Guest Contribution: “TPP Critics’ Nighttime Fears Fade by Light of Day”

Today we are fortunate to have a guest contribution written by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at Harvard University, and former Member of the Council of Economic Advisers, 1997-99. A shorter version appeared at Project Syndicate.

The text of the TPP (Trans Pacific Partnership) that was finally agreed among trade negotiators of 12 Pacific countries on October 5 came as a triumph over long odds. Tremendous political obstacles, domestic and international, had to be overcome over the last five years. Now each country has to decide whether to ratify the agreement.

Many of the issues are commonly framed as “Left” versus “Right” in US politics. The unremitting hostility to the negotiations up until now from the Left – often in protest at being kept in the dark regarding the text of the agreement — has carried two dangers. One danger was that opponents would succeed in blocking negotiations altogether. Indeed, when Democrats in Congress voted against giving President Obama the necessary authority in June, the entire negotiations were widely declared to be dead. This would have been a shame — at least in the view of most economists — because the resulting trade liberalization was very likely in the end to turn out beneficial overall.

The second danger was that the Administration would be forced at the margin to move to the “Right” in order to pick up votes from Congressmen who said they would support the outcome if (and only if) it contained provisions that were sufficiently generous to American corporations. Those concerned about labor and the environment risked hurting their own cause by seeming to say that they would oppose the agreement no matter how well it did at including provisions to their liking, which could have undermined the White House incentive to pursue their issues.

In this light, this month’s outcome is a pleasant surprise. In the first place, the agreement gives the pharmaceutical firms, tobacco companies, and other corporations substantially less than they had asked for — so much so that Senator Orrin Hatch (Utah) and some other Republicans now threaten to oppose ratification in the final up-or-down vote. In the second place, the agreement gives the environmentalists more than most of them had bothered to ask for. I don’t know the extent to which these outcomes were the result of hard bargaining by other trading partners such as Australia. Regardless, it is a good outcome. The domestic critics might consider now taking a fresh look with an open mind.

The issues that are the most controversial in the US are sometimes classified as “deep integration,” because they go beyond the traditional negotiated liberalization in trade tariffs and quotas. Two categories are of positive interest to the Left: labor and the environment. Two categories are of “negative interest” to the Left in the sense that it has feared excessive benefits for corporations: protection of the intellectual property of pharmaceutical and other corporations and mechanisms to settle disputes between investors and states.

Now that the long-delayed agreement is completed, what turns out to be in it? Two good things in the TPP’s environment chapter are especially noteworthy. First, it takes substantial steps to enforce prohibition of trade in endangered wildlife — banned under CITES (Convention on International Trade in Endangered Species) but insufficiently enforced. Second, it also takes substantial steps to limit subsidies for fishing fleets — which in many countries waste taxpayer money in pursuit of the overfishing of our oceans. For the first time, apparently, these environmental measures will be backed up by trade sanctions.

I wish that certain environmental groups had spent half as much time ascertaining the specific possibility of good outcomes like these as they spent in sweeping condemnations of the process. The agreement on fishing subsidies was reached in Maui in July; but critics were too busy to take notice. Fortunately it is not too late for them to climb on board now.

Some NGOs might still worry that these provisions will not be enforced strongly enough. But trade penalties are among the most powerful tools for enforcement of international agreements that exist; for that reason environmental groups in the past have asked that such measures be placed in the service of environmental goals. There is no denying that the TPP provisions on endangered species and fishing are steps forward.

A variety of provisions in the area of labor practices, particularly in Southeast Asia, should also be of interest. They include steps to promote union rights in Vietnam and steps to crack down on human trafficking in Malaysia.

The greatest uncertainties were over the extent to which big US corporations would get what they wanted in the areas of investor-government dispute settlement and intellectual property protection. On the one hand, critics often neglected to acknowledge that international dispute settlement mechanisms could ever serve a valid useful purpose. Similarly, they often neglected to acknowledge that some degree of patent protection is indeed needed if pharmaceutical companies are to have an adequate incentive to invest in research and development of new drugs. But, on the other hand, there was indeed a possible danger that such protections for corporations could have gone too far.

The dispute settlement provisions might have interfered unreasonably with member countries’ anti-smoking campaigns, for example. In the end, the tobacco companies did not get what they had been demanding. Australia is now free to ban brand name logos on cigarette packets. TPP sets a number of other new safeguards against misuse of the investor-state dispute settlement (ISDS) mechanism as well. For example there is a provision for rapid dismissal of frivolous suits. The rest of the details are publically available in clear bullet point form, from USTR, if one takes the trouble to read them.

The intellectual property protections might have extended to other TPP member markets a 12-year period of protection for the data that US pharmaceutical and bio-technology companies compile on new drugs (biologic medical products, in particular), and might have made it too hard for generics to eventually bring the benefits to the public at lower costs. In the end, these companies too did not get much of what they had wanted. The TPP agreement assures protection of their data for only 8 years in some places and 5 years in others and instead relies on the latter countries to use other measures to constrain the appropriation of the firms’ intellectual property.

The focus on new areas of deep integration should not obscure the old-fashioned free-trade benefits that are also part of TPP: reducing thousands of existing tariff and non-tariff barriers that inhibit trade. Many of these reductions benefit US exports. (Most US barriers against imports were already very low.) Liberalization in manufacturing includes the auto industry, for example. Liberalization in services includes the internet.
The liberalization of agriculture is noteworthy; this sector has long been a stubborn holdout in international trade negotiations. Countries like Japan have agreed to let in more sugar, beef, pork, rice and dairy products, from more efficient producer countries like Australia and New Zealand. In all these areas and more, traditional textbook arguments about the gains from trade apply: new export opportunities, higher wages, and a lower cost of living.

Many citizens and politicians made up their minds about TPP some time ago, based on having read seemingly devastating critiques of what was feared would emerge from the trade negotiations. When the text of the agreement is released is the time for the critics to read the specifics that they have so long hungered to see and to decide whether they can support it after all. They just might discover that their nighttime fears are much diminished by the light of day.

This post written by Jeffrey Frankel.

17 thoughts on “Guest Contribution: “TPP Critics’ Nighttime Fears Fade by Light of Day”

  1. James Harrigan

    This is a very disappointing piece. I am pretty sure that Frankel has not seen the text (since it has not been released yet), and the only link he gives to what is in the agreement is a pro-TPP summary from USTR. I am teaching trade policy right (at the University of Virginia) now and would dearly love to be able to have a well-informed opinion about TPP, but I have had no luck finding objective information about what is, and is not, in the agreement. I have excellent contacts in the trade policy world, and NOBODY can tell me what is in the agreement.

    The more I try to find out what is in this agreement, the more unhappy I get. The administration has made a big mistake not being more open about what the US negotiating position was, and what is in the agreement. None of the pro-TPP voices out there can vouch for what has been agreed to, and that very much includes Jeff Frankel. This is not how democracy is supposed to work.

    1. Erik Poole

      Well James, I am a little surprised at how readily you admit that you don’t know much about policy, democratic process, political rent-seeking/special interest politics, etc. Either that or you don’t seem to care.

      There are some rather simple, but solid reasons as to why the US executive and other nation state governments have adopted ‘fast-track’ legislation or have something similar in place.

      Of course, if you would like to make an argument along the lines of American exceptionalism, I am sure that the rest of us are all ears.

      1. James Harrigan

        Erik, you are confusing two issues. I fully understand the arguments for fast track (I explained it in detail in class last week), and I am very much in favor of fast track. But that is separate from secrecy. The Congress will (eventually) get the full text, and vote it up or down, but until then, how can any of us be informed citizens about TPP?

  2. Rich

    TPP makes the world marginally better; the alternatives are all much worse. Now we can cheat each other directly.

  3. Erik Poole

    James Harrigan: My last post was a little harsh. As a teacher of this material, you possess some expertise, and so I should give you the benefit of the doubt.

    Please enumerate the successful freer trade agreements where the details were widely with all affected special interest groups in the national economy prior to signing.

    1. James Harrigan

      Eric, my wife asked me just this question at dinner last night. For the US, the relevant precedents of big multilateral trade deals are NAFTA (1994) and the establishment of the WTO (1995). I don’t recall if the lack of transparency about the provisions was the same as it is with TPP.

      As for rent seeking, the effects goes both ways. When the US negotiating position is secret, insiders that have the ear of the negotiators have more influence than they would with more transparency.

      1. Erik Poole

        James: Good question. I don’t recall exactly. The numerous party negotiations tend to be fast-track with no details if I am not mistaken.

        I understand the concern but would counter with the following: 1) freer trade tends to reduce privileges for special interests; 2) the special interests and their privileges in the economy or foreign policy are already there to see quite plainly.

        If Americans are already throwing billions upon billions of dollars at the agricultural sector, for example, do you have to wait for a trade deal to start undercutting the privileges and influence of this sector? As a special interest, agriculture is a national security threat. Too many questionable if not downright risky initiatives are undertaken to get access to markets for US agricultural products.

        The Canadian federal government will compensate Canadian dairy farmers for losses to the tune of C$4.3B. That information was released during a general election. Canadians have for years paid dearly for supply-managed products like dairy. Lots of funds and tax credits are available. All this for a popular life-style industry where inducements to work are entirely unnecessary. The agricultural sector has probably destroyed more salmonid habitat in British Columbia than any other single sector.

        I guess I am willing to give central governments all the tools they require to reach a deal and erode agricultural protectionism as much as possible. I have given up on leadership from the ‘people’ who seem to have strange ideas about generosity and food security and are as well for the most part indifferent about security events in Central America or Eastern Europe and elsewhere.

  4. Marko

    Yes , Lucy , go ahead and tee-up that football. We Charlie Browns lost any dignity we had long ago , so we’ll be happy to take another fall for your entertainment and enrichment.

  5. Joseph

    Sorry, but I’m not buying it.

    The argument is that corporations aren’t happy so it must be a good deal. The corporations got 99% of what they wanted and still cry bloody murder. They always cry bloody murder. That’s supposed to make us feel better that the perennial whiners are still whining?

    I mean, if you can’t prevent tobacco companies from selling their deadly products in your country, you are only allowed to keep their names off the labels, that is called victory? One of the most deadly, corrupt industries in history and that’s the best you can do. If that is the bar you are setting for success, it is obvious that all of the other corporations will have absolute free rein.

    And regarding pharmaceuticals, the only limits they give up are a few years protection on biologics, a tiny (albeit growing) segment of the pharmaceutical industry. When Mr. Frankel trumpets the 8-year limit, he elides the fact that this applies only to the tiny biologic segment. All the other patent drugs get exactly what they wanted, 20 years of protection. Now some people would call this deceptive, while other might be inclined to call it outright lying. I’m inclined to the rule that good ideas don’t require lies to sell them.

    And what exactly are the pharmaceutical companies trying to protect? It is the data behind their patents. Recall that a basic tenet of patent law is that a patent is granted in exchange for full disclosure of the patent. The idea is that by encouraging disclosure, patents increase innovation by sharing what would otherwise be hidden as trade secrets. By granting patents without full disclosure, the TPP is simply enforcing market distorting monopolies without the accompanying increases to innovation due to disclosure. These rules retard innovation.

    And what did environmentalists get? No more trade in rhino horns. Seriously, this is the argument Mr. Frankel makes. Billions of dollars of benefits for corporations and environmentalists get rhino horns, oh and ocelots, don’t forget the ocelots. It’s embarrassing he even made that argument.

    And what of the actual tariff reductions? Well tariffs are already quite low in aggregate so even the most optimistic arguments for GDP growth are so tiny as to be nearly immeasurable. But most important are where the putative gains go. We learned from NAFTA that they go primarily to the 1%. And given all the intellectual property expansions, especially pharmaceuticals, the poor around the world will become poorer and sicker. The bottom line net is that a very few privileged people will become better off but the vast majority of the world’s population will be worse off.

    So, sorry, I’m not buying it.

    1. Jeff Frankel

      So you are not happy even with the tobacco exemption part of the agreement? How do you think TPP could have gone further to facilitate anti-smoking campaigns? If Australia wants to put very high taxes on cigarettes, I would be in favor. If the country wants to ban smoking altogether, 100%, I believe that they can. But even a rabid anti-smoker like myself does not believe it is the job of an international agreement like TPP to force member countries to do those things.

  6. Kaleberg

    I think the Fed should hold off on raising interest rates until the general American public starts seeing some benefits from free trade. It’s been forty years now, so I’m figuring a 2160 25 basis point increase might be salutary.

  7. Erik Poole

    Prof. Frankel: Thanks for an excellent summary.

    The ban on fishing subsidies could be a significant step.

    But let’s face reality, many Neo-Marxist critics will see the way commercial fishing is currently subsidized (with capital subsidies in the USA and income transfers in Canada, for example) as a good way of saving capitalism from the tragedy of over-production by destroying social wealth.

    The Canadian welfare state unwittingly subsidized the collapse of once valuable commercial species on both coasts and continues to support with tax payer dollars fisheries that cause conflict with Aboriginals.

    So if these agreements can force governments to start reducing support for natural wealth-destroying activities, I am all in favour of it.

    Of course, there is only so much that trade deals can do. The biggest source of direct and occasionally violent confrontation between British Columbia Aboriginals and settlers or second-comers if you prefer occurs with BC recreational fishermen who access the resource essentially under rules of unrestricted and unlimited effort.

    The discourse of cultural superiority that comes tripping off the tongues of second comers is interesting. As Robert Higgs pointed out, the confiscation of Aboriginal fishing rights and new efficient tools such as fish wheels over the early and mid-part of the 20th century represented ‘technical regress’.

    It is interesting in light of the fact that the biggest multi-billion dollar pie sitting on the table are pipelines to take growing Alberta heavy oil to foreign markets outside North America. Perhaps treating people with disrespect is simply ‘good business’? I do not recall receiving that lesson in Economics 101.

    We like to talk a lot about secure economic property rights but in practice special interest politics often intervene to reduce those rights to costly rent-seeking competitions.

  8. David L

    Professor Chinn,

    I was in your Econ class a few years ago when I was in college. Ever since I graduated and left Madison, I have been doing corporate finance in a bank’s HK office, and most of my clients are Chinese companies involving in international trade. What impact do you think the TPP act will have on our side?


    1. Menzie Chinn Post author

      David L: That’s a good question; while China’s exclusion from TPP would make it seem obvious that Chinese firms would suffer, my guess is that the impact, even after the long phase-in, would be small. See this artice.

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