Wrapping up the TPP is not without Risks

July 27, 2015International Tradeby East Asia Forum

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The TPP could end up doing more harm than good in the Asian region.

The largest hurdle for the 12-member Trans-Pacific Partnership (TPP) agreement — the US president’s ability to get Trade Promotion Authority, or fast track — is now clear. Many people think that the TPP can wrap up in a few months.

There are still difficult issues to resolve, but they are trivial compared to the ability to get a straight up-or-down vote in the US Congress, without which the deal would be a non-starter. The remaining issues can easily be horse-traded at the political level and compromises can happen in order to complete the deal.

The temptation will be strong to rush across the finish line for what will be a major political trophy — but the risk is that the TPP will be an agreement that does more harm than good for economic and political relations in the Asia Pacific.

Grandiose statements about the deal that covers 60 percent of global GDP and half the world’s trade will accompany a completed TPP. This sounds much less impressive when you compare it to groupings like APEC, which includes China and Indonesia that have even higher global GDP and trade coverage. However, the numbers like these do not tell us anything about what kind of deal it will be or what gains and costs it will bring. The most optimistic estimates suggest trivial increases in GDP.

The TPP aims to write rules for international commerce in the 21st century and includes a large number of chapters that go beyond 20th century trade issues.

There are three major flaws, though, that will likely overwhelm any positives the deal may deliver.

The first is that the core of the new rules involves aspects that further private interests (read: large multinationals) at the expense of general welfare in member countries. The most egregious of these is stronger intellectual property (IP) rights protections, which are anti-development and simply transfer wealth to US pharmaceutical companies and Hollywood. Stronger intellectual property protections stymie innovation. This means a net reduction in trade and a loss in global welfare. If countries like Australia think stronger IP protections are in their national interest, they do not need an international treaty to introduce them.

The second flaw is whom the TPP leaves out. China, India and Indonesia, among others, are not party to the TPP nor will they be able to join anytime soon. The hurdles to membership are unreasonably high for non-advanced countries left out, which will pay a cost with strict rules designed to divert trade from them.

The third major flaw is that even in the win-win trade enhancing areas, the TPP will either entrench protection in some areas — chiefly agriculture — or, where it succeeds in liberalising, will do so at the expense of non-members. Inefficient and unproductive sectors are a drag on economies, and liberalising them would produce real gains. But many countries in the TPP are bringing an overly defensive stance — think Japan and its rice and other ‘sacred’ produce — or are starting with that sector off the negotiating table altogether, as is the case with US sugar.

More egregiously, the TPP will complicate trade and impose serious costs on non-members.

Vietnam is a case in point. The country is paying a high price for entry by adopting standards and rules inappropriate to its stage of development, but it will benefit from increased market access in the United States for its garments exports. Yet Vietnamese exporters will only enjoy that preferential treatment if it procures raw materials from another TPP member instead of from cheaper, more efficient suppliers like China. These and similar provisions that derive from the way TPP has been negotiated bilaterally make it a particularly complex and costly agreement. The trade diversion that will result imposes economic costs on members and non-members alike — and some of the latter are even poorer than Vietnam.

To make matters worse, the trade- and welfare-reducing IP rights provisions trade off against, and bundled with, market access provisions. In addition, some provisions could be disruptive and costly, imposing onerous standards, institutions and reforms — to state-owned enterprises, for example —and countries expect to leapfrog stages of development.

As TPP members sprint towards the finish line, they will need to introduce measures to enhance the positives of the agreement — the genuine trade and investment liberalisation that occurs — and over time minimise the negatives. A first step is to limit the scope and reach of the welfare reducing IP protections.

The agreement needs to be expansionary on the win-win trade and investment liberalisation aspects. That involves limiting the complicated preferential deals within the TPP and making it easy to expand membership. That is no easy task given the design of the agreement is to punish non-members into compliance on terms set by the advanced economies. A more productive way forward would be to help build capacity in lower income countries so that they can reach those standards. That is how to further productive economic interdependence and win friends.

If there is reform progress and liberalisation unilaterally or through the help of other regional initiatives, and if there is a strengthening of the WTO and multilateral system, then the benefits of the TPP will accentuate and they would avert some of its more pernicious costs.

The race to a risky Trans-Pacific Partnership deal is republished with permission from East Asia Forum

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