Trans-Pacific Partnership: Trade deal assessed
The world has not seen a big multilateral trade pact for over 20 years. Now the Trans-Pacific Partnership (TPP) has been provisionally signed by 12 countries including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Concerns about the agreement include job losses and rising inequality, the secrecy of negotiations, aligning with America’s longer protection for intellectual property and increasing costs for medicine due to patent extensions.
Protesters outside the TPP signing ceremony in Auckland, New Zealand. Phil Walter
The United States government considers the TPP as the companion agreement to the proposed Transatlantic Trade and Investment Partnership (TTIP), a broadly similar agreement between the United States and the European Union.
Three studies, with different modelling approaches, show varying results for the long-term impact of the Trans-Pacific Partnership trade agreement.
The World Bank released modelling that takes account of all aspects of the proposed deal – both trade and non-trade related – and found that “by 2030, the TPP will raise individual country GDP by from 0.4 to 10 percent, and by 1.1 percent, on a GDP-weighted average basis”. These are cumulative increases to 2030.
Here’s the break-down by country: Vietnam – 10%, Malaysia – 8%, Brunei – 5%, New Zealand – 3.1%, Singapore – 3%, Japan – 2.7%, Peru – 2.1%, Mexico – 1.4%, Canada – 1.2%, Chile – 1%, Australia – 0.7%, US – 0.4%. The poorest signatories are likely to be the deal’s biggest beneficiaries; the World Bank estimates that the Vietnamese economy will be 10 per cent larger by 2030 thanks to the Trans-Pacific Partnership.
But a study from the Washington-based Peterson Institute emphasised the US and Japan would be the biggest beneficiary of the agreement in absolute terms (increase in GDP), although it was more equivocal about the employment impact. “The present analysis does indicate that the benefits of the TPP to the US economy will greatly outweigh adjustment costs, and that economy-wide price and employment consequences will be limited,” the Peterson report said.
The Institute rates the TPP as the most important trade agreement in world history, incorporating 40 percent of the global economy and setting the stage for eventual expansion to a comprehensive Free Trade Area of the Asia Pacific (FTAAP).
“The TPP includes 12 countries but is largely a free trade agreement between the United States and Japan. These two countries together account for about 60 percent of its economic benefits. Both already have free trade agreements (FTA) with most of the other participants but not with each other. They are the only two individual TPP members whose ratification is required for the agreement to enter into force and hence could veto it. It is unlikely that either could have reached a bilateral FTA, in light of their domestic politics, but the regional umbrella of TPP has made a highly desirable FTA between them possible. They worked effectively together to forge the agreement among the 12”.
The Institute’s model estimates Japan will be the single largest national beneficiary of the TPP, with exports and imports each growing by $140 billion annually and national income increasing by more than $100 billion. These absolute increases are greater than for any other member country. In percentage terms, only much smaller Vietnam and Malaysia will enjoy larger gains. Japan’s percentage gains will be two and half to five times those of the United States.
These benefits will grow significantly when other countries join the TPP in a second stage, as half a dozen (including Indonesia and Korea) are already hoping to do. The Institute also promotes the deal as a catalyst for structural reform in Japan.
Models depend on their assumptions and these results should be taken with a grain of salt. American think-tanks regularly promote Japan as an economic basket case but after Japan’s asset bubble burst in the early 1990s, the government eventually acted in the late 1990s and early 2000s. Since then, Japan’s per capita growth has been comparable to that in other industrial countries and unemployment averaged 4.5% from 2000 to 2014, compared with 6.4% in the US and 9.4% in the euro zone.
The Institute also portrays the TPP as a challenge to China and other countries in Asia that are outside its initial membership to participate in new regional trade liberalisation compacts. “China alone will suffer trade diversion of about $35 billion annually from the present TPP and over $100 billion if the rest of the Asia Pacific Economic Cooperation (APEC) forum joins while it does not”.
A third working paper was much more pessimistic. Written by Jerome Capaldo and Alex Izurieta, economists from Tufts University’s Global Development and Environment Institute, and Jomo Kwame Sundaram – formerly the United Nations Assistant Secretary-General for Economic Development, the paper takes a critical, independent look at the economic modeling performed by the TPP’s proponents and finds it based on a set of nonsensical, nonstandard assumptions about how economies perform such as full employment and unchanging income distribution.
The researchers revisited the pro-TPP research using a “realistic” set of modeling assumptions, based on the widely accepted United Nations Global Policy Model (GPM). When they re-run the numbers on the TPP’s impact on jobs, they come back with a stark finding: developed nations that sign TPP can expect to hemorrhage jobs by the tens of thousands – and poor countries will gain few, if any jobs from those losses.
TPP would generate net losses of GDP in the United States and Japan. For the United States, they project that GDP would be 0.54 percent lower than it would be without TPP, 10 years after the treaty enters into force. Japan’s GDP is projected to decrease 0.12 percent.
Economic gains would be negligible for other participating countries – less than one percent over ten years for developed countries and less than three percent for developing ones. These projections are similar to previous findings that TPP gains would be small for many countries.
TPP would lead to employment losses in all countries, with a total of 771,000 lost jobs. The United States would be the hardest hit, with a loss of 448,000 jobs. Developing economies participating in the agreement would also suffer employment losses, as higher competitive pressures force them to curtail labor incomes and increase production for export.
TPP would also lead to losses in GDP and employment in non-TPP countries. In large part, the loss in GDP (3.77 percent) and employment (879,000) among non-TPP developed countries would be driven by losses in Europe, while developing country losses in GDP (5.24%) and employment (4.45 million) reflect projected losses in China and India.
These job losses would contribute to trade tensions. “This increases the risk of global instability and a race to the bottom, in which labor incomes will be under increasing pressure,” the paper says.
TPP would lead to higher inequality, as measured by changes in the labor share of national income. The authors foresee competitive pressures on labor income combining with employment losses to push labor shares lower, redistributing income from labor to capital in all countries. Further, “The TPP would negatively affect income distribution, further weakening domestic demand and significantly undercutting possible gains from trade.”
Combined with the credibility of the authors, the results seem the most convincing. In short, free trade deals will benefit global corporations with integrated supply chains, but result in a net loss of jobs. The only positive is the potential gain for rising wages in developing countries, but even those gains may not materialise in an increasingly competitive export-oriented global economy?
The monetary authorities of the TPP countries are also organising a side agreement on macroeconomic and exchange rate issues is to avoid future currency manipulation by partner countries that could undermine the agreement’s trade liberalization. TPP group plans to provide a new forum to help deter and, if necessary, counter such practices.
Sounds good, but unfortunately the Peterson Institute also clarifies the forum’s role as “reinforcing the widespread consensus that domestic implementation of monetary policy, including quantitative easing, should not be regarded as currency manipulation and is thus fully acceptable internationally” – which is total rubbish, reserving currency manipulation by money printing for those countries central enough to the global economy to be exempted from market currency attacks.
New Zealand commentary and opposition
New Zealand has had the most active public opposition to the TTP. The Campaign Against Foreign Control of Aotearoa (CAFCA, Aotearoa is the Maori name for New Zealand) sets out a much more detailed critique of the TPP by Jane Kelsey in their excellent newsletter, Watchdog:
TPP every bit as bad as we said it would be
As expected, access to the text of the Trans-Pacific Partnership Agreement reveals major holes in the Government’s “fact sheets”’. An initial review of the most controversial chapters confirms that New Zealand will have to comply with onerous new obligations and lose the future capacity to regulate in ways that an elected Government thinks appropriate.
This goes beyond New Zealand’s existing agreements in numerous ways. For example, a foreign investor from a TPPA country that is party to a contract for oil exploration, a public private partnership (PPP) contract for water, sewage or toll roads, or a mining or forestry concession with central Government or a State-owned enterprise exercising a delegated power, can use the controversial investor-State dispute settlement (ISDS) process if it wants to claim its rights are breached, even if the contract requires them to use NZ courts or some other dispute mechanism.
Notably those from the US and Japan gain special rights not available to New Zealand investors, which are commonly used to challenge new regulations that adversely affect their business. In New Zealand, where risk-tolerant light handed regulation is the norm, that poses major problems for a future Government wanting to regulate in the public interest.
Categories Of Investment
As the Government conceded, the categories of investment where the rules can be tightened have been constrained and existing regulation of various services and investments are locked in so they can’t be made more restrictive in the future.
Environment, Health & Regulatory Objectives
Some of the so-called protections for environment, health and regulatory objectives in the investment chapter are a nonsense – they allow the Government to do what the chapter allows the Government to do. The wording of the annex on expropriation, which supposedly restricts the scope of indirect or regulatory expropriation – where regulations are challenged for eroding the value of an investment – is weaker than other New Zealand agreements.
General Exception Provision
This, which provides only weak protection for public health or environment measures at best, does not apply to the investment chapter. Instead, there are highly contestable rights to adopt rules for “legitimate public policy” reasons, but those apply only to some rules and will be interpreted by ad hoc investment arbitrators.
There are some attempts to rein in the investor-State dispute settlement process, but they do not address the major concerns. The arbitrators are still likely to be drawn from a small club (often referred to as the Mafia) who are also investment lawyers; there are no conflict of interest rules, merely that they must be developed before the Agreement comes into force; there is no appeal; compound interest can still be awarded; and the kinds of damages that be claimed are still extensive.
Circumventing Attempts To Constrain The Adventurism
A further, fundamental problem is that investment tribunals have proved adept at reading down or circumventing attempts to constrain the adventurism of the tribunals, including provisions on which parties to the TPPA claim the right to make binding interpretations that the tribunals must follow.
This applies only to disputes brought by investors under the investment chapter, where a country opts to exclude it. Unlike the proposed Malaysian carve-out for tobacco control measures from the entire Agreement, it does not apply to other chapters, such as labelling rules, intellectual property, or the investment chapter itself (Australia’s plain packaging law is currently facing a dispute over labelling and intellectual property in the World Trade Organisation).
There is at least some provision for countries to impose capital controls, which does not exist in standard US free trade agreements. But it is circumscribed by almost impossible conditions.
There are serious new constraints on financial regulation, including of cross-border financial transactions and data flows, which require further careful study.
State-Owned Enterprises Chapter
The unprecedented State-owned Enterprises chapter has three complex principal rules, which will create major problems for SOEs that provide integrated services both within and outside the country or produce a mixture of goods and services. The procedural requirements are commercially intrusive and provide scope for harassment by other TPPA parties on behalf of their corporations.
Creation Of New SOEs
The chapter will create particular problems for the creation of new SOEs that require a capital injection and subsidisation or other special treatment or the provision of guarantees – for example, the proposal to establish a new State-owned insurance company.
This is extended by 20 years in two tranches; New Zealand is the only country that has to make changes immediately.
This highly sensitive area is far from secure. New Zealand’s negotiators say they consider our current process satisfies the obligation. But there is a very high risk that the US will demand that we adopt its interpretation of what is required and refuse to “certify” our compliance (a prerequisite for the Agreement to come into force with the US) until we provide a longer effective monopoly on those new generation pharmaceuticals. In addition, the rule comes up for renegotiation in ten years, by which time biologics will be a much more dominant part of the medicines budget.
The transparency annex that affects Pharmac’s processes will increase its administrative burden and a new review procedure provides Big Pharma with a new opportunity to challenge Pharmac’s decisions.
Where to from here..
The member governments now have two years from to get members representing 85 per cent of the group’s overall GDP to ratify the deal, while Japan and the US hold a veto. Activists have two years to increase public awareness and opposition to the deal. And if the world hits another global financial crisis, reminding the public of the dangers of free markets, we have a critical window of opportunity to promote a more effective agenda for international economic development.