The Party That Failed
An Insider Breaks With Beijing
The rebalance to Asia undertaken by the administration of U.S. President Barack Obama is perhaps the most important Western initiative in the region since U.S. President Richard Nixon went to China in the early 1970s. A linchpin for this strategy is the Trans-Pacific Partnership (TPP), a sweeping trade agreement that has been tasked with three main objectives: to bring the United States closer to Asia’s sizable economic markets, to establish the world’s largest free trade zone, and to challenge China’s dominance in the Pacific Rim.
After the agreement’s actual text was released in November, though, critics of the TPP have raised doubts about whether it can achieve any of those goals. Several influential members of Congress, including Senators Orrin Hatch (R-Utah) and Bernie Sanders (D-Vt.), have expressed their disappointment with aspects of the deal. Sanders, a U.S. presidential candidate, stated that “the disastrous Trans-Pacific Partnership trade agreement . . . will hurt consumers and cost American jobs." Industry representatives from Ford Motor Company and the Pharmaceutical Research and Manufacturers of America have expressed concerns with the lack of provisions against currency manipulation and more extensive patent protection for brand-name drugs, respectively.
The TPP’s detractors all have their points, but the five years of negotiation that led to the deal should not go to waste. If the TPP is to live up to its creators’ expectations, its member states must come up with solutions to the problems that its critics have identified. Long-term, innovative policies are required to make the TPP work, whether the deal is perfect or not.
The TPP does have both benefits and drawbacks for the United States. According to a widely cited report by the Peterson Institute for International Economics (PIIE), the TPP’s total benefits to the global economy could reach $223 billion by 2025. That same year, U.S. income gains would hit $77 billion, or 0.1 percent of the nation’s GDP. U.S. export gains are also projected to reach $54.8 billion, an increase of 1.9 percent. Foreign direct investment would similarly rise by 1.9 percent, reaching $169 billion.
But as with all trade deals, those gains will not be spread evenly. The services industry, in which the United States already runs a trade surplus, will benefit disproportionately. So too will agriculture, owing to the new export markets for staple foods such as beef, corn, and soybeans. And technology firms stand to gain ground thanks to the relaxation and elimination of protectionist policies within TPP member nations aimed at incubating domestic technology sectors. The semiconductor industry, for example, is particularly encouraged by rules that will prohibit market-access restrictions on encrypted products, measures that countries had previously put in place on cybersecurity grounds.
At the same time, however, the TPP will likely have negative consequences for employment in the United States, particularly in the manufacturing sector. The public understands that free trade deals typically lead to lower overseas labor costs, which in turn depresses domestic wages. But the dynamics are much more complex than that. In recent years, manufacturing companies have begun to bring back jobs to the United States because of rising international wages and a desire to improve quality control for their products and services. In fact, since 2010, manufacturing jobs in the United States have increased by approximately one million, according to the Bureau of Labor Statistics.
With the TPP in place, however, this trend should reverse. Approximately 650,000 more people (0.5 percent of the U.S. labor force) will find work in export-related jobs, with a smaller number winning jobs in fields that compete with imported goods. The PIIE has made the argument that export-related jobs are likely to be higher paying and would therefore raise the median U.S. wage, leading to welfare gains in the United States to the tune of $459,000 per job. Others, including the economist David Rosnick of the Center for Economic and Policy Research, are less optimistic, concluding that median wage earners will see their wages go down, while low-income workers will maintain their level of wages and high-income employees will see their pay rise even more.
However one comes down on the TPP, U.S. employment issues are better solved by looking beyond the deal. The partnership only reinforces a nearly five-decade-long trend in the United States in which service jobs have replaced manufacturing positions. Even if the TPP yields more service positions, this trend cannot continue unchecked. To be sure, low-skilled manufacturing work may be performed at a lower cost and with greater efficiency in other TPP member countries, but high-skilled manufacturing jobs are a key driver of economic productivity and wage levels in the United States, and losing them would be devastating.
If the United States is to regain its competitiveness in the manufacturing sector, it must invest in technologies that allow workers to do their jobs more efficiently. Other sectors of the U.S. economy could provide these solutions, and as the Nobel laureate Michael Spence argues in The Next Convergence, Washington can establish public policies (particularly in infrastructure and technology, where such high-skilled manufacturing jobs may be found) to promote their development now.
The TPP comes with benefits and drawbacks for other countries as well. On the one hand, the timing of the agreement’s passage is not ideal, given that the World Trade Organization’s Doha Round of negotiations on a comprehensive global trade regime are nearly 80 percent complete. On the other, the TPP supports the work of the Doha talks. As the North American Free Trade Agreement put pressure on the WTO Uruguay Rounds to reach a final agreement on global trading systems, the TPP could encourage countries to resume stalled Doha proceedings, lest the United States and others abandon Doha and focus their efforts on further piecemeal free trade agreements.
There is no doubt, however, that the WTO is aware of the deep fissures in its multilateral foundations, and the TPP is but the latest blow to the notion of a global trade regime. Economists such as Columbia University Professors Jagdish Bhagwati and Joseph Stiglitz have argued that the proliferation of bilateral and regional free trade agreements can lead to a “spaghetti bowl” of trade regulations that create confusion, inefficiency, and economic losses.
None of this is to suggest that Asia or the United States should rely only on Doha to achieve the urgent goal of economic integration. A global regime would, by necessity, require more lead time to take effect and be unable to take advantage of local synergies in production capacities, economic systems, geography, and even governing institutions. At the time that the TPP was being negotiated, a couple of other Asian free trade agreements were in the works. The Regional Comprehensive Economic Partnership had progressed the furthest. Encompassing all members of the Association of Southeast Asian Nations (ASEAN) and the countries with which they have free trade agreements, the RCEP trade area represents approximately 27 percent of global trade, with a combined GDP of $21 trillion. RCEP negotiations first began in November 2012 at the East Asia Summit and have steadily progressed since. At last year’s Asia-Pacific Economic Cooperation summit, member countries agreed to launch a two-year study into establishing the Free Trade Area of the Asia-Pacific (FTAAP), an initiative spearheaded by China in response to the TPP that would cover all countries in the Pacific Rim.
Though there was by no means a horserace between the TPP, RCEP, and FTAAP to become the dominant trade regime in Asia, the economic dynamics in the region have changed significantly now that the TPP deal has been finalized. Given U.S. and Latin American participation, the TPP has the most heterogeneous membership roster out of the three. The TPP is betting that greater economic integration within Asia and with the rest of the world will be best achieved through convergence to an international, not local, order. It remains to be seen whether the economic relations among Asian countries can be normalized while governed by these different agreements. The rules of origin, for example, remain an area of confusion even at the WTO level and are unlikely to be harmonized with the proliferation of free trade agreements.
In addition to the wrench it throws into these ongoing trade negotiations, the TPP has several drawbacks. The TPP’s “gold standards” in trade and governance regulations closely align with U.S. law and may not be appropriate in emerging markets. For example, the stringent U.S. patent and copyright laws that made it into the final TPP text do more to protect larger businesses than foster innovation. The deal also includes environmental protections that may be too costly for developing industrial economies. In fact, the TPP has set forth a host of legal and economic requirements that will push developing markets to adopt reforms before they are ready to do so.
The TPP also wades into one of the world’s thorniest globalization issues: the loss of national sovereignty. Under the TPP, investor-state dispute settlement (ISDS) mechanisms will allow private entities (namely, corporations) to sue countries for TPP violations. Historically, these suits have been settled in favor of the United States and other countries with lots of economic clout. The ISDS system provides little transparency about its arbitration decisions, and no appeals process exists through which incorrect decisions can be ameliorated.
Additionally—and perhaps most important—the TPP will further divide Asia between those countries that are more welcoming of U.S. regional influence and those that fear offending China by aligning with Washington on trade. In order to establish a true free trade area in Asia and unlock the economic benefits that come with it, these countries will have to come together through smaller regional agreements, such as the RCEP or the FTAAP. Now that the TPP has made it across the finish line first, Asian unity and integration have become much more complicated propositions.
In spite of its flaws, it’s hard to overstate how important the TPP is for global economic policy and for Washington’s interests in Asia. The Asian Development Bank estimates that the region’s developing countries will grow by 6.3 percent in both 2015 and 2016, making it one of the most dynamic regions in the world. China has made significant inroads toward becoming the dominant player in Asia’s growth. In 2007, China surpassed the United States as the trade leader with ASEAN and has maintained that position ever since. Last year, China’s total goods trade with ASEAN reached $480 billion, more than twice that of the United States.
Leaving aside China’s interests in establishing political and economic clout in Asia, Beijing recognizes that it needs to deepen its economic engagement with its neighbors. In the last four years, China’s foreign direct investment increased at a compound annual growth rate of 16 percent, twice that of the global average. However, Southeast Asia receives only four percent of China’s investment. On the trade front, the region’s low-cost industrial inputs are crucial to China’s transition from a manufacturing to a services economy in the years ahead. So for China’s own economic growth to continue, investment needs to increase.
Despite some fears about Beijing’s growing economic bargaining power and military might, China remains the paramount example of successful development in Asia. The difference between the U.S. and Chinese approaches in this area could not be clearer. China has existing free trade agreements with all ten ASEAN countries, and none of them address issues that the U.S. considers non-negotiable for future trade agreements (such as intellectual property, environmental policy, and labor rights). Perhaps for that reason, until the TPP, the United States had only one free trade agreement in the area—with Singapore.
China’s agnosticism about legal and governance institutions is apparent in its Asian Infrastructure Investment Bank and the “One Belt, One Road” initiative, China’s marquee international economic initiatives. The AIIB pledges to spend up to $100 billion on infrastructure needs in Asia, and the “One Belt, One Road” initiative pledges $40 billion toward development in its member countries, which span from Central Asia to Europe and even Africa. The AIIB and “One Belt, One Road” both promise to invest capital first and ask questions afterward. Although China will doubtless keep an eye out for the health of its investments, it refuses to do so through mandating standards common in the Western industrialized world. Beijing maintains this perspective not only because it cannot comply with these standards itself but also because it aims to speak the same language of development as other emerging economies.
Although the TPP goes a long way in challenging China’s dominance in Asia, it cannot be the only solution offered by those who are skeptical of Beijing’s outsize role. The TPP will increase the growth of Asian economies: Indonesia stands to add four percent to its national income, and Vietnam will grow 14 percent by 2025. Japan, Korea, and Singapore will benefit a little less but will still see gains of two to three percent in their national incomes. However, the TPP’s trade liberalization initiatives will require domestic reforms that will be very costly for developing Asian countries. Therefore, it is important that the United States join China’s development initiatives in addition to passing the TPP. This strategy would allow the United States to challenge China economically, usher in long-term governance reforms that it deems central to the developing world, and prevent the country from monopolizing regional short-term development activity. More than simply a free trade agreement, then, the TPP presents the United States with a unique opportunity to adjust its long-standing global development model and lead on a new strategy.
The TPP’s architects have heralded the deal as a “trade agreement for the twenty-first century” for the past five years. If the deal is to fulfill its promise, it needs to be supported by other twenty-first-century initiatives: greater support for highly skilled manufacturing jobs in the United States, harmonization with existing international economic systems, and participation in development programs that are driven by other countries. Ultimately, the TPP is on shaky ground not because it is imperfect but because it is expected to act alone.