the TPP will boost U.S. national income by a mere 0.5 percent.) Most U.S. citizens would feel neither benefitted nor harmed. Yet it has been the special interests, combined with public antipathy to trade, that have tipped the balance against the TPP by prompting many otherwise pro-trade members of Congress to bolt.
As a result, Congressional ratification of the TPP is a steep uphill climb. Both parties’ presidential candidates, Hillary Clinton and Donald Trump, oppose it. McConnell and Ryan have already ruled out a vote in the lame duck session of Congress between the November 8 elections and Congress’ December 16 adjournment. Obama claims to be confident that he can get them to change their minds, but it’s hard to see how. If the TPP is not ratified this year, it will have even less of a chance in 2017 and beyond, no matter who wins the presidency.
In the post–World War II era, one of the United States’ greatest advantages has been that other countries have generally regarded it, despite its lapses, as a benign hegemon—especially compared with how they saw the old European colonial powers or the Soviet Union. A pillar of that benign posture was the United States’ willingness to pursue trade liberalization with its partners, enabled by a belief on the part of U.S. leaders that the country benefitted, both economically and politically, when its allies became prosperous and stable. As this attitude was shared by business and labor leaders, Washington was able to persuade domestic interest groups—even those with legitimate worries about trade—to compromise in pursuit of the broader national interest.
That spirit of compromise has now faded. As late as the mid-1960s, the largest U.S. trade union, the AFL-CIO, said it would support the Kennedy Round of trade talks in return for a Trade Adjustment Assistance (TAA) bill, which would help workers displaced by imports. Business, represented by the U.S. Chamber of Commerce, enthusiastically supported the bargain, even commissioning a study praising its benefits. Today, it seems as if there is almost no deal that would induce labor unions to accept a free trade agreement. The unions have therefore lost most of their leverage over U.S. negotiators. On the other side, business groups have refused to accommodate unions and actively worked to lower funding for TAA—or end it outright. (In 2015, the chamber accepted a stripped-down TAA in the interests of getting the TPP through Congress.)
When it comes to trade, the U.S. government simply no longer has as much power to corral competing interest groups. It can no longer induce them to agree on a trade pact that would promote growth through market liberalization, while at the same time addressing the concerns of those who are hurt by liberalization. Hence, U.S. negotiators have produced a TPP unable to command broad political support—a vacuum that gives narrow interest groups their veto power. This is part and parcel of Washington’s general policy gridlock. Yet to its allies abroad, the result is that the United States now appears both less benign and less hegemonic. During an August visit to Washington, Prime Minister of Singapore Lee Hsien Loong spoke for others in Asia when he warned, “For America’s friends and partners, ratifying TPP is a litmus test for your credibility and seriousness of purpose.”
The essence of free trade is that nations open their domestic markets so as to expand their own access to foreign markets. But that’s not how the United States proceeded with the TPP. Instead, it focused on opening only a small portion of its market, even as it expected its trading partners to open more of theirs, as well as to adopt U.S. positions on issues like foreign direct investment and intellectual property rights. The United States tells itself that in most sectors, tariffs were already so low that even eliminating them altogether would not have done much to liberalize U.S. markets. However, there were many other things besides tariff reduction that the Obama administration could have offered other countries. It didn’t do so because Congress would have rejected the entire pact.
“For America’s friends and partners, ratifying TPP is a litmus test for your credibility and seriousness of purpose.”
Consider government procurement, which amounts to more than ten percent of U.S. GDP and has a history of being protected by Congress. Under the current international General Procurement Agreement, the United States has only opened federal procurement to imports, along with, to a lesser degree, state-level procurement in 37 states. No localities have been opened. Yet 75 percent of U.S. procurement takes place at the state and local levels. Put that together with set-asides for small businesses and assorted “buy America” provisions in U.S. law, and foreigners are eligible to bid on only 20 percent of total U.S. procurement.
In 2014, only 4.6 percent of the United States’ total procurement was spent on imports, compared to 4.7 percent in Japan, 6.1 percent in China, and 7.5 percent in the European Union. Suppose that the U.S. procurement market had the same share of imports as the U.S. economy as a whole—roughly 13 percent. That would increase U.S. imports by one percent of GDP, five times what the USITC projects the TPP will accomplish. Given that Japan’s procurement market is worth about $1 trillion, and Canada’s about $265 billion, mutual liberalization of procurement would have boosted U.S. exports as well.
Virtually none of these procurement issues are addressed in the TPP. Although the United States wanted changes in procurement policies from Malaysia and Vietnam, the USITC reports that the United States was unwilling to accept real changes to its own procurement policies. Meanwhile, Japan and Canada, along with Australia, Chile, and Peru, have all agreed to liberalize procurement for provinces and localities—as they have done in past agreements—but only for countries that reciprocate. The United States, along with Malaysia, Mexico, New Zealand, and Vietnam, rebuffed the offer.
Two other issues illustrate how special interests boxed in U.S. negotiators. The first involved motor vehicle imports from Japan. To placate the U.S. auto industry, Washington insisted that Japan acquiesce to an extremely lengthy phase-out of auto import tariffs as a condition of joining TPP talks in 2013. Rather than using auto tariffs as a bargaining chip to gain more Japanese concessions in farming or other areas, Washington insisted they were nonnegotiable. As a result, the United States’ 2.5 percent tariff on imports of Japanese passenger vehicles and SUVs is to be phased out over 25 years. For pickups and work vans, the tariff is to stay at a stunning 25 percent until year 29 and then drop to zero in year 30. These are far more stringent terms than those granted to South Korea through the U.S.-Korea trade agreement, in which the passenger car tariffs are phased out in five years and the light truck tariffs in ten.
Second, U.S. negotiators provided only a token movement forward on the stated goal of eliminating tariffs and quotas on dairy imports from New Zealand. This came as a result of Canada’s refusal to dismantle its “supply management system,” a form of protection for Canadian dairy farmers. The U.S. dairy lobby, which is indispensable to congressional ratification of the TPP, threatened to withhold support for the agreement if the United States opened itself to imports without Canada doing the same. This cave was particularly upsetting to New Zealand, which is the world’s largest dairy exporter and lowest-cost producer, with dairy accounting for one-third of its total exports. Yet after punishing New Zealand for Canada’s sins, Congress feels no reluctance in demanding that New Zealand give up even more on issues such as data exclusivity for biologics.
The United States is hardly the only country that tries to protect politically connected special interests—Japan’s stubborn resistance to agricultural liberalization was a big factor in delaying the pact. But U.S. leaders should reflect that such behavior on the part of Tokyo is one of the reasons why Asia does not look to Japan as a leader.
In the United States, proponents of the TPP have largely failed to win the argument that the agreement will have substantial economic benefits, and have struggled to marshal support. Recently, the TPP’s champions have therefore begun to argue that failure to ratify the deal will hurt faith in Washington’s ability to keep its promises, weaken U.S. influence in the Pacific, and create a vacuum that China will be eager to fill. That may be. But TPP boosters should also recognize the damage that has already been done. That is, the loss of good will—among both the U.S. public and our foreign partners—stemming from the way that the United States negotiated the TPP in the first place.