Trans-Pacific Partnership: An Assessment

Trans-Pacific

Partnership:

An Assessment

Policy Analyses in International Economics 104

Cathleen Cimino-Isaacs and

Jeffrey J. Schott, editors

Cathleen Cimino-Isaacs, research associate, has been with the Peterson Institute for International Economics since August 2012. She works with Senior Fellows Gary Clyde Hufbauer and Jeffrey J. Schott on international trade policy, free trade agreement negotiations, and the future of the World Trade Organization. She is also the manager of the Institute’s Trade and Investment Policy Watch blog. She is coauthor of Local Content Requirements: A Global Problem (2013) and assisted with Economic Normalization with Cuba: A Roadmap for US Policymakers (2014).

Jeffrey J. Schott, senior fellow, joined the Peterson Institute for International Economics in 1983. During his tenure at the Institute, he was also a visiting lecturer at Princeton University (1994) and an adjunct professor at Georgetown University (1986–88). He was a senior associate at the Carnegie Endowment for International Peace (1982–83) and an official of the US Treasury Department (1974–82) in international trade and energy policy. Schott is the author or coauthor of several recent books on trade, including From Drift to Deals: Advancing the WTO Agenda (2015), Local Content Requirements: A Global Problem (2013), Understanding the Trans-Pacific Partnership (2012), NAFTA and Climate Change (2011), and Figuring Out the Doha Round (2010).

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

1750 Massachusetts Avenue, NW Washington, DC 20036-1903

(202) 328-9000 FAX: (202) 328-5432 www.piie.com

Adam S. Posen, President

Steven R. Weisman, Vice President for Publications and Communications

Cover Design: Peggy Archambault

Cover Photo: Shutterstock ©kentoh

Printing: Versa Press, Inc.

Copyright © 2016 by the Peterson Institute for International Economics. All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without permission from the Institute.

For reprints/permission to photocopy please contact the APS customer service department at Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923; or email requests to: info@copyright.com

Printed in the United States of America

18     17     16         5     4     3     2     1

Library of Congress Cataloging-in-Publication Data

Names: Cimino-Isaacs, Cathleen, editor. | Schott, Jeffrey J., 1949– editor.

Title: TPP : an assessment / Cathleen Cimino-Isaacs and Jeffrey J. Schott, editors.

Other titles: Trans-Pacific Partnership Description: Washington, DC : Peterson Institute for International Economics, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2016001825 (print) | LCCN 2016006008 (ebook) | ISBN 9780881327137 | ISBN 9780881327144 () Subjects: LCSH: United States—Foreign economic relations—Pacific Area. | Pacific Area—Foreign economic relations—United States. | United States—Foreign relations—Pacific Area. | Pacific Area—Foreign relations—United States. | Duty-free importation—Pacific Area. | Free trade—United States. | United States—Commerce—Pacific Area. | Pacific Area—Commerce—United States. Classification: LCC HF1456.5.P3 T77 2016 (print) | LCC HF1456.5.P3 (ebook) | DDC 382/.911823—dc23

This publication has been subjected to a prepublication peer review intended to ensure analytical quality.

The views expressed are those of the authors. This publication is part of the overall program of the Peterson Institute for International Economics, as endorsed by its Board of Directors, but it does not necessarily reflect the views of individual members of the Board or of the Institute’s staff or management.

The Peterson Institute for International Economics is a private nonpartisan, nonprofit institution for rigorous, intellectually open, and indepth study and discussion of international economic policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them.

Its work is funded by a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as income on its capital fund. About 35 percent of the Institute’s resources in its latest fiscal year were provided by contributors from outside the United States. A list of all financial supporters for the preceding four years is posted at https://piie.com/sites/default/files/supporters.pdf.

Contents

Preface

The Trans-Pacific Partnership (TPP) trade agreement between the United States and 11 Pacific Rim countries concluded in October 2015. Despite fears about secrecy, the entire text was released soon after, months before the official signing of the pact in February 2016, so that the public could read and assess the trade deal. Even the interested and educated publics of participating countries, however, need a clear assessment and unbiased evaluation of what the pact would mean. That is the purpose of this volume. With Trans-Pacific Partnership: An Assessment, which includes rigorous, fact-based, but hopefully accessible essays by experts, the Peterson Institute for International Economics hopes to clarify the issues for readers and dispel misinformation.

The TPP is a ground-breaking megaregional trade deal encompassing 36 percent of world GDP and a wide range of economies and people and clearly would be on net beneficial for all participants, including the United States. The partnership adds several new free trade agreement (FTA) partners for the United States, including Japan and Vietnam, and substantially upgrades existing trade pacts between member countries, most notably the North American Free Trade Agreement (NAFTA). These upgrades make NAFTA fairer and more functional for Canada, Mexico, and the United States. The TPP will open markets and contribute new rulemaking in issues that are critical to economic integration in the 21st century, such as services, investment, and digital trade. The agreement neither achieves full liberalization nor addresses all concerns in these important growing sectors. But it does make real progress in both market opening and setting higher common standards, though in a way not seen before.

Trans-Pacific Partnership: An Assessment, edited by Jeffrey J. Schott and Cathleen Cimino-Isaacs, provides an indepth, comprehensive analysis of the potential economic impact of the TPP. We assembled contributions from a team of experts to deal with the key issues. The authors analyze the traditional market access aspects of the deal but also assess innovations in trading rules, drawing out the implications for governments, businesses, workers, and households. Chapters 1 to 20 were first published as two volumes of PIIE Briefings in February and March 2016, with all the data underlying the analyses available on the Institute’s website, www.piie.com.

The volume includes a comprehensive analysis of the macroeconomic and sectoral effects of the TPP by Peter A. Petri and Michael G. Plummer in chapter 1, which demonstrates that the agreement will deliver large economic benefits to the United States and its trading partners. In chapter 2 Robert Z. Lawrence and Tyler Moran build on these estimates to quantify the adjustment costs for trade-affected US workers. Other essays analyze in greater and qualitative detail the impact of market opening in agriculture, autos, textiles, government procurement, services, and investment. Our authors examine the potential impact of innovative new rules on areas such as intellectual property, state-owned enterprises, digital trade, environment, and labor standards for both member countries and the future of the world trading system. In addition to the Institute’s contributing authors, we are grateful for additional expertise contributed by R. Michael Gadbaw in chapter 18 on competition policy and Jennifer Hillman in chapter 12 on dispute settlement from the Georgetown University Law Center. Kimberly Ann Elliott, senior fellow at the Center for Global Development, contributed chapter 6 on rules of origin in textiles and apparel.

The rigorous analyses based on well-accepted economic methods put forward by the authors of this volume is a good antidote for the casual politicization and factual errors about the TPP too prevalent in the media and in political discourse. Its conclusion underscores the key point of all contemporary trade agreements: Benefits to TPP participants largely accrue from reforms and competition that boost productivity by promoting innovation and more efficient deployment of capital and labor in each domestic market. Developing countries like Vietnam that have to change their domestic policies the most are the ones that will achieve the strongest growth. It is noteworthy that all TPP countries, developed and developing, adhere to common obligations and binding dispute settlement procedures in almost all areas, though the less developed members are provided additional time to implement new reforms.

The overall gains are accompanied by challenging adjustment costs for some workers that are critical in human as well as legitimate political terms. It must be recognized, though, that such affected workers are very small in number compared with the number of workers who lose or are forced to change jobs in any given year for any member’s economy. That ratio for the United States is roughly 600 job losses or involuntary changes occurring annually among American workers for every one job loss directly from trade. It is especially important for the United States to follow the lead of other advanced economies that trade—like TPP members Australia and Canada—and reinvest a share of the gains from trade and increased productivity in providing more generous assistance to those workers forced to cope with adjustment or job loss by greater competition.

This study continues the Institute’s long tradition of and deep commitment to providing analyses of important FTAs starting with The Canada-United States Free Trade Agreement: The Global Impact (1998) edited by Jeffrey J. Schott and Murray G. Smith. Institute studies were widely cited and helped inform the public debate throughout North America on both the Canada-US FTA and NAFTA. This volume’s purpose is similar to that of NAFTA: An Assessment (1993) by Gary Clyde Hufbauer and Jeffrey J. Schott, which provided a reader’s guide to the complex provisions of that historic trade accord and was used extensively in ratification debates in Mexico City, Ottawa, and Washington. This volume reflects gains in economic knowledge since that time, including from the NAFTA debate, and focuses on well-established long-term implications of trade for productivity and resource allocation, and not on falsely precise projections of transient employment fluctuations (which can be positive or negative depending upon factors completely outside of any trade deal). Trans-Pacific Partnership: An Assessment builds on two previous Institute studies that provided insights into the content and implications of the TPP negotiations in its early stages, Understanding the Trans-Pacific Partnership (2013) and The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment (2012).

The Peterson Institute for International Economics is a private nonpartisan, nonprofit institution for rigorous, intellectually open, and indepth study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world, and then to develop and communicate practical new approaches for dealing with them.

The Institute’s work is funded by a highly diverse group of philanthropic foundations, private corporations, public institutions, and interested individuals, as well as by income on its capital fund. About 35 percent of the Institute’s resources in our latest fiscal year were provided by contributors from outside the United States. The production of this book is partially supported by a generous grant from the GE Foundation. A list of all our financial supporters for the preceding year is posted at https://piie.com/sites/default/files/supporters.pdf.

The Executive Committee of the Institute’s Board of Directors bears overall responsibility for the Institute’s direction, gives general guidance and approval to its research program, and evaluates its performance in pursuit of its mission. The Institute’s President is responsible for the identification of topics that are likely to become important over the medium term (one to three years) that should be addressed by Institute scholars. This rolling agenda is set in close consultation with the Institute’s research staff, Board of Directors, and other stakeholders.

The President makes the final decision to publish any individual Institute study, following independent internal and external review of the work. Interested readers may access the data and computations underlying the Institute publications for research and replication by searching titles at www.piie.com.

The Institute hopes that its research and other activities will contribute to building a stronger foundation for international economic policy around the world. We invite readers of these publications to let us know how they think we can best accomplish this objective.

ADAM S. POSEN

President

May 2016

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

1750 Massachusetts Avenue, NW, Washington, DC 20036-1903 USA 202.328.9000 Tel 202.328.5432 Fax

Adam S. Posen, President

BOARD OF DIRECTORS

* Peter G. Peterson, Chairman

* James W. Owens, Chairman, Executive Committee

Caroline Atkinson

Ajay Banga

* C. Fred Bergsten

Mark T. Bertolini

Ben van Beurden

Nancy Birdsall

Frank Brosens

Ronnie C. Chan

Susan M. Collins

Richard N. Cooper

* Andreas C. Dracopoulos

Barry Eichengreen

* Jessica Einhorn

Peter Fisher

Douglas Flint

* Stephen Freidheim

Jacob A. Frenkel

Maurice R. Greenberg

Herbjorn Hansson

Stephen Howe, Jr.

Hugh F. Johnston

Michael Klein

Nobuyori Kodaira

Charles D. Lake II

Andrew N. Liveris

Sergio Marchionne

Pip McCrostie

* Hutham S. Olayan

Peter R. Orszag

* Michael A. Peterson

Jonathan Pruzan

Ginni M. Rometty

* Lynn Forester de Rothschild

* Richard E. Salomon

Sheikh Hamad Saud Al-Sayari

* Lawrence H. Summers

Mostafa Terrab

Ronald A. Williams

Min Zhu

* Robert B. Zoellick

HONORARY DIRECTORS

George David

Alan Greenspan

Carla A. Hills

Frank E. Loy

David Rockefeller

George P. Shultz

Jean-Claude Trichet

Paul A. Volcker

Ernesto Zedillo

* Member of the Executive Committee

Acknowledgments

This volume has really been a team effort, requiring expertise and discipline from a number of trade and legal scholars. Special thanks to R. Michael Gadbaw and Jennifer Hillman from the Georgetown University Law Center for their contributions. We are grateful for the thoughtful insights and comments of a number of colleagues within and outside the Institute. This volume benefited significantly from keen editing from our superb publications team, led by Steve Weisman. Our thanks to Madona Devasahayam, Susann Luetjen, Barbara Karni, and Cameron Fletcher for their diligence and skill in preparing the manuscript for publication and producing the book so expeditiously.

CATHLEEN CIMINO-ISAACS

JEFFREY J. SCHOTT

Coeditors

July 2016

Introduction

Trade Deals Aren’t For What You Think They Are For

ADAM S. POSEN

Adam S. Posen is the president of the Peterson Institute for International Economics (PIIE). This essay builds on remarks delivered at the launch of Assessing the Trans-Pacific Partnership, Volume 2: Innovations in Trading Rules at PIIE on March 28, 2016, and Assessing the Trans-Pacific Partnership, Volume 1: Market Access and Sectoral Issues on February 2, 2016.

The analyses of the Trans-Pacific Partnership (TPP) in this book bring home, in specific detail, the truth that many pay lip service to, and some mistakenly deny, but is real: The amount of dislocation for individuals in an advanced economy like the United States caused by this kind of trade agreement is significant for those individuals and their communities, but limited in scale. The gains to society from expansions of trade far, far outweigh the cost. The issue is this: Why has the United States been unable to bring about economic redistribution to truly help those disadvantaged by trade?

All other trading democracies have done better by their workers on this score. Obviously, the answer to this question, supported by our analytical work about TPP, must be understood in the context of the current political scapegoating of this agreement, and of trade more generally. This latter development, of course, is a far more important issue than the fate of any single trade agreement no matter how significant. The scale of recent scapegoating of trade for economic discontent is unprecedented for the postwar United States. Though a recurring trope, blaming American domestic problems on trade has not received this level of attention and venom during any previous postwar presidential election campaign. And it is a shame to see this happening, not because of how this scares a globalized elite, although it may. It is a shame to see this happening because it is ultimately destructive of American working people’s living standards. It is ultimately destructive of American foreign policy. And it is ultimately destructive of the competitiveness and innovation of the American economy.

Rejecting mainstream views about the large net benefits of trade requires disputing long-established facts. That is why these views remain out of the mainstream. It is true that economics is not physics, so talking about trade is not the same as talking about climate change or vaccines. But the economics of trade come far closer to having an agreed basis in reality than is often characterized in the popular press, also far closer than in some other fields of economics where more is in dispute. People should not be fooled by press reports that apparently have to pretend that there are two sides to every story, or by the existence of a few usually credible economists who get this wrong. James Watson’s understanding of DNA did not mean that his views on race and genetics were valid. Similarly, even the occasional economics Nobelist will let passion or politics determine their statements without basis on an issue like trade.

The mainstream economic view of trade is actually much closer to being real science than people currently give it credit for. We have seen misleading claims even in places such as the New York Times, where they say, economists differ on the benefits of trade, or economists differ on which model to use to study trade’s effects. Well, actually, no, they don’t, or at least very few do, and with good reason.

For example, does it ultimately make sense to think that, over a 30-year period, the US economy on average is in recession or at full employment? Full employment is the assumption made in the Petri-Plummer calculations in chapter 1 of this book in projecting the gains from TPP. That assumption is the norm in such analyses. Trade deals are implemented and have full impact over decades. The correct conclusion, as a matter of logic, as well as of the data on the last 120 years of the American economy, is that it is most reasonable to assume full employment on average. On a separate substantive issue, does it make sense to assume that reallocation of jobs up the value chain is ultimately beneficial to the economy as a whole and to productivity growth more specifically? Obviously yes.

Does it make sense to say that average Americans earning a living in the United States would have the quality of autos we have today, or the auto safety we have today, or the lower real cost of cars we have today, were it not for the competition that comes from trade? And with all due respect to the current American auto industry, the answer is obviously, no. I remember my mother’s 1974 Oldsmobile. The point is that the US auto industry itself would not be as competitive today and not be selling millions of cars in China and around the world today either, if it had not faced the competition of overseas manufacturers it faced in the 1970s and 1980s.

That is just to cite one example. The same holds true for availability to Americans households of a wider variety of fresh fruits and vegetables, of less expensive clothes and footwear from new materials, and of personal electronics of every kind that would not exist without openness to trade and thus competition. So the economics of international trade is not the physics of climate change, but a lot closer than the media maintains. This should not be the he said, she said feature of covering American presidential campaigns, no matter how many primary votes it may gain you to lie about this. So I ask all of you reading this book, and who are thus giving TPP and trade a fair hearing, and everyone who reads my colleagues’ writings and values their presentations online, to convey that message.

But that still does not explain, let alone address, how the United States fails its workers exposed to risk of unemployment and loss of wages. I think there is a clear moral case for doing something about those adjustment costs. And it is clearly feasible to do so given not only the resources from the scale of gains from trade (as shown, for example, by Robert Z. Lawrence and Tyler Moran in chapter 2 of this volume)—but it is also practical to do so given lower inequality and higher social protection in all other wealthy democracies, all of which (except Japan) trade more than the United States. Other trading countries have maintained a higher level of wages for workers at the lower end of their skill and income distribution than the United States does overall. The Peterson Institute has repeatedly worked on this issue of economic inequality, whether proposing wage loss insurance or advocating expanded trade adjustment assistance or looking at labor market and benefits reform more broadly. Ultimately the economics of trade should not be in as much question as some people claim. The failures are from the same political forces and policy decisions that are the primary cause of inequality being so high and increasing in the American economy.

Most American voters supporting candidates decrying free trade or calling for fair trade are right about one thing: Trade is about change. Trade entails the pursuit of commerce in a way that enables individual firms to win or lose on a bigger scale. Capital and labor resources should go where businesses have advantages, and where they are uncompetitive, those businesses should ultimately close. Trade accelerates and strengthens those forces on business. But for all the logic and benefits of economics, many voters do not like change, even when it helps their families’ income.

Americans, even some trade critics, preach about the advantages of trade and the changes it brings to other countries all the time. We Americans have spent decades going to Japan, going to Korea, going to Brazil, to Mexico, to Russia saying, Look, trade will change your economy, trade will put competitive pressure on your privileged elites, trade will force you to come up to international standards. US officials and pundits have even gone to Western Europe and Canada and said the same things. They have been right to do so. Competitive pressure is the part of trade that is most demonstrably and domestically beneficial. And that means sometimes local businesses and, more importantly, individuals will lose in those competitions.

It is time again for the United States to face up to the reality that the need for competitive pressure and reform applies to our economy as well as the rest of the world. The United States cannot move forward if it protects yesterday’s economy. Today people talk as though Detroit somehow symbolizes a defeat in trade or as though the disappearance of low-skill manufacturing processes is a great loss. But Detroit actually symbolizes the need to change forced by trade. In the same way, the rise of Houston and Charlotte, Salt Lake City and Atlanta, and Minneapolis and San Jose represents a victory not in trade but through trade, because the United States adapted to economic competition.

And now we are seeing Detroit adapt again, and come back as a result. By Detroit, I do not mean just the auto industry. I mean the human beings, the citizens, the residents old and new of Detroit. Lower-skilled manufacturing jobs also left the Ruhr in Germany and the British Midlands, but only the United States had a Detroit, where the problems were aggravated because of white flight and a paltry welfare state. It is absurd for anyone, let alone a presidential candidate claiming business credentials and disdaining losers, to bemoan, in April 2016, the lost steel jobs in Pittsburgh from the 1980s, when Pittsburgh and its hundreds of thousands of workers have adapted beautifully since that time.

So if trade is about competition and pressure to change, then it is, of course, fair to ask for fair rules constraining the sources of that change as well as opportunities to compete abroad as at home. Achieving those goals is the focus of most of this volume. TPP does introduce more and better rules than any previous US trade agreement. In fact, it improves the fairness of our already existing largest free trade agreement, the North American Free Trade Agreement (NAFTA) with Canada and Mexico. But before we get to the specifics, I do want to remind people that sometimes foreign companies win and it is not because they cheated. You hear occasionally from the American political candidates that essentially any time an American loses his or her job in competition, it must be because the foreign company had some unfair advantage. Sometimes yes. Mostly no.

In the same way, we expect and push Japan or Vietnam, or Mexico or Australia, or the other countries joining TPP to let their companies sometimes lose to American companies, which assuredly will happen in services and high-tech and in some forms of agriculture when TPP is approved. And whether it is Vietnam, Australia, or Peru, they will be the better for it. And it is the height of political pandering to pretend that the United States loses only when somebody cheats, or that the closing of any specific business is a loss for the United States rather than a part of helping the United States grow. It is a lie that the United States will remain a vital economy by interfering with that process.

Advocates of freer trade in general and TPP in particular should not fall into tactical rhetoric and falsehood either. Many of my colleagues who have been long-time trade advocates occasionally feel the need, when going into the trenches of Capitol Hill or home district campaigns, to cite dubiously precise estimates of jobs created or sales opportunities from specific trade barriers that will taken down abroad—so that, for example, Washington State apples can have better market access or worse that some specific number more jobs will be created in Washington State because of a trade deal.

I understand the political pressure to say such things. But it is wrong for economists like us at least to go down that route. It misleads people about what is actually true and provable. It misleads further by overlooking the real advantage of trade. The real advantage of trade is not about market opening abroad. That is a mere means with some short-run benefits of diminishing importance over time. The real goal of trade is about the productivity gains made through domestic reallocations of demand, investment, and, yes, employment in countries opening further to foreign trade and investment.

The dynamic long-lasting gains from trade deals are from the competitive pressures we put on our own industry and our own workforce. And trade advocacy therefore should be about that, but also about dealing with the price that a small but attention-worthy minority of workers’ pay in that process. These workers deserve our attention and our financial help, but they are not entitled to have the same job in the same place forever any more than any other American worker would be.

If trade advocates just pretend, however, that trade benefits are to be debated in terms of whether this or that industry, or this or that district, is going to come out ahead, we are making the wrong argument. I understand why representatives of the administration may have to employ those tactics. But if we in the researching and chattering class adopt those tactics, then we have already given up intellectual ground on a false basis to trade critics like Donald Trump and Bernie Sanders. And that is wrong. The primary reason we have rising anti-trade sentiment in the United States in 2016 is that we have failed our workers over decades. But another part of the reason is that trade’s friends kept talking about the number of jobs past deals created or about stopping cheating by foreigners. That argument made it sound like our economy is in a Trump/Sanders world of no benefits to the United States from competition and that any change amounts to unfair losses. That is not only misleading, it feeds delusions. We are now paying the price for yielding the intellectually honest ground by pandering to those ideas in prior trade debates instead of fighting for globalization head on.

Let us instead remind people that trade also delivers huge gains that matter for the poorest in our society. As Lawrence and Moran argue in chapter 2 in this volume, and as many other scholars have argued over the years, when consumers are saving huge amounts of money on a wider variety of better quality and usually improving autos, food, communications, and clothing, the result is a material increase in the real living standards of lower-income people in society. That gain can be as much as 20 percent of household expenditure for working people. Greater variety is not primarily about imported wine and fine cheeses for wealthy foodies, but a true increase in the standard of living for millions in the United States. So whenever somebody says, Oh, TPP is a small thing not worth doing since we already are so liberalized, let us remember that it is not small for everyone. The gains are still big for lower-income Americans. And let us remember the gains are very big for the people of Vietnam and Peru, and Chile, and Mexico, and even Malaysia. Poor people get to earn a better living and purchase more with their hard-earned wages—which is a good thing, and we should care about it, even if they do not vote in the United States.

And so TPP is a true win-win. If Senator Sanders’ supporters want to have a US foreign policy that is based less on military intervention, then we have to have a foreign policy that is based more on opening up our markets to other countries and giving them a stake and a path to prosperity with the United States. And if Mr. Trump’s supporters want to have an America First policy that delivers wider prosperity, we have to let American businesses succeed and fail in competition rather than get subsidized by taxes on our citizens through protectionism.

It is time to reclaim the radical center for trade. Being for trade agreements that force the US economy to improve due to competition and poorer countries to compete on the basis of fairer rules is that well-justified radical center. The benefits to the United States are from change at home and success abroad, not from protecting yesterday’s jobs and industries at home and continued low standards and lower wages abroad. Let us advocate TPP without apology or false claims because it is the right thing to do.

But let us also pay for real labor market reform in the United States. As I mentioned, there is a huge moral, as well as economic, case to provide adjustment for those few directly disadvantaged by trade. And this is where the rubber hits the road. For decades we have been unable to get a consensus in the United States for active labor policies and a decent welfare state, like those that already exist in every other rich democracy. As a result, we have relied on piddling efforts to buy off this interest group or that Congressman’s constituent. Such tactics have occasionally worked to pass a trade deal. But of course, they have not fundamentally changed the consensus. If anything, they have eroded support for trade.

The narrative that loss of jobs due to trade is unnatural and unfair, rather than change being part of life for all US workers and businesses, creates space for globalization’s opponents, sometimes due to being misguided in this way. It works against getting comprehensive labor protections for all our workers by treating shifts in employment as something to oppose rather than ease. This has led to the AFL-CIO wanting to protect its own high-membership uncompetitive industries like textiles, and to saying that Trade Adjustment Assistance is just burial insurance, we don’t want it.

Maybe the right response to the current anti-trade venom is for the radical center to go back to stating the truths of basic economics rather than tactically trying to outpander. Which is to say, there is no reason a worker displaced by international competition should be treated any differently than a worker displaced by technological innovation. We need to invest in helping all our workers adjust. And whether or not people say that they do not want adjustment assistance often because they understandably want to keep their current jobs and they do not want to move, our moral obligation is to help them get to their next job. Our obligation is also not to let them hold the rest of the economy hostage because they do not want to change. That is not an acceptable option when 60 people lose or change jobs in the American economy annually for every 1 who does so because of direct trade competition. Opposing change or holding the economy hostage to prevent change is damaging to living standards today and in the future. And the unions and progressives need to realize that such attempts have not worked to save jobs or increase worker incomes.

It is time for trade advocates to ally with progressives and really pursue broad generous labor adjustment policies in this society and not stigmatize trade while doing so. That is the only path that combines reducing inequality, increasing productivity, and getting a world outside our borders that we want to live in—given that other countries exist and change must happen.

Overview

Understanding the Trans-Pacific Partnership

JEFFREY J. SCHOTT

Jeffrey J. Schott is senior fellow at the Peterson Institute for International Economics.

The Trans-Pacific Partnership (TPP) is by far the most comprehensive trade and investment pact since the creation of the World Trade Organization (WTO) more than 20 years ago. It eliminates a broad array of barriers to trade and investment, some of which have been untouchable in previous trade pacts, and establishes state-of-the-art rules on domestic policies that can distort trade and investment flows.

Three years ago, the Peterson Institute for International Economics published Understanding the Trans-Pacific Partnership. That Policy Analysis, written at the midpoint of the negotiations, argued that the content and implications of the prospective trade pact were not well understood (Schott, Kotschwar, and Muir 2013, 1). Fast forward to 2016: After more than five years of negotiations, the pact was signed by the United States and 11 other Pacific Rim countries on February 4, 2016. But ratification of the pact, especially in the United States, poses substantial challenges in large measure because what it does and what it means for firms, workers, and farmers are still not well understood.

Trans-Pacific Partnership: An Assessment is designed to better inform public understanding of the TPP by providing objective analyses of the agreement’s major provisions. Simply put, it sets out a substantive reader’s guide to the TPP that explains what the trade deal covers and what it requires in terms of trade and investment reforms by each member country. It examines both the highlights and shortcomings of the TPP text—areas where the TPP produced substantial reforms and those where reform efforts fell flat.

Achieving broad-ranging reforms and developing innovative trading rules is particularly noteworthy given the diversity of the TPP participants in terms of the size of their economies, level of economic development, and political systems. As shown in table O.1, the 12 TPP countries include both rich and poor and large and small economies. Most members are high- or upper-middle-income democracies with high scores in the United Nations’ Human Development Index (HDI), which measures per capita income, education, and life expectancy. But the TPP also includes nondemocratic regimes and several developing economies—such as Vietnam, the only member with an intensive state-run economy and the lowest HDI in the group.

This overview chapter summarizes why the TPP is a big deal for the participating countries, for their trading partners, and for the world trading system. But first it is important to examine the countries participating in the TPP and their objectives in building a free trade agreement (FTA) across the Asia-Pacific region.

TPP: Origins and Objectives

To understand the motivations and ambitions of the TPP, it makes sense to consider what the TPP countries initially intended. But the TPP poses complications for such an analysis: Unlike other trade negotiations, the number of countries engaged in the TPP expanded over the course of the talks, each adding its own export priorities and import sensitivities. Singapore, Chile, New Zealand, and Brunei (the P4) constituted the initial core of the pact when they signed their Trans-Pacific Strategic Economic Partnership agreement in 2004. In March 2010, eight countries attended the first negotiating round in Australia (with Australia, Peru, the United States, and Vietnam joining the P4, the latter initially as an associate member); Malaysia joined the talks in October 2010, followed by Canada and Mexico in late 2012, and Japan in mid-2013.¹

The key objective for the Asian participants in launching the TPP talks, reflecting the strategic vision of the late Lee Kwan Yew of Singapore, was the need to ensure sustained US participation in the region’s economic development and to maintain US strategic engagement to deter the type of military adventurism that caused so much devastation in East and Southeast Asia over the past century. The same objectives underpinned the creation of the Asia-Pacific Economic Cooperation (APEC) forum in the late 1980s and continue to drive strategic initiatives almost three decades later.

It is probably not a coincidence that Lee Kwan Yew advised President Barack Obama in November 2009—just before Obama’s first trip to Asia as president—to maintain US strategic presence in the region and to deepen economic relations by joining the TPP talks. Obama agreed and at the start of his trip in December 2009 announced that the United States would participate in the TPP talks. At the time, with low capacity utilization in US industry and high US unemployment, the TPP offered the prospect of increased US exports to the region with the most dynamic growth in the world economy. The TPP fit well into an emerging US trade policy response to the global financial crisis, the National Export Initiative (NEI), which Lawrence Summers (then Obama’s chief economic adviser as head of the National Economic Council) and Michael Froman (then Summers’ deputy and now US Trade Representative) cogently argued could contribute to the US economic recovery. The NEI is a faded memory but the TPP, once implemented, can provide a strong impetus to economic growth for the United States and its TPP partners.

Table O.1 Economic profile of the TPP-12, 2014

a. The Human Development Index (HDI) is published by the United Nations Development Program. The HDI is a summary measure of average achievement in key indicators in three dimensions of human development: a long and healthy life (life expectancy at birth), being knowledgeable (mean years of schooling, expected years of schooling), and a decent standard of living (gross national income per capita). The HDI is the geometric mean of normalized indices for each dimension. The index is on a scale of 0 to 1, where 0 indicates the lowest and 1 indicates the highest level of human development.

b. Total trade is the sum of exports plus imports.

Sources: World Bank’s World Development Indicators database, http://data.worldbank.org/indicator; United Nations Development Program, 2015, http://hdr.undp.org/en/data; UN Comtrade data via World Bank’s World Integrated Trade Solution (WITS) database.

The TPP Is a Big Deal

The TPP is far different from the FTAs that have increasingly populated the trading system since the Doha Round of multilateral trade negotiations ran aground almost eight years ago. The economic footprint of its members is larger than other recent trade pacts and its content is more comprehensive. Compared with other FTAs, the TPP contains fewer exceptions to its liberalization commitments and more extensive rules to govern domestic practices that can impose barriers to foreign trade and investment.