Tuesday, August 30, 2016

Alphabet Soup, Part II: The TPP

by B. Lana Guggenheim The race for the White House has focused on the country’s many trade deals, including one that was recently passed: The Trans-Pacific Partnership, or TPP. Hillary Clinton once called it “the gold standard,” but has since been forced to walk that back due to public backlash. What’s the deal with these trade deals? Why do so many Americans hate them, and what can be done?

In a previous installment, we covered some of the contradictory results of free-trade agreements by examining NAFTA, a divisive piece of trade legislation. Ultimately, while NAFTA did benefit America’s bottom line, as it opened up Mexico’s markets to America’s products, it also enabled manufacturing to move to Mexico, thus further decimating the already-declining blue-collar job market. During this election season, NAFTA has served as a political lightning rod and litmus test both, and growing populist distrust and disgust about the nature of the economy and government shepherding thereof combined with a declining manufacturing sector has led to greater opposition to free-trade deals in general. Growing opposition has made it difficult to get other trade agreements passed, such as when CAFTA (the Central American Free Trade Agreement) was stalled in Congress in 2005 from lack of support.

But that wasn’t enough to scuttle the TPP, the Trans-Pacific Partnership - though not for lack of trying. Many lawmakers on either side of the aisle publicly opposed going forward, including Senators Bernie Sanders, Kirsten Gillibrand, Elizabeth Warren, Barbara Boxer, and Mitch McConnell as well as Representatives Candice Miller, Dave Trott, Bill Shushter, Sander Levin, Paul D. Ryan, and others. Signed only in February this year, though not yet put into effect, the TPP is basically the new NAFTA (some even call it “NAFTA on steroids”). A total of 12 countries (USA, Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore, and New Zealand) would share in the perks, namely the reduction or elimination of tariffs on goods. These countries together account for 40% of the Global GDP. It is also similar to NAFTA in that yet more automotive manufacturing will be moved abroad, almost guaranteeing more job losses in that sector both in the USA and Canada, as it provides more trade and job increases in other sectors, as NAFTA has. And like NAFTA, one of the goals of this deal is to bring other countries in line with the (often higher) standards of the USA in labor laws, environmental protections, and even healthcare.

Like NAFTA, the TPP has come under fire for being environmentally unfriendly. The United States government says that the TPP is “the most robust enforceable environmental commitment of any trade agreement in history,” and is backed as such by the World Wildlife Fund, the Humane Society, the Wildlife Conservation Society, and others. The Peterson Institute for International Economics, a well known non-profit think tank focused on international economics, stated that the TPP is “the most environmentally friendly trade deal ever negotiated.” It is worth noting that the TPP is the first trade agreement to include prohibitions on harmful fishing practices. It also contains provisions about the preservation of wetlands, marine pollution, and logging.

However, other conservation groups, such as the Sierra Club, the Natural Resources Defense Council, and the World Wide Fund for Nature, level harsh criticisms at the TPP, saying that it would give more leverage to corporations to threaten the environment. Since the announcement of the United Nations Sustainable Development Goals (or SDGs for short, a series of aspirational goals spearheaded by the UN and shared by governments worldwide), in September 2015, many see the TPP as a mixed bag that promotes environmental health and economic growth in some factors, but inhibits it in others, especially where development and environmental goals may clash. What may be history’s most environmentally friendly trade deal to date does not necessarily ensure that the environment is adequately protected from the depredations of man.

In line with the goal of bringing other nations “up to speed” on transparency in government and better human rights standards, the TPP requires all signatories to join the UN Convention Against Corruption, criminalize bribery of public officials, and enforce anti-corruption laws, as well as prohibiting child and forced labor, protecting the right to collective bargaining (thus allowing unions to form, for example), and prohibiting employment discrimination (a particularly tricky thing to enforce, as it is very difficult to prove.) Expanded trade opportunities combined with strong protections for workers can help move people into the formal, wage-paying economy, and this in turn helps improve human rights conditions. President Obama points to Malaysia’s efforts on cracking down on human trafficking as an example. Malaysia began to comply with the TPP in June 2015, and since then has given trafficking victims better access to government shelters, transitional housing, and better restitution procedures, as well as taken steps to halt the human trafficking industry.

Still, both Malaysia and Vietnam, two of the nations participating in TPP, are lax in enforcing labor laws, including issues relating to minimum wage, hours of work, human trafficking, and collective bargaining. The Peterson Institute for International Economics asserts that the TPP has more labor rights protections than any previous agreement, but just like the environment, the best yet may still not be enough. Suspension of benefits of the TPP if countries do not comply may be enough of a “stick” to ensure cooperation, but it may not be - and only time will tell. Senator Bernie Sanders stated that for Americans to compete against Vietnam and Malaysia, with their lax enforcement of labor laws and 56 cents-an-hour minimum wage is neither fair, nor free trade, but a race to the bottom. Instead of bringing other countries in line with America’s labor laws, Sanders asserts the TPP will just succeed in moving more jobs offshore, undercutting worker rights, and challenging existing labor, environmental, and health and safety laws.
Another key section of the TPP is the protection of intellectual property, including trademarks, copyrights, and patents, all of which are of increased concern in an increasingly digital market. But some critics, like the Electronic Frontier Foundation, argue that these are excessive, and entrench controversial aspects of American copyright laws, which in turn restrict Congress’ ability to engage in domestic law reform, something that will doubtless become increasingly necessary considering the rapid pace of digital innovation. More disturbingly, strict sanctions and vague text about “misuse of trade secrets” might create new threats for journalists and whistleblowers at home and abroad.

More concerning is how intellectual property laws cover pharmaceuticals. Tightening patent laws allow corporations, especially the large pharmaceutical companies, to possibly gain unfair advantages. While some argue that the TPP would result in increased tech-transfers that would stimulate more innovation and drug launches in other countries, both economist Paul Krugman and Doctors Without Borders worry that the opposite might occur, and patent extensions might delay or scuttle the availability of affordable generic drugs, the access of which is critical to under-privileged communities both at home and abroad. Former US Labor Secretary Robert Reich raised concerns about how provisions for international tribunals can require corporations be reimbursed for lost revenue for another nation’s development of a generic version of a patented drug. However, the US government says that the TPP aligns with the Doha Declaration on Public Health, which allows developing countries to dodge patent rights in order to have better access to essential medicines, and pharmaceutical companies have criticized the TPP for having too lenient property protections.

Also controversial is the investor-state dispute settlement (ISDS) mechanism, which allows investors to sue foreign governments in cases of treaty violation. It’s meant to provide protections from discrimination abroad, denial of justice, expropriation of property, and other violations. While it can’t overturn local laws that violate the treaty, it gives a mechanism for groups to recoup losses that occur because of them. It does not, however, allow corporations to sue for “lost profits” only - they have to have resulted from a treaty breach. However, tobacco products are specifically excluded from the ISDS process, an exception carved out in response to the possibility of suing due to anti-smoking laws in various countries. But it might leave open the possibility of oil companies to sue governments that enact legislation to reduce carbon emissions, which is troubling. Granting such power to investors and corporations can result in hobbling governments and their judicial systems, including for measures meant to address public health, national security, and economic crisis legislation. But the US government challenges this assertion, noting that investment protections are a component of over 3000 trade agreements, most of which have a form of neutral arbitration - and the US is party to at least 50 of them, and of them, the TPP has more robust protections, including provisions to dismiss frivolous claims quickly, preventative measures against sham corporations from accessing investment protections, and arbitrations would be open to the public and allow input from non-parties. And the USA has faced only 13 ISDS cases, and never once lost a single one. According to the International Bar Association, states have won a higher percentage of ISDS cases than investors, one-third of all cases end in settlement, and only 8% of these proceedings are commenced by large multinational corporations in the first place. Once again, the Peterson Institute for International Economics says that the TPP’s ISDS provisions are a significant improvement over previous iterations, and that many of them are disliked by the business community, even as they are necessary for boosting investment. But yet again, the best yet may not be good enough for many.

Opinion is split on if the TPP will be of economic benefit, if only modestly so. The Peterson Institute for International Economics and the World Bank state that the TPP will lead to net positive outcomes for all parties, while others disagree, including some economists and a number of previously mentioned lawmakers - and many American citizens. Economists Peter A. Petri and Michael G. Plummer insist that the gains are likely to be evenly distributed, and that though some workers will need to change jobs, it will account for but a small fraction of expected job-churn in any given year. Economists David Autor, David Dorn, and Gordon Hanson argue that TPP would give US companies a strong competitive advantage, and killing it won’t bring back factory work to America. Furthermore, it’d pressure China to raise their regulatory rules and standards to those of TPP members.

However, two economists from Tufts University, Jeronim Capaldo and Alex Izurieta, argue that Petri relies on unrealistic assumptions, such as lost jobs would be immediately replaced by openings in other industrial sectors, and Harvard economist Dani Rodrik agrees that Petri and Plummer assume greater market flexibility than actually exists, countering that potential gains and losses are not so easily calibrated. The Tufts University scholars project an American job loss of 450,000 jobs due to TPP, and 771,000 jobs lost worldwide in signatory countries total, including Japan, thus pressuring wages worldwide and increasing inequality. But not everyone agrees with their model either, and Rodrik says they do a poor job of explaining how their simulation actually works. Others contend that the Tufts study ignores potentially positive impacts of the TPP, including the emergence of structural change and innovation, the emergence of new industries, and the impact of lower barriers on international trade.

However, as Hillary Clinton asserted (or at least she used to before she walked back her support), there are geopolitical reasons to support TPP, even with its potentially adverse economic effects. Of all 12 countries included in this massive deal, China is excluded. The result? A potentially Pacific-wide decrease of dependence on Chinese trade, whilst increasing American influence on future developments for the global economy and allowing them to better compete against China. It also increases the likelihood that Japan kickstarts reforms needed to revive its economy (no more lost decades!). And combined with a potential addition of South Korea to the TPP later on (their interest in joining rose once Japan signed on), while it cannot slow the Chinese juggernaut, it might levy enough pressure on China to liberalize its economy. (Conversely, TPP’s failure would offer China greater opportunity to pursue alternative arrangements that could exclude the United States.) China isn’t particularly pleased about these measures, seeing them as a containment policy but since 2010, China’s attitude has swung from outright disdain to “wait and see,” with possible interest in future membership.

China has long been an economic policy hot button. China’s rise as a global player is unprecedented, and they are currently America’s top trading partner for goods. As it turns out, trade with China has had a concentrated, decidedly negative effect on specific labor sectors, mostly manufacturing. This may be partially due to some of China’s “dirty tricks” - undervaluing their currency to artificially make Chinese goods cheaper in the USA, and American goods more expensive in China, and China’s membership in the World Trade Organization making it difficult for the USA to retaliate. China’s economy is still state-controlled, and that means they can artificially set the value of their currency, unlike in the USA or the EU, which allows the market to determine the currency value. This means that things look more volatile on our end, but are a great deal more honest in representing their actual global purchasing power - something that a large, stable economy like China’s can afford to handle. Artificially manipulating their currency means the Chinese can make American goods more expensive in Chinese markets, and Chinese goods cheaper in American markets. It’s like imposing a trade tax without running into the international laws that forbid you to do so. Still, China suffers from this policy, as it has led to serious inflation at times. And in the past ten years, since the currency restructuring in 2005, the relative value of the yuan has risen over 30%, reflecting slow-but-steady economic reforms. Many American lawmakers state that if the Chinese ceased artificially devaluing their currency, they’d have to compete on a more even playing field, which would likely mean they would have to increase the quality and safety standards of their goods, which in the long run is good both for China and the rest of the world. To that end, some have criticized the TPP for its lack of provisions addressing currency manipulation, but such a provision would hinder US monetary policy. However, the IMF contends that since their reforms, China’s currency is now fairly valued, even as it still remains more-or-less pegged to the US dollar. China is in the midst of vacillating between conservative stability and more liberalizing reform, a process that is hard to control, and the result of which caused a huge tumble in the country’s stock markets earlier this year, and prompted them to close the trading market after a mere 29 minutes back in January.

Both President Obama and Republican nominee Donald Trump have raised the alarm about China, but on opposing sides regarding the value of the TPP. Both Hillary Clinton and Bernie Sanders promised to “stand up to China” and asserted that the trade deficit with China cost Americans “millions of jobs.” Obama argued that without TPP, “China will write the rules” for Asian trade, whereas Trump said it was a deal “designed for China to come in...through the back door and totally take advantage of everyone.” Both are wrong, in that this trade agreement isn’t about neutralizing an enemy, but about influencing China, ensuring a balance of power, and bringing China and other countries into a rules-based order predicated on trade.

In fact, it is impossible to “contain” China, neither in undercutting their growth or neutralizing their diplomatic ties. Rather, the US has in interest in the economic success of smaller, but strategically important states like Vietnam, not to bring them into a US-led bloc against China, but rather to prevent an over-dependence on the Chinese economy that would lead to a loss of independent diplomatic and political leverage, and thus preserve a balance of power.

This is particularly relevant regarding China’s recent tendency to force outcomes in maritime disputes using mercantile and paramilitary pressure. China’s efforts to control the South China Sea are older than the United States itself, but recent developments point to a worrisome trend of militarization in the area. China relies on something called “the nine-dash line,” a line drawn on a map by the Kuomintang government back in 40s, to justify their claims (the KMT fled to Taiwan in 1949, and the PRC was established by the victorious Communists in the mainland.) The islands and atolls in this area are mostly uninhabited, but are the sites of many natural resources, including oil, fisheries, and mineral deposits. Among the various islands and atolls under dispute between China, Taiwan, Japan, Brunei, Vietnam, and the Philippines, the Senkaku/Diaoyu islands feature prominently. Japan claims the Senkaku Islands pointing to treaties stretching back to the 19th Century, and America’s post-WWII decades-long occupation and administrative handover to Japan as proof of sovereignty. The US-Japan Mutual Defense Treaty is especially seen as backing Japan’s sovereign claims. And to bolster its claims, Japan bought three of the five islands from a private owner, which incensed China and caused thousands to march in the streets in protest. China, calling them the Diaoyu Islands, claims them as wrongfully seized Chinese territory that was reverted back to Chinese ownership at the conclusion of Japan’s occupation of China at the end of WWII. Since then, as recently as 2013, China has measurably beefed up and unified its maritime agencies, seeking to match Japan’s Coast Guard, which is the most robust Coast Guard in the world. In turn, Japan has made moves to beef up its diplomatic reach, offering military aid for disaster relief training to East Timor and Cambodia, both traditionally allies of China. In May 2013, Japan announced it will provide patrol boats to the Philippine Coast Guard, which boost their ability to patrol the southern areas of the sea and contain China’s growing maritime presence. In November of 2013, China declared an Air Defense Identification Zone, stating that non-commercial flights that did not submit a flight plan as far out as the East China Sea, including the Senkaku/Diaoyu Islands, were liable to be subject to Chinese military actions. They also released their first Naval aircraft carrier, the Liaoning, into these troubled waters. Classified as a training vessel, it nonetheless ruffled a lot of feathers.

China has also reclaimed a lot of land around the Spratly Islands in the South China Sea, more than the acres reclaimed by all other regional claimants combined. China built up a lot of infrastructure on these man-made islands, including runways and loading piers, which can be used for military purposes . However, the UNCLOS (UN Convention on the Law of the Sea) does not grant maritime rights on man-made islands, and has criticized China for harming the environment in what it sees as a blatant territorial expansion. Despite calls from the US to ease up, in February of this year, China deployed surface-to-air missiles on Woody Island, a land mass in the Paracel Island Chain, another group of disputed territory near Vietnam, and disputed between Vietnam, Taiwan, and China. China has a total of 8 military installations on 7 reefs in the Spratly Islands, including one barely 115 miles off the coast of the Philippines. This all was only done a mere two years after the US eased arms embargoes on Vietnam and signed a new defense pact with the Philippines, underscoring the American commitment to their  “pivot” in East Asian diplomatic focus. But in June of this year, an international tribunal at the Hague ruled in favor of Philippine claims in the region, resolving a claim filed by the Philippines in 2013, saying that China has no historic rights in most of the South China Sea, a ruling that China thoroughly rejects. This ruling is welcomed not by just the Phillipines, but Vietnam as well, which has long sought to internationalize this dispute to try to leverage international opinion against China’s military and economic regional superiority.  

China’s activities prevent their neighbors from developing oil and gas fields in disputed areas because Chinese pressure on multinationals means investors are reluctant to back these risky projects. In September of 2010, after Japan detained the captain of a Chinese fishing trawler near the Diaoyu/Senkakus, China blocked the shipment of rare earth minerals to Japan, which are a vital component of modern electronics. And soon after China clashed with the Philippines over the Scarborough Shoal in the South China Sea (or West Philippines Sea, depending on which flag you wave), China blocked hundreds of containers of imported Philippine bananas from entering port, and soon after slowed inspections of other imported Philippine produce and stopped sending tour groups to the country. China claimed the rejected Philippine bananas were infested with pests, and that the tours to the Philippines were suspended due to safety concerns. And in 2012, for the first time in 45 years, the 10 members of the Association of Southeast Asian Nations (ASEAN) failed to reach agreement on the wording of a joint communique over whether or not to include a section that focused on China’s recent actions, even though China is an observer state and not a member, due to China’s pressure on Cambodia, the meeting’s chair. The message from this and their other actions was clear: China was willing to use its economic clout to bully its less powerful neighbors.  

This begs the question: Why is China doing all this?  It is likely to rally public support around China’s Communist Party in the face of economic downturn. Were it not for domestic pressure, it would make much more sense for China to bide its time, and trust in its growing military superiority and economic might to shift the region to its favor. But the price China pays for throwing its weight around, even if stopping shy of provoking conflict or trade disagreements, is that its neighbors are alienated, and willing to build closer ties to the United States. And the United States seeks to formalize this relationship via the TPP.

The TPP may even yet prove to be beneficial to China, as they need to engage in new reforms to avoid the “middle income trap” and set the stage for long-term growth. Trade deals like the TPP would create incentives for China to adhere to regional and global trade rules and even domestic economic and political liberalization. And that would be good not just for the US, but the entire world. Even China has considered the benefits of joining in the future.

Other criticisms about the TPP are less about the content, and more about how the deal was created and discussed in the first place. Republican nominee Donald Trump basically called the TPP too damn long, saying it’s “so complex that nobody’s read it.” To be fair, he’s got a point: the text of the deal is monstrously long and complex, and I doubt that any lawmaker has read the deal in its entirety, as it is literally over 5,000 pages long. However, text-heavy deals are probably unavoidable, as they increasingly tackle non-tariff trade barriers such as different standards and regulations between signatory states. The complexity of these trade deals is a sign of the times. Less easily explained away is the secrecy under which negotiations for the TPP were conducted - which is standard for many trade agreements. Drafts of the deal were made public not by government fiat, but WikiLeaks. Critics like Public Citizen’s Global Trade Watch, a consumer advocacy group, called for more open negotiations in 2012. And the American populace in general is very suspicious of secret negotiations, being mistrustful of government and government officials. (This populist sentiment also characterizes the rise of two so-called “government outsiders”, Donald Trump and Bernie Sanders, though one has had truck with politicians on both sides of the aisle throughout his career, and the other has been a Senator since 2007, and in Congress longer than God, probably.)

But some lawmakers were also upset about their piecemeal and controlled access to the drafts of the TPP, including Oregon Senator Ron Wyden, who tried to pass a bill that would require disclosure of all TPP documents to all members of Congress (he failed), and Michael R. Wessel, former commissioner on the US Trade Deficit Review Commission, who said that advisers like himself were prohibited from publicly airing their criticism, that they were only able to read portions of the text under supervision, were often given access to summaries rather than the original text, and that information on secure, government-run websites didn’t contain up-to-date information. Massachusetts Senator Elizabeth Warren opposed the TPP due to disproportionate influences by corporations and industry interests, saying it makes the deal inherently biased in their interests and against that of the common American people. But others say her language is biased and misleading, and that both labor and industry representatives are present in various committees, and that the latter is critical to provide much-needed expertise. However the committee system that reviews such agreements are still numerically dominated by industry representatives.   Ultimately, these arguments did not scuttle the TPP, as some had hoped. President Obama signed the agreement into law February 4, 2016. However, it has not been ratified, which means that it is not yet in effect. The President had hoped to sign one more free trade agreement before he left office, a hope that will not come to fruition: the TTIP, or Trans-Atlantic Trade and and Investment Partnership, a free trade agreement with the EU. In our next installment, we will look at the issues preventing a trade agreement with Europe, the USA's largest trading partner, and why the TPP succeeded while the TTIP was ultimately kicked down the road for years to come.

Click the link to check out Part 3 of our series on trade deals.


Post a Comment