Editor’s Note: The Trans-Pacific Partnership. This massive trade deal between the United States, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam accounts for nearly 40 percent of global output and is anything but simple. We asked trade scholar Gary Hufbauer and Cathleen Cimino-Isaacs of the Peterson Institute to break down the nuts and bolts of the trade deal and make their case for it.
— Kristen Doerer, Making Sen$e Editor
“The TPP is a horrible deal,” Donald Trump said. “It’s a deal that’s designed for China to come in, as they always do, through the back door and totally take advantage of everyone.”
“TPP is a disastrous trade agreement designed to protect the interests of the largest multinational corporations at the expense of workers, consumers, the environment, and the foundations of American democracy,” Senator Bernie Sanders argued.
With presidential candidates on both extremes denouncing the Trans-Pacific Partnership as a bum deal, and with middle-ground candidates offering tepid support at best, it may be tempting to declare the Trans-Pacific Partnership dead on arrival.
That would be a mistake.
The agreement promises huge benefits for the U.S. economy and furnishes the economic pillar for U.S. geopolitical strategy in Asia. Economists Peter A. Petri and Michael G. Plummer estimate that implementation of the Trans-Pacific Partnership would increase real incomes in the United States by $131 billion annually, or 0.5 percent of GDP, and U.S. exports by $357 billion or 9.1 percent over baseline projections. Equally important, a substantial majority of Republicans in Congress endorse the Trans-Pacific Partnership, and they are joined by a significant number of Democrats in Congress, whose critical support ensured the passage of Trade Promotion Authority “fast track” legislation earlier this year.
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A more accurate assessment is that the Trans-Pacific Partnership faces a rocky road to Congressional ratification.
Fortunately, most of the rocks are in Washington, not spread across the Pacific in the capitals of other member countries. Once Congress gives its assent, legislators in the 11 partner countries will almost certainly approve the Trans-Pacific Partnership.
But an elaborate timeline governs U.S. Congressional assent. President Obama started the clock on Nov. 5, 2015 when he made the entire Trans-Pacific Partnership text public and simultaneously notified Congress of his intent to sign the agreement on behalf of the United States. Under authorizing fast-track legislation, the President must wait 90 days before actually signing the Trans-Pacific Partnership. The 12 countries signed the agreement on Feb. 4, 2016 in New Zealand.
Meanwhile, the Obama administration and Congress must work together to draft implementing legislation. Under U.S. practice, it is the implementing legislation, enacted pursuant to Trade Promotion Authority, not the actual Trans-Pacific Partnership text, which has the force of domestic law. Trade implementing legislation can, and usually does, contain special features — not ordained by the text of the trade agreement — to answer the demands of key congressmen who may be unsatisfied with certain features of the deal. (For example, the carve-out of tobacco-related claims from investor-state dispute settlement or the permitted use of data localization in the financial services sector.)
Once the implementing legislation has been agreed upon, it’s up to President Obama to decide when he wants to submit the legislation for congressional ratification — most likely after he has insured the congressional votes. Congress must then take an up-or-down vote on the entire legislation, with no amendments, within 90-legislative days — this expedited timeline is the heart of fast track authority. Following this timeline, the earliest time for a ratification vote appears to be late spring 2016 — in the midst of the presidential primary season.
Entry into force
If Congress passes the trade legislation, the stage will be set for other countries to ratify the Trans-Pacific Partnership. And without doubts about U.S. participation, it looks likely that they will.
But there’s a caveat — and a rather large one at that. Before the Trans-Pacific Partnership can enter into force for the United States, the President must certify that all other partners have faithfully implemented the agreement. Unless Congress ratifies the Trans-Pacific Partnership by summer 2016, this provision means that presidential certification seems unlikely while Obama sits in the Oval Office. In other words, if ratification is delayed, the next U.S. president could have a decisive say as to when, if ever, the trade deal is implemented.
In the debate ahead, sparks will fly over just a handful of topics covered in the 6,000 pages of Trans-Pacific Partnership text, schedules and side letters. Here are three of the most incendiary issues:
Currency values. Critics complain that negotiated tariff cuts of 5 percentage points or more can be overshadowed or undermined by currency devaluation either through market forces or central bank action — by which a country depresses the value of its currencies to increase exports. This fear is not unfounded. In fact, Korea did just that shortly after the Korea-U.S. free trade agreement entered into force in March 2012.
The Trans-Pacific Partnership itself does not, however, directly address currency questions. Instead, these are covered in a separate “Declaration” by which the partner countries promise not to “manipulate” or “undervalue” their currencies as a means of boosting exports or restraining imports. Critics object that the currency declaration lacks hard-edged enforcement mechanisms, such as withdrawal of Trans-Pacific Partnership benefits. This is true. But in its defense, the declaration requires timely disclosure of the amount and composition of official reserves and calls for annual meetings between Trans-Pacific Partnership finance ministers to review exchange rates. These obligations represent a forward step.
Patent and related standards. Chapter 18 of the Trans-Pacific Partnership requires member countries to protect and enforce intellectual property rights — patents, copyrights, trademarks and trade secrets — pretty much according to U.S. practice. Among other safeguards, members are permitted to disregard intellectual property rights in the event of a health emergency or in the interests of national security. Some critics contend that U.S. laws already go too far in protecting patents, copyrights and other intellectual property rights, and thus, any extension of U.S. practice to other Trans-Pacific Partnership members is bad policy that will only benefit giant firms like Disney, Apple and Pfizer.
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Particularly contentious is that member countries must preserve the confidentiality of “marketing data” — scientific evidence that a pharmaceutical product is both safe and efficacious — of pharmaceutical drugs for at least five years. For biologics, Trans-Pacific Partnership countries must meet a minimum standard of eight years of data protection or alternatively offer comparable protection of at least five years combined with other measures, such as regulatory procedures. This prevents companies that produce generic forms of the same drug from using the original marketing data to satisfy safety and efficacy standards; thus, generic forms can’t come on to the market during the five-year window. So why was this provision included? For each new drug, the underlying animal and human tests typically cost hundreds of millions of dollars. The five- to eight-year confidentiality period enables the pioneering firm to recoup these costs and make a profit, especially in countries that do not allow patents on biologic products.
This confidentiality period represents a U.S. concession in trade talks since U.S. law provides a 12-year confidentiality period for biologic drugs sold in the United States. Sen. Orrin Hatch (R-Utah), the Chairman of the Senate Finance Committee whose leadership will be key to getting the deal through Congress, strongly objects to the five- to eight-year confidentiality period, because it gives U.S. biologic firms less protection. On the other hand, critics of data exclusivity are concerned that even a five-year period is too long.
These arguments are as old as the patent system itself: the merits of rewarding invention versus the advantages of cheaper goods. The novel debate in the Trans-Pacific Partnership is whether the costs of rewarding invention should be partly paid by foreign consumers through higher prices that they pay for new drugs. Reflecting America’s technological leadership, U.S. negotiators insisted on a strong intellectual property rights chapter. From the standpoint of U.S. interests, it’s hard to say they were wrong.
Investor-state dispute settlement. Chapter 9 of the Trans-Pacific Partnership establishes investment protections and lays out specific procedures for foreign investors to challenge host states in the event of expropriation or unfair treatment and to seek money damages through arbitration. Importantly, the chapter ensures the right of member countries to issue non-discriminatory regulations that protect health, safety and the environment. It also blocks virtually all challenges to such regulations by tobacco companies, and it limits claims by financial firms.
Nevertheless, some critics, including Senator Elizabeth Warren (D–Mass.), denounce any provision that enables foreign corporations to challenge host states. The critics fail to recognize that host states generally welcome investor-state dispute settlement (also referred to as ISDS) in order to attract foreign investment through the promise of fair play. From where we sit, it appears that the Trans-Pacific Partnership negotiators got the balance right in Chapter 9.
The Trans-Pacific Partnership’s critical role
Leaving contentious issues aside, a strong case can be made for the Trans-Pacific Partnership. It begins with dismal conditions in the world economy. Economic pundits have barely noticed, but the value and volume of world trade actually declined over the past year — a drop of about 4.5 percent in value terms. U.S. exports of manufactures illustrate the decline: down 5 percent in the third quarter of 2015 compared to the third quarter of 2014 — that is, $285 billion vs. $300 billion. For more than half a century after World War II, world trade, driven by policy liberalization, consistently expanded, year by year, 2 to 4 percentage points faster than the world economy. Foreign direct investment grew even faster. Rapid trade and investment growth supplied key ingredients of the best half century in recorded economic history. No more.
Falling trade and direct investment are both a consequence and cause of global economic stagnation. Sluggish world demand for everything from copper and oil to furniture and computers obviously serves to retard trade volumes and values. But in addition, declining international trade and investment deprive the world economy of essential fuel.
There are two big reasons for falling trade and investment, in addition to sluggish world demand: first, the virtual absence of major policy liberalization since the conclusion of the Uruguay Round of multilateral trade negotiations in 1995; and second, the proliferation of protective measures worldwide since the 2008-2009 financial crisis.
This is why the Trans-Pacific Partnership is critical. The pact shows that major countries are prepared to slash many existing trade and investment barriers and promise not to erect new ones. Once ratified, the trade deal will become a magnet for more countries to join — Korea, Indonesia, the Philippines, Colombia and others. It will inspire “competitive liberalization” — a race to remove barriers — not only in Asia , but also in Africa and perhaps even South America. With inspiration from the Trans-Pacific Partnership, the world economy could again be paced by fast trade and investment growth.
Finally, the geopolitics
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Beyond the long-term economic benefits, the Trans-Pacific Partnership is seen as an essential economic arm of the Obama administration’s Asia “pivot” — a policy to rebalance U.S. attention and leadership to one of the world’s most dynamic regions, but also one beset by security challenges, from territorial disputes in the South China Sea to a nuclear-armed North Korea. In the United States, past experience has shown that without a strong geopolitical rationale, it’s hard to get the requisite political support for trade negotiating authority, much less a final deal. Put simply, Trans-Pacific Partnership means expanding trade and investment with like-minded countries that are also key regional allies.
It’s worth remembering that new Asia-Pacific initiatives are evolving with or without the United States — China is pursuing its own regional trade deal (with several Trans-Pacific Partnership members) and touting ambitious initiatives like “One Belt, One Road” and the Asian Infrastructure Investment Bank. Successful passage of the Trans-Pacific Partnership would be a signal of U.S. commitment to the region. But it will also spread U.S. influence via the Trans-Pacific Partnership ’s rule-based system and promotion of good governance — not only to current members of the Trans-Pacific Partnership, but to those new members to come.