March 31, 2014
The Trans-Pacific Partnership (TPP), the proposed trade deal linking the US with eleven other countries ranging from Brunei to Australia and Chile, will be an economically transformative agreement—but not for the US. Estimates by Petri, Plummer and Zhai (used throughout) place US GDP gains at only 0.13 percent, $27 [billion, by 2025. At about 57 percent of TPP participant GDP and 40 percent of the population, the US is too big to benefit from the deal, and many of the other nations involved are already tied together by agreements. If the entirety of the $210 billion annual benefit to 2025 global GDP from TPP were to accrue to the US, it would only add about 1 percent to GDP.
But realizing an immediate economic benefit is not the American goal. It’s more about engaging with emerging Asia and being present while the rules of trade are set. Exports and privileged access to the US market benefit emerging Asia, as the terms of trade will favor them over trading partners not at the table. The US and Japan could also act an economic counterbalance to China in the region—helping the smaller, less-developed countries compete for export growth.
While China has said it would like to be part of the discussions, it has yet to sit at the table. China would stand to lose about 1.2 percent in exports, but only about 0.3 percent GDP—translating to only $57 billion in export losses and $47 billion lower GDP. These losses are easily surmountable, and China does not lose enough to be convinced to participate in discussions surrounding state-owned enterprises (SOEs) and governmental participation in the economy.
If you have to pick a winner, it’s Vietnam by a significant margin. By 2025, Vietnam would stand to gain nearly $96 billion or 28 percent of its GDP. This is largely due to exports increasing an estimated 37 percent. Not trivial. Malaysia also does well, with GDP moving higher by more than 6 percent and export growth north of 12 percent.
It is the developed countries that do not fare quite as well. The US, Canada and Australia will gain little economically from the TPP, because these nations already have trade agreements in place. The US has long since ratified NAFTA with Mexico and Canada and has deals on the books with Peru, Singapore, Australia, and Chile as well.
The potential breakthrough for the TPP would be if the US and Japan can sign a free trade agreement (FTA). Japan and the US do not have an existing FTA. To an extent, this lack of cooperation in trade has benefited the US. Japanese auto companies moved production to facilities in Kentucky and elsewhere in the US. Japan has also been hesitant due the sensitivity surrounding its agriculture industry, though these concerns appear to have been assuaged, if not overcome.
It has also been a boon to Mexico. Lower labor costs and NAFTA have allowed Japanese automakers to move production to Mexico and avoid transportation costs. Auto production has shifted to the extent that it is likely Mexico will surpass Japan as the second largest exporter of autos to the US in 2014, trailing only Canada.
For the TPP to matter, it must slash non-tariff barriers (NTBs), impose strictures for intellectual-property protection, and provide a broad framework for trade in services that can be applied to future trade deals.
One lightning rod for the TPP negotiation is SOEs. The establishment of intellectual property standards will be critical to creating a viable long-term framework. SOEs are getting much of the attention, and this is detracting from discussions of how best to go about IP protection when local laws and standards differ. Dealing with SOEs and strengthening IP protections are the two most critical elements in the ultimate determination of the effectiveness of the TPP.
But the US needs to carefully consider the ramifications of going too far in the SOE debate. Some proposed definitions would go so far as to define an SOE as any business in which a government has a stake, limits the amount of competition, or acts on the company’s behalf. Broad definitions are unlikely to gain traction in negotiations. Malaysia, Singapore, and Vietnam rely heavily on their SOEs for economic growth. Even the US has government sponsored entities—such as Fannie Mae and Freddie Mac—that are supported by the government and facilitate a critical portion of its economy. Leaving little room for governments to interfere in time of crisis could be difficult to sell to emerging economies, not to mention the US government.
Pushing for formalized rules of trade in services should be a US priority. In 2013, the US ran a services surplus of $232 billion. This is where the US excels. For perspective, service-providing employment grew by two million jobs from December 2012 to December 2013, but there were only 230,000 goods-producing jobs created. At the end of 2013, more than 90 percent of private US employment was in services. It is where the majority of US competitiveness lies today, and should continue to be a considerable strength going forward.
When it comes to TPP clearly the focus is not the economics for the US—at least not right away. The potential gains from the passage of a strong Trans-Atlantic Trade and Investment Partnership far outweigh what US stands to garner from the TPP. The benefits of the TPP come down the road as more countries join the framework and trade becomes increasingly liberalized. But both agreements face similar hurdles. Namely, can there be substantial progress made on topics like the role of SOEs, intellectual property protection, and trade in services to make it matter? Probably not. The US and Japan will finally be tied by an FTA, but it will be difficult for it to have a deep impact on either country without significant strides in cutting NTBs.
Hailed as part of the Asian pivot, the TPP is more political than anything for the US. With so little to gain in terms of growth, it would be difficult for the US to justify many concessions unless the focus is in developing a platform based on the TPP to expand and accommodate additional members. The US is gambling that it can play a role in more substantive future trade negotiations. If large Asian trading partners joined, it could increase the impact to US GDP by fivefold, but this is unlikely to happen in near-term. The TPP is an investment in the long-term liberalization of trade. Simply, the US is too big to benefit from a deal involving too many friends and too few real changes to the global economic regime.
Samuel Rines is an economist with Chilton Capital Management in Houston, TX.
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