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The race to a risky Trans-Pacific Partnership deal

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Protestors stand at a rally outside the Sheraton Hotel in Sydney as global trade ministers meet at the venue to discuss the Trans-Pacific Partnership (TPP) free-trade agreement on 25 October 2014. (Photo: AAP)

In Brief

The largest hurdle for the 12-member Trans-Pacific Partnership (TPP) agreement — the US president’s ability to get Trade Promotion Authority, or fast track — has been cleared. Many people think that the TPP can be wrapped up in a few months.

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There are still difficult issues to resolve, but they are trivial compared to the ability to get a straight up-or-down vote in the US Congress, without which the deal would be a non-starter. The remaining issues can easily be horse-traded at the political level and compromises can be made in order to complete the deal.

The temptation will be strong to rush across the finish line for what will be a major political trophy — but the risk is that the TPP will be an agreement that does more harm than good for economic and political relations in the Asia Pacific.

A completed TPP will be accompanied by grandiose statements about the deal covering 60 per cent of global GDP and half the world’s trade. This sounds much less impressive when you compare it to groupings like APEC, which includes China and Indonesia, that have even higher global GDP and trade coverage. But the numbers like these don’t tell us anything about what kind of deal it will be or what gains and costs it will bring. The most optimistic estimates suggest trivial increases in GDP.

The TPP aims to write rules for international commerce in the 21st century and includes a large number of chapters that go beyond 20th century trade issues.

There are three major flaws, though, that will likely overwhelm any positives the deal may deliver.

The first is that the core of the new rules involves aspects that further private interests (read: large multinationals) at the expense of general welfare in member countries. The most egregious of these is stronger intellectual property (IP) rights protections, which are anti-development and simply transfer wealth to US pharmaceutical companies and Hollywood. Stronger intellectual property protections stymie innovation. This means a net reduction in trade and a loss in global welfare. If countries like Australia think stronger IP protections are in their national interest, they do not need an international treaty to introduce them.

The second flaw is who the TPP leaves out. China, India and Indonesia, among others, are not party to the TPP nor will they be able to join anytime soon. The hurdles to membership are unreasonably high for non-advanced countries, who will pay a cost from being left out with strict rules designed to divert trade from them.

The third major flaw is that even in the win-win trade enhancing areas, the TPP will either entrench protection in some areas — chiefly agriculture — or, where it succeeds in liberalising, will do so at the expense of non-members. Inefficient and unproductive sectors are a drag on economies, and liberalising them would produce real gains. But many countries in the TPP are bringing an overly defensive stance — think Japan and its rice and other ‘sacred’ produce — or are starting with that sector off the negotiating table altogether, as is the case with US sugar.

More egregiously, the TPP will complicate trade and impose serious costs on non-members.

Vietnam is a case in point. The country is paying a high price for entry by adopting standards and rules inappropriate to its stage of development, but it will benefit from increased market access in the United States for its garments exports. Yet Vietnamese exporters will only enjoy that preferential treatment if it procures raw materials from another TPP member instead of from cheaper, more efficient suppliers like China. These and similar provisions that derive from the way TPP has been negotiated bilaterally make it a particularly complex and costly agreement. The trade diversion that will result imposes economic costs on members and non-members alike — and some of the latter are even poorer than Vietnam.

To make matters worse, the trade- and welfare-reducing IP rights provisions are being traded off against and bundled with market access provisions. And some provisions could be disruptive and costly when onerous standards, institutions and reforms — to state-owned enterprises, for example — are imposed and countries are expected to leapfrog stages of development.

As TPP members sprint towards the finish line, they will need to introduce measures to enhance the positives of the agreement — the genuine trade and investment liberalisation that occurs — and over time minimise the negatives. A first step is to limit the scope and reach of the welfare reducing IP protections.

The agreement needs to be expansionary on the win-win trade and investment liberalisation aspects. That involves limiting the complicated preferential deals within the TPP and making it easy to expand membership. That is no easy task given the design of the agreement is to punish non-members into compliance on terms set by the advanced economies. A more productive way forward would be to help build capacity in lower income countries so that they can reach those standards. That is how to further productive economic interdependence and win friends.

If progress can be made in reform and liberalisation unilaterally or through the help of other regional initiatives — and if the WTO and multilateral system can be strengthened — then the benefits of the TPP can be accentuated and some of its more pernicious costs averted.

Shiro Armstrong is co-director of the Australia-Japan Research Centre and co-Editor of East Asia Forum at the Australian National University.

10 responses to “The race to a risky Trans-Pacific Partnership deal”

  1. We hope that NZ will have the quiet courage to demand a decent outcome. The US is the supplicant just now, so it is a good time to insist on some actual policy change from the complacent giant.

    NZ is the ‘repository’of the TPP, so it cannot be jettisoned summarily.

  2. Is the GDP of all the 12 TPP members combined really 60% of the world’s total? My calculation based on the most recent World Bank’s GDP figure for 2014 suggests it was 53.7%, or 54%, that is a 10% smaller than 60%. Note that there is no data for New Zealand so its 2013 figure plus 5% was used as an estimate. There are some other countries whose data are not available for 2014 too, but they, including Taiwan, are mostly small economies.

  3. Influential members of the Republican Party in the US are on record saying they support fully the TPP deal so any change in US party leadership should not result in US driven delays.

  4. Thanks for your excellent analysis of the TPP.

    Taking up just one of your reservations about the TPP, how can it make
    sense for any Australian government to become a party to such a serious
    undertaking that specifically leaves out China, Indonesia, and India?
    These countries are obviously our neighbors and, no matter what happens,
    they are our future.

    To sign up to an exclusive US collaboration with Japan, designed to
    bolster US primacy against China, makes no geopolitical sense for
    Australia. Especially now, just after China has cooperated with the US
    to conclude a key non-proliferation agreement with Iran, and just when
    China is working with the US to achieve a serious agreement in Paris in
    December on climate change.

    • Whether it is willingly or unwillingly on Australia’s part, the TPP may prove to be a mixed blessing for Australia indeed, given that China is Australia’s largest market and that Australia relies very heavily on Chinese economy to perform. China is excluded from the TPP and will suffer as a result of the trade diversion effects away from its exports. If China’s exports is negatively affected by the TPP, then it in turn will have a negative effects on Australia.
      But more seriously than that, the intention of the US and Japan to contain China’s (and possibly India’s too) rise economically as shown in their approach to the TPP memberships, there may be a long term and lasting damage to a number of bilateral relationships. In the future those countries which are deliberately excluded by the US and japan may take potentially remedy measures, whether it is retaliatory or purely a natural response.
      The Chinese and Indians may not openly say anything but in their heart and minds it is crystal clear what the TPP is about and what it means for them.
      The damages have already been done and let’s hope they would be contained without spiral out of control.

  5. Brilliant analysis and indictment of the TPP. The three flaws cited by Shiro Armstrong are major flaws. TPP is a huge mistake. Jean-Pierre Lehmann

  6. Many thanks indeed for this illuminating commentary which points to the potential pitfalls lurking in the underbrush, as it were, for non-OECD participants. As Shiro notes, Vietnam’s likely challenges merit particular notice.

    I would, if I may, wish to additionally observe that one possibly fundamental weakness afflicting the TPP is that it is not simply a commercial/financial agreement binding disparate economies, which it apparently is, but is also an instrument of strategic leverage against non-invitees, especially China. The geopolitical driver manifest in the TPP’s tacitly coercive intent has been analysed by insightful American commentators in recent years, A couple of instances:

    http://csis.org/publication/tpp-more-trade-agreement

    https://www.aei.org/publication/trans-pacific-partnership-americas-strategic-role-asia/

    The TPP’s progress to completion warrants close attention for all the reasons Shiro underscores. I would suggest that additionally, its geopolitical objectives, as acknowledged by these US observers place it in a category unto itself.

  7. Great analysis.

    Anyone interested in the promotion of trade liberalisation, especially trade for development, should be worried that the TPP will become a whipping horse of the anti-liberalisation movement once its more neo-colonial elements become common knowledge, much like the Washington consensus. It is a shame that erstwhile economic goals are so often hijacked by strategic interests.

    I fail to see how the middle powers of Asia can consider a situation where China is economically isolated and embarrassed as being good for their security.

  8. The TPP is indeed, like the WTO treaties, as much or more about protecting monopoly as free trade. Patent laws should be abolished in toto. In the meantime, if Australia had any brains it would impose a 10per cent annual user charge on the self-declared value of patents and if Big Pharma etc don’t want to pay their patents can be forfeited to the Crown for free public use thereafter. Of course, if a low value is declared they can be bought out as required. The only redeeming merit of patents is that they can be used to lower tax burdens for multinationals who may be gracious enough to share some savings with their customers.

  9. Anyone remember the Free Trade Area of the Americas (FTAA) project around a decade ago? There are some interesting parallels to be drawn with the TPP, and lessons from the past FTAA negotiations experience that the US does not seem able to have learned from, i.e. the need to be more flexible (especially in matters of commercial regulation) when dealing with various countries with asymmetric political economies and development capacity levels

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