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The pros and cons of the Trans Pacific Partnership pact

, February 8, 2016, 0 Comments

trans pacific partnership marketexpress-inThe TPP, one of biggest trade deals in history was signed on Wednesday, February 3, in New Zealand. The TPP involves 12 Pacific Rim nations – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam – which account for 40 percent of the global economic output and 26 percent of world trade.

The far-reaching deal, which excludes China, aims to dismantle tariff and non-tariff barriers to trade and investment between the participant countries. It also foresees streamlining regulations, and the implementation of common standards for the protection of foreign investment and intellectual property, among other things.

The Trans Pacific Partnership, one of the world’s biggest multinational trade deals, has been signed by 12 Pacific Rim nations. Economist Gary Hufbauer spoke to DW about the risks and advantages of the trade pact.

The TPP will now undergo a two-year ratification period in which at least six countries must approve the final text for the deal to be implemented. After its successful ratification, the agreement is expected to serve as a model for future trade pacts. Many countries negotiating the TPP such as Australia, Singapore and Canada already have free trade agreements with the US.

However, the huge differences in terms of economic structure and competitiveness among TPP members – which include countries at different stages of economic development – require undertaking significant restructuring and reforms by some countries. Moreover, critics argue that the deal may actually cost jobs in some countries and weaken labor and environmental standards.

Gary Hufbauer, an international trade expert at the Washington-based Peterson Institute for International Economics talks to DW about the key aims of the deal, the risks involved and the countries set to benefit most from the pact.

DW: What are the key aims of the TPP?

Gary Hufbauer: The broad goal of the TPP is to create a trade and investment bloc that covers approximately 40 percent of the world economy. The hope is that the removal of trade and investment barriers will entice countries to join the partnership, despite the high standard of rules the countries are expected to follow.

Furthermore, there will be a unified set of rules for state owned enterprises, intellectual property rights and labor and environmental standards. The ambitious partnership is far more expansive than the World Trade Organization’s (WTO) system, but falls well short of achieving the same institutional framework found in the European Union. It is important to note that full implementation of the trade agreement will take a considerable amount of time, perhaps even a decade.

How is the TPP expected to boost trade, create jobs and improve the living standards of the countries involved?

The Trans Pacific Partnership is expected to lower trade and investment barriers that will enable competitive firms to move into new markets, hire workers at better wages, cut prices and improve the range of quality of goods and services available to households and firms.

The TPP is a supply side program. Some may ask: “Do we need more action on the demand side to boost the economy of TPP countries?” And I give a resounding “yes.” But on the bold assumption that the macro managers will do a better job in stimulating demand, the TPP will enable a lot of demand to be filled without inflation.

However, critics argue that the deal may actually cost jobs in some countries and weaken labor and environmental standards. What is your view on this?

Trade and investment gains work through the process Joseph Schumpeter called “creative destruction.” Some jobs will be lost and some firms will go out of business, which will require transition assistance for displaced workers. But our calculations indicate that national gain through lower prices, higher pay in export jobs, better quality of goods and services, etc., exceeds $400,000 annually for every displaced worker.

However, the criticism on labor and environmental standards is completely unwarranted. The WTO has no labor and environmental standards in its playbook, while the TPP will have rigorous standards that will be enforced by a dispute settlement mechanism.

In terms of the negotiations, what were the key sticking points that had to be overcome?

The key sticking points were: (1) market access for “sensitive” products, like sugar and apparel in the US, pork and beef and rice in Japan, dairy in Canada, and a range of protected services like insurance and health care in many countries; (2) the right amount of intellectual property protection in terms of the duration of data exclusivity, patent linkage, enforcement against music and software piracy; (3) commercial standards for state-owned enterprises – nearly the whole of the Vietnamese economy; (4) labor practices in Malaysia with respect to anti-Chinese preferences and trafficking in Burmese workers.

Which countries are likely to benefit most from the deal?

A country with a more protected economy will benefit more from liberalization. That’s not what the “man in the street” thinks, but that’s what economists think. So, relative to their economic size, Vietnam and Japan will benefit the most. Vietnam will benefit in almost every sector thank to the jolt from external competition. Japan will receive a jolt in the agricultural and service sectors (retailing, education, insurance, etc.).

Which are likely to benefit the least?

Free market economies are likely to have the smallest gains relative to the country’s GDP. Therefore, Singapore, Australia and New Zealand will likely experience smaller gains in relation to GDP. Nevertheless, the most competitive firms in these countries will gain from greater access to export markets. The same is true of competitive firms in Vietnam (apparel and some foodstuffs, like shrimp) and Japan (a wide range of manufacturing firms).

Why is China not part of the negotiations?

China is not prepared to meet the high standards of free trade and investment envisaged in the TPP. It may be ready to join ten years down the line. I co-authored a book, “Bridging the Pacific,” which lays out a path for the eventual Chinese membership. The book received a lot of interest from Chinese officials and academics.

How is the TPP likely to affect China’s economic position in the region?

China continues to be an economic powerhouse. Recently, I gave a talk in Shanghai urging China to accelerate the RMB towards the status of an international currency. Even since my speech the authorities have taken constructive steps, opening the bond market, disclosing gold reserves, etc. The AIIB will be a major source of infrastructure finance for all of Asia.

China’s growth will continue at the six to seven percent range, making China a huge market for all sorts of goods and services exported from Asia and the world. Taken by itself, tariff preferences in the TPP will deprive China of about $100 billion of exports annually, but that will be a small loss given the Chinese growth trajectory.

Economist Gary Hufbauer is an international trade expert at the Washington-based Peterson Institute for International Economics.