Tuesday, November 24, 2015

How Good of a Deal is the Trans-Pacific Partnership?

The Trans-Pacific Partnership (TPP) is one of the most ambitious trade deals the global economy has ever seen. Encompassing 40% of global GDP and a third of its trade, the 12 nations who are negotiating stand to see benefits resulting from the easing of trade restrictions amongst such a massive bloc. More importantly than lowering already historically low tariffs, the TPP hopes to create a set of coherent quasi-global labor, environmental, and intellectual property standards. Its intention is to “define the rules of the road” for Asian trade according to Michael Froman, America’s chief negotiator.

Despite the great benefits expected from greater trade related gains, these will not necessarily benefit all countries involved equally. The elimination of trade barriers will disproportionately benefit the most efficient countries and industries. While countries which had coddled their industries with generous protections will see declining market share due to increased competition. The TPP will not be helpful to all countries in the same way or for the same reasons.

 Vietnam provides an example of the uneven benefits that TPP’s members will see. Vietnam is a developing nation which is estimated by many experts to receive some of the biggest increases to GDP as a result of the TPP. It is expected to see an increase of 11% to its GDP by 2025. With its combination of a large and young workforce, high productivity and low wages, the country stands to see manufacturing industry expansion as everything from car parts, textiles and other manufactured goods can be exported tariff free to America and Japan. In addition the exclusion of China from this deal means that Vietnamese manufacturers will see a comparative advantage when exporting to rich countries compared to their Chinese competitors.

In addition there as of yet unaccounted benefits that will come to Vietnam as a result of a set of rules that it will have to adhere to that will steer it towards a more open economic environment. Restrictions on SOE’s which it protested but will likely free its private sector to become more efficient and innovative as its allowed to flourish. The state controlled behemoths will be forced to loosen their grip on the economy and may eventually fade away Vietnam could see the emergence of its own private enterprise titans, just as South Korea did after it opened up its trade. Due to the rule setting nature of the TPP, the benefits to developing countries will be twofold better labor and environmental standards will help all, and fair rules will help entrench Anglo-American capitalism which has proven to be a powerful force for growth when embraced by developing nations.

However, in reality there may be some “losers” in these deal, primarily developed nations with inefficient industries that currently benefit from some degree of exclusivity. Canada stands as a prime example the plight of developed countries that sign on to this agreement. It has a highly developed economy is tightly integrated with America’s benefitting greatly from its current free trade agreement NAFTA, encompassing the U.S., Canada and Mexico.

Manufacturing in Canada is an important part of the supply chains of Americans manufacturers. As a result the availability of a new source of cheap parts from Asia will directly hurt Canadian industry. The auto sector has already been promised a billion dollar handout to help it cope. (Keenan) In addition dairy manufacturers and the agricultural sector in Canada which is less efficient than the American and Australian sectors, and kept profitable through heavy restrictions on imports and a system of tariffs and quotas will definitely lose in this deal. Ottawa responded with a series of measures to support agriculture worth five billion dollars. Ultimately the country and its consumers will benefit from lower priced goods and products allowing increased consumption, however for all its costs Canada is expected to receive a negligible change to GDP as a result of the TPP.

The challenge then is for industrialized countries to create a system within their country that equitably shares the gains from trade, while developing nations must cope with a significant upgrade to their labor/environmental laws. Better enforcement and information gathering would help both tremendously with this endeavor. Luckily the world has seen the need for a system to maintain the rule of law in the face of serious challenges and compromise seems possible on even the thorniest issues.

The TPP represents more than just a chance to boost GDP for developed nations, it is being pushed through despite its potential to hurt vested interests in certain nations due to its greatest strength. An encompassing and enforceable regulatory environment binding so much of the world economy will ultimately be far more beneficial to all nations, specially allowed to expand, as every country has a chance to benefit from more open trade and rules that follow the liberal consensus as opposed to an increasingly assertive China’s diktat.

1 comment:

  1. It is very interesting to hear the effects of this partnership. Economics play a huge role in maintaining international peace. Transaction and commerce commonly are barriers to outbreak in war because it forces countries to consider the loss of profiteering in the event they spark a war between a trade partners. Moreover, this bargain has subtle implications to American security as a rising Chinese power becomes more and more intimidating. The reason this bargain does more than levy the GDP for some developing nations is because it creates a mutual alliance between every nation involved in the bargain. For instance, if something happens to Brunei, the United States and other western countries will be interested in securing that country’s security. Brunei will have developed an important role in the economics of several nations so interference with that country’s ability to manufacture goods will cause those western countries to take arms against whatever oppressor.