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Best to get the TPP done right, not done fast

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A demonstrator protests against the legislation to give US President Barack Obama fast-track authority to advance trade deals, including the Trans-Pacific Partnership, during a protest march on Capitol Hill in Washington, DC, 21 May 2015. (Photo: AAP)
  • Richard Katz

    Carnegie Council for Ethics in International Affairs

In Brief

Unless the Trans-Pacific Partnership (TPP) trade talks are concluded soon, they risk dragging on interminably. If that happens, the United States’ capacity to function as a benign world hegemon will be diminished.

To avoid this, the White House is determined to get the pact signed and ratified by the end of 2015.

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This means persuading the US Congress to approve the Trade Promotion Authority (TPA) in June and its TPP negotiating partners to sign a deal just few weeks later.

The negotiating partners won’t conclude the negotiations without TPA approval. They have no reason to present their best offers if they fear that the US Congress will treat their concessions as a floor not a ceiling.

US TPP proponents condemn opponents in Congress or other countries for the delay. There is truth in that accusation; protectionism from America’s auto sector to Japan’s farmers has caused delays. But blame also lies with the posture taken by the TPP’s proponents in both the US government and the business sector. A delay of ratification until 2017 could be worth the risk if further negotiation results in a better TPP.

A major part of the US role as benign hegemon was to support free trade. World War II showed that the US is better off if other countries are more prosperous.

China, for instance, is far less dangerous internationally than it was under Mao Zedong. Much of that political evolution has occurred because China’s leaders know that economic interdependence fuels the rapid growth undergirding their rule. Bringing China into the TPP would further the trend.

But today the bipartisan US consensus supporting free trade has all but disappeared. That’s because of the unequal distribution of American income growth in the past few decades.

Labour unions blame international trade, but trade explains only 10–20 per cent of worsening inequality. More impact has come from a political system that has eroded the minimum wage, walked back progressive taxes, diminished labour unions, and cut budgets for public schools and student aid for college.

In the absence of broad support for free trade, US trade negotiators are often forced to placate narrow corporate interests in order to cobble together the razor-thin majority needed to get congressional ratification. And many short-sighted business groups unintentionally aid the anti-trade forces by resisting even woefully insufficient compensatory measures. Critics see negotiators as acting more like lawyers for special interests than champions of the national interest.

The new politics of trade has led the US toward some self-defeating negotiating tactics. A prime example is US insistence on using the Investor–State Dispute Settlement (ISDS) system, even though some TPP countries want to modify or eliminate it, as do some European Union countries in separate talks. Under ISDS, foreign corporations can sue governments in host countries for ‘loss of anticipated profits’ due to new regulations. The dispute is settled in special arbitration panels. Half of all ISDS arbitrators serve as lawyers for corporations in other ISDS cases, giving those arbitrators a financial incentive to see more merit in the corporations’ arguments.

Originally, ISDS was put in place to make sure that firms were compensated when their property was expropriated by some dictator. Today, it’s very different. R.J. Reynolds threatened to sue Canada on the grounds that a regulation compelling the firm to use plain wrapping on cigarettes was akin to expropriation. Canada backed down on the regulation. Philip Morris is suing Australia. And now, hedge funds, and other financiers, are fostering a new wave of ISDS cases by financing suits in return for 20–50 per cent of corporate winnings; they’ve even created a derivatives market in ISDS victories. This kind of profiteering is illegal in most domestic courts of OECD countries.

It is the thinness of the pro-trade majority in Congress that gives each narrow group the power to tip the balance. This lessens Washington’s ability to serve the national interest and increases the perception among other countries that the US is less a benign hegemon than a selfish one.

There is a way to restore broad support for free trade and with it White House leverage vis-à-vis special interests: the notion of ‘free trade plus compensation’. Although free trade is a win–win proposition for each nation as a whole, trade makes some citizens richer and others poorer. Fortunately, the gains for the winners are so big that some of them can potentially be redistributed so that every citizen is better off. Unfortunately, almost all of the 20th century measures used in the US to promote income equality and security are now under attack. Trade is unjustifiably scapegoated for the consequences of this whole system of policies.

Some European countries make sure that trade, technological progress and wages rise in tandem by spending as much as 1–2 per cent of GDP on ‘active labour measures’. These include retraining services and active efforts to help find new jobs for those displaced by trade or domestic changes in technology. The US spends the least among rich countries, just 0.1 per cent of GDP. This is penny wise and pound foolish for US growth, living standards, and the politics of trade.

Business, and its political allies that want free trade, must recognise the need for a grand bargain — free trade plus compensation — along a whole range of axes. Until the US restores bipartisan support for free trade, the White House will have increasing trouble securing any new trade agreements, and/or will have to pay a high price on other issues. For example, the more that US negotiators coddle special interests at home, the less international cooperation the US will get on other issues, including how to integrate a rising China. At the same time, labour unions and their Democratic Party allies need to recognise that TPP or no TPP, globalisation is going to continue. Rather than fight the inevitable, they too should focus on the grand bargain.

The White House should reconsider its stance that the TPP must be ratified this year. Given that the TPP will be the template for trade rules for years to come, that members hope to expand it to dozens of nations — including China — and that Washington needs to restore bipartisan support for free trade, getting the TPP right is better than getting it fast.

Richard Katz is Editor of the Oriental Economist Report.

This article was adapted from a longer version published here in Foreign Affairs and is reprinted with the permission of the ©2015 Council on Foreign Relations.

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