TPP Can Be Fixed If You Know What’s Wrong with It

December 5, 2016 2:15 PM
Photo Credit: 
REUTERS/Kevin Lamarque

President-elect Donald Trump confirmed on November 21, 2016 that he would withdraw from the Trans-Pacific Partnership (TPP) on day one of his administration. Opposition to the TPP was a central theme of Trump’s campaign; he called the TPP a “disaster” and vowed to rip it up when he took office. In practice, this means that he will not present to Congress the implementing legislation necessary for US participation in the agreement.

Is the TPP history? Many supporters of Democrats Hillary Clinton and Bernie Sanders hope so.  But many Republicans, representing a vast array of farm and industrial groups, support the TPP and argue instead that Trump should fix the deal rather than deep-six it. Trade is not their top priority, but after the big first year push on tax reform and infrastructure projects, Republican leaders in Congress might ask Trump to renegotiate the deal; some already are holding open that option.

To date, there is no indication that the Trump administration would consider revisiting the TPP. Commerce Secretary-designate Wilbur Ross regards TPP as a “dumb deal.”  Instead, he favors bilateral negotiations where US officials can leverage access to the huge US market and wrest more concessions from our trading partners. However, after careful due diligence of  the TPP and alternatives, he may want to pursue a different course of action.  

What’s Wrong with the TPP in Trump’s View or What’s Wrong with Trump’s View of the TPP?

The Trump critique of the TPP is quite similar to that of Bernie Sanders, reflecting populist complaints reminiscent of the anti-NAFTA coalition in the early 1990s that allied the left wing of the Democratic Party with the right wing of the Republicans. Campaign documents criticize previous bad trade deals like NAFTA and the Korea-US FTA that have contributed to US trade deficits and large US job losses. It’s a seductive sound bite but bad economics: Large trade deficits in recent years often coincide with employment gains, reflecting stronger growth in the United States than in other leading economies (as Gary Hufbauer has documented).

Wilbur Ross cites two specific reasons why TPP is a bad deal: US officials gave too many concessions; and the TPP’s rules of origin for autos allow China and others to free ride on access to the US market. On both points, he has it backwards.

On the first point, Ross argues that the United States paid too much because each of the 11 TPP partners demanded something different and additional to what was offered to the others. He believes that one-on-one talks would avoid such cascading demands for more and more US concessions. But that’s not how it works. 

In fact, US concessions in the TPP were very limited. The US market already is largely open to foreign suppliers from all member countries of the World Trade Organization (WTO) and US negotiators did not commit to many significant changes in existing US practices and protection. And where we maintain barriers, we grudgingly committed to small or partial reforms. We even postponed cutting the 2.5 percent US auto tariff for 25 years! At the same time, US officials achieved in the TPP substantial openings of long protected Asian markets. Sounds like a very favorable deal; in fact, it’s even better. We got “paid” twice by our TPP partners. Not only did we get “paid” in terms of reciprocal concessions in each of the 11 markets, but we also got a bonus payment from many of those countries—in terms of more of what we wanted from them in market access and support inter alia for new investment and intellectual property rules—for helping them get better access via the TPP to the Japanese, Vietnamese, and other markets than they would otherwise have been able to get on a bilateral basis. So negotiating the regional TPP produced larger US gains with fewer US concessions.

The second point on auto rules of origin seems convincing until you look at the facts. Rules of origin set criteria for qualifying for preferential tariff treatment under the TPP and other free trade pacts. If the good doesn’t qualify, it pays the most-favored nation (MFN) tariff like other WTO countries. The US MFN auto tariff is 2.5 percent and under the TPP the United States does not give a tariff preference for 25 years.  As a practical matter, US auto imports are excluded from the TPP! Yes, some US auto parts tariffs are a little higher and phased out sooner, but Ross focused on Chinese parts in Japanese and other exports to the United States—and that’s not a significant problem since the trade can continue relatively unimpeded simply by paying the MFN tariffs.

To be sure, the TPP has other flaws that can and should be fixed. Two particular concerns merit closer attention: adding new obligations prohibiting currency manipulation and revisiting the controversial investor-state dispute settlement (ISDS) provisions. Reopening the TPP could fix these issues relatively easily and attract bipartisan support in Congress.

Currency Manipulation

First, commitments undertaken by TPP countries regarding currency manipulation in a declaration issued in parallel to the TPP text should be incorporated into the TPP pact and subject to the TPP’s binding dispute settlement procedures. This amendment would be a major change in the TPP that addressed one of the top criticisms of the pact by members of both parties. Such a change should be consistent with new provisions of US law contained in the Trade Enforcement and Trade Facilitation Act, enacted in February 2016, that are designed to deter the types of predatory practices common among some Asian countries during the past decade. The substance of such currency provisions could be taken off the shelf from the Joint Declaration, with some refinement regarding the definition of currency manipulation drawing on the new US law.

Other TPP countries should accept this major addition to the TPP—it’s a small price to pay to avoid a long delay in implementing the pact. Japanese support is critical; while wary of TPP provisions on currencies, they already signed the Joint Declaration and have accepted similar commitments in the G-7. Moreover, they don’t have to change their current policies, assuming the TPP definition of currency manipulation tracks US law and avoids quantitative easing policies (as both the United States and Japan will insist). At the same time, none of the other TPP countries currently engage in currency manipulation, so they would not have to change existing policies—though they would have to accept constraints on their ability to pursue competitive devaluation or inhibit appreciation of their currencies going forward.

Investor-State Dispute Settlement

Regarding ISDS, there are two options for TPP fixes: revise the current procedures or drop them entirely. Given that choice, Main Street Republicans and many multinational corporations probably would favor additional procedural reforms. While the TPP already improves significantly on past FTA practice by clarifying the rights of governments to regulate in the public interest among other reforms, more could be done. In the financial services sector, the use of ISDS is subject to specific clearances by national authorities (see TPP Article 11.22 and Gelpern 2016) before private litigation can proceed. Broadening this precedent, the TPP could be revised to add a requirement that each ISDS petition be reviewed within 30 days of submission by a government legal authority to ensure that the claim is qualified for ISDS proceedings. This review would essentially provide a preclearance to start ISDS litigation; it would constrain abusive litigation but would not deny private investors the right to arbitration panels. 

But grassroots Trump supporters may disagree and demand extraction. These groups reflect populist concerns, related to past FTA provisions and practice, that ISDS challenges give too much power to multinational corporations and have the potential to undercut regulatory protections or blunt new regulatory proceedings.

Eliminating ISDS entirely was considered and rejected during the TPP negotiations because some countries regarded ISDS as helpful in reinforcing rule of law in their national systems and providing greater predictability for investors. It does help protect US investment abroad, which is valuable in countries where the rule of law and judicial processes are substandard. But most countries today are trying to attract investment, so have an incentive to avoid indirect expropriations that could harm their reputation and discourage new investors. In short, this useful process is now not worth the political baggage it imposes on trade agreements and could be deleted from the TPP.

In sum, the incoming Trump administration has an opportunity to formulate a new and better policy for trade with Asia-Pacific nations. Restructuring the deal designed and developed by the Bush and Obama administrations, as suggested above, would remedy key problems about the TPP cited during the campaign and yield important new benefits for the US economy.

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