China crash?

An extended version of my column on “China’s slowdown” now appears at VoxEU, including academic references.

Someone at Seeking Alpha responds with the following question:  What are the odds of an outright recession in China, with substantially negative GDP growth?

My reply:

This scenario is certainly possible. I have even described financial bubbles-and-crashes as a sort of “rite of passage” that newly arrived economic powers undergo (Holland 1637, England 1720, US 1929, Japan 1990, Korea 1997).  In China the crash would probably come from the accumulation of bad loans (especially in the shadow banking system) and financing of unused capacity (especially in residential construction).

I would put a 25% probability on a Chinese recession happening within the next few years. Even then, however, China would more likely recover before long, as Korea did, rather than stagnate as the US did in the 1930s or Japan in the 1990s-2000s.

 

China’s Slowdown

Investors worldwide are closely watching the steep decline in China’s stock market.  The Shanghai Stock Exchange Composite Index is down more than 40% since June 2015.

The reason observers are concerned is not because they themselves are invested: China’s stocks are overwhelmingly held by Chinese themselves.  Rather, many are interpreting it as evidence that China’s economy is going down the tubes.

China’s growth rate has indeed slowed down and there are plenty of reasons to believe that the slowdown is not just temporary.  But none of them have much to do with the stock market.

For one thing, market prices are still well above where they were in 2014.  That was a time when many observers were bullish on China, proclaiming that its economy had just surpassed the US to become the world’s largest, on the basis of new PPP-based GDP statistics.  But in fact the slowdown in Chinese growth began four years ago.  According to the official statistics, growth averaged 10% over the three decades 1980-2010, but slowed down to the 7%-8% range in 2012-14.

Indeed, the reason that China’s stock market started to ascend at the end of 2014 is that the People’s Bank of China began to cut interest rates in November, in an appropriate response to the slowdown in economic growth that was already evident.  But the market’s continuing rise took on the character of a credit-fueled bubble in the spring of 2015.  The peak came on June 12, when the China Securities Regulatory Commission tightened margin requirements.

The bubble has now been reversed.  That doesn’t necessarily convey much information about China’s growth prospects.

There are plenty of reasons not to be surprised that China’s growth rate has slowed down and not to expect it to return to 10%.  The human instinct of some forecasters five years ago was simply to extrapolate the preceding three decades.   But casting a wider statistical net would have revealed that a fourth decade at 10% would have been historically unprecedented.

The Middle Kingdom is not exempt from the broader statistical regularities.  Some see the slowdown as a case of the middle-incometrap. Others find that the more relevant statistical pattern is regression to the mean in growth rates.

What are the economic forces behind the tendency for a rapidly growing country to slow down?  There is a wide variety of possible economic interpretations. Six come to mind:

  • One is diminishing return to capital.  China’s investment in steel mills, transportation infrastructure and residential construction became “too much of a good thing.”
  • Another interpretation is the observation that productivity growth is easier when it is a matter of copying the technologies, production processes, and management practices of the Western countries.  When the gap between the economic frontier and the newcomers narrows, the latter countries have to do some of the innovating on their own.
  •  A third explanation is that rural-urban migration has been a big source of China’s growth, but that the surplus labor has finally been used up, wages have risen, and the competitive advantage in labor-intensive manufactures has been lost.  (The “Lewis turning point” has been reached.)
  • A fourth is that the population is ageing.  The working-age population peaked in 2012.  The ratio of retirement-age people to working-age population is rising.  This demographic transition occurs naturally in advanced countries; but the one-child policy accelerated it prematurely in China.
  • A fifth is that urban land prices have been bid up and the “carrying capacity” of the environment has been exhausted.
  • A sixth is that the composition of the economy is shifting away from manufacturing and into services, which is appropriate but which entails slower growth because in all countries there is less scope for productivity growth in services than there is in manufacturing.

Thus a shift from 10 per cent growth in China to a more sustainable long-term 5-7 per cent trend is perfectly natural.  The important question is whether the transition takes the form of a soft landing or a hard landing.  In a soft landing China would continue to grow at the slower-but-sustainable trend rate.  In a hard landing it would suffer a financial crisis and more severe economic recession.

High dependence on investment spending and debt financing can work well during a high-growth phase but then lead to excess capacity and financial crisis when the long-run growth rates slows down.  Precedents include post-1980s Japan and 1997-98 Korea.

Some say that the official statistics seriously overstate GDP and that the true growth rate has already fallen well below the 6.9 per cent that the government has reported for 2015.  It is indeed suspicious that official growth statistics seem in most years to come close to the numbers in plans that had been announced by the government ahead of time.  So the skeptics reasonably turn to more tangible measures.  They point out that energy consumption, freight railway traffic, and output of such industrial products as coal, steel, and cement have slowed sharply.  (These are components of the so-called Keqiang Index.)  But Nicholas Lardy persuasively argues that those statistics are also consistent with the interpretation that the composition of China’s economy has been shifting away from heavy manufacturing and toward services.

The shift away from manufacturing to services is one component of a desirable package of policies to smooth the transition to a sustainable growth rate.  Another is a reduced reliance on investment spending and export demand, and a greater role for household consumption.  Other desirable reforms include increasing the flexibility of land markets and labor markets.  For example labor mobility is still impeded by insecure land rights in the countryside and the hukou system in the cities.  More generally, the markets should continue to play a growing role in the economy.  State-owned enterprises should be reined in.  Reforms are also needed in health care, social security, and the tax system.  And, of course, environmental regulation and the end of the one-child policy.

Chinese economists and leaders know all this. Indeed a very similar list of reforms was the outcome of the Communist Party’s Third Plenum in 2013.  Beijing has taken some steps to implement them over the last two years.  But there is still a long way to go and it is by no means guaranteed that the implementation will be fully successful.  As Shang-Jin Wei of the Asian Development Bank points out, the fate of China’s economy depends a lot more on how well the reforms go than on anything about last year’s stock market bubble and its subsequent reversal.

 

Forecasting 2016 Economic Developments & Candidates’ Reactions

As the new year starts, Politico asks a set of economists for forecasts.  Prognostication from 23 appears at “Could the Economy Tank in 2016?

By the way, I think my forecast last time, two years ago, turned out to hold up pretty well:

Something important will get better in 2014: Fiscal policy will stop hurting the economyThe biggest impediment to economic expansion over the last three years has been destructive budget policy coming out of the CongressThere are good grounds for optimism in 2014. For the first time in four years, Congress will probably not inflict contractionary fiscal policy on the American people. If the government sector stops making a negative contribution, that will show up as economic growth.”

This time I focused on the following question from Politico:

Q: How will the 2016 presidential candidates have to adapt to economic realities and unforeseen developments in the coming year, such as the risk of recession, as they make the case to voters about their own economic visions?

A:  Recessions are not forecastable.  A downturn is no more likely in 2016 than in a typical year, nor less likely.

The next president will, like his or her predecessors, have to shift gears from the campaign and adjust to a very different set of developments and realities upon taking office.  But this is because of politics, not mainly because of uncertainty regarding what lies ahead.   The adjustment process will not begin until after the election, even if major new developments in the domestic or global economy take place during 2016.  The polite way to phrase it is to observe that “politicians campaign in poetry and govern in prose.”

Republican nominees, for example, always promise to cut taxes, increase military spending, protect seniors, and yet to run a strong budget balance, even though that combination is arithmetically impossible.  Democratic nominees too make unrealistic claims about how they will be able to combine spending increases with budget discipline.   Unforeseen disasters – financial, economic, national security – do not cause candidates to rethink their plans, but only to double down.   It is only after they take office that they are forced to confront the arithmetic, and sometimes they can postpone facing up to it for several years.

Some presidents adjust to fiscal realities immediately, during the presidential transition (Bill Clinton), some after a year or two of fiscal failure (Ronald Reagan and George H.W. Bush), and some later still (George W. Bush).   But none do it before the election.

 

The Fed, China and Oil

My answers to three questions at the start of 2016 (from Chosun Ilbo, leading Korean newspaper):

1. How do you analyze the recent US interest hike, and how will it influence the global economy in the coming year?

The Fed had telegraphed its decision to raise the interest rate so far in advance and (by December) so clearly, that the policy change was already fully reflected in markets.  For example most of the substantial appreciation of the dollar since 2014 can be attributed to anticipation of the Fed tightening.   Furthermore, the movements in relative monetary policy — the end of quantitative easing in the United States, the first increase in interest rates, simultaneous monetary easing in other countries and the appreciation of the dollar – all reflect relatively greater strength in the US economy compared to most others.  It will create difficulties for some commodity-producing countries that had gone back to large-scale borrowing in terms of dollars.  But the pattern of US growth, monetary tightening, and dollar appreciation is not bad news for the rest of the world overall.

 

2. What is your view on China’s economy, and how will it economy influence the global economy this year?

It was inevitable that China would not be able to sustain a fourth decade of growth rates in the neighborhood of 10%.   Some of the sources of its growth have begun to run into diminishing returns, such as rural-urban migration, heightened capital/labor ratios and an over-stretched environment.

The open question is whether the transition to a more sustainable and moderate rate of growth that we are now seeing will be a soft landing or a hard landing (e.g., a crisis arising from unneeded construction, shadow banking, and bad loans).   A good scenario, the soft landing, is by no means ruled out yet.  The 2015 stock market bubble and crash was not as important as observers thought.  Much of what we are seeing could be the desired shift in the composition of China’s economy, away from the production of manufactured goods and their sale for exports or physical investment, and toward the production of services and their sale to the consumer sector.

Even though China is slowing down a lot, its economy occupies a much larger share of the world economy than it used to.  For this reason, it will continue to be an engine of growth in the world, just not as quite as strong an engine as had been forecast by those who rely on simple extrapolation of past trends.

3. What is your view on oil prices recently? How will the oil price change impact the global economy this year?

The fall in dollar oil prices has many causes, both on the supply side (US fracking, Saudi decisions) and the demand side (weakened demand from much of the world, especially China).   One cause that is often overlooked is the strength of the dollar against other currencies.

Needless to say, the fall in oil prices hurts oil exporters and benefits oil importers.   The benefits for oil importing countries in Asia and Europe in 2016 will probably be greater than what has been evident so far.

Low retail prices for fossil fuels are bad for the environment.  All countries should take advantage of the recent fall in oil prices by either shifting their taxes onto fossil fuels or else, if they currently have wasteful subsidies to fuel consumption, then they should cut them.  They should take their cue from developing countries such as Egypt, India, Indonesia, Mexico and the UAE that have done that recently.

 

The Paris Agreement on Climate Change, C’est Bon

How should one evaluate the agreement reached in Paris December 12 by the 21st Conference of Parties to the UN Framework Convention on Climate Change (UNFCCC)?   Some avid environmentalists may have been disappointed in the outcome.  The reason is that the negotiators did not commit to limiting global warming to 1 ½ degrees centigrade by 2050, nor will the new agreement directly achieve the 2 degree limit.

But such commitments would not have been credible.  What came out of Paris was in fact better, because the negotiators were able to agree on meaningful practical near-term steps. Virtually all countries agreed concretely to limit their emissions in the near term, with provisions for future monitoring and periodic checkup and renewal. This is a more important achievement than setting lofty goals for the distant future while giving little reason to think that they would be met.  The important thing is to get started.

In four key respects, the agreement is a good one, for those who see global climate change as an important problem and who want down-to-earth steps to address it.

First, and most salient, is comprehensive participation.  More than 186 countries offered individual commitments, called Intended Nationally Determined Contributions (INDCs), to go into effect in 2020. These countries account for 96% of global emissions, compared with the current coverage of the Kyoto Protocol which is only 14% of global emissions.  In the past, only advanced countries were expected to agree to commitments to reduce emissions of greenhouse gases.  Developing countries were explicitly spared that within the UNFCCC.  One reason it is so important for them to make explicit commitments is that the growth in emissions is now taking place exclusively in developing countries, not among the advanced countries.  Furthermore, countries like the United States would not agree to limit their emissions if they feared that the effect might simply be a migration of carbon-emitting industry to developing countries.

Second is the agreed process of future assessment and revision of targets.  The decision was to take stock and renew the commitments every five years. (Some negotiators had been arguing for ten-year intervals.)  Future steps can adjust targets to be either more aggressive or less, in light of future developments.  Probably more aggressive, if the scientists’ predictions are borne out.  The second set of INDCs is to be decided in 2018.

Third is transparency in monitoring, reporting and verifying each country’s progress.  Countries are to report every five years, starting in 2023, how well they have done compared to what they had said they would do.  The United States and Europe had to push hard on China and India to get agreement on this.  But without it, the INDCs would not have been credible.

Fourth are mechanisms to facilitate international linkage, including scope for firms operating in rich countries to finance emission reductions in poor countries.  This is important in order to achieve the environmental goals in an economically efficient way:  it is cheaper to pay a poor country to refrain from building new coal-fired power plants than to shut down plants that are already operating in rich countries.  Achieving the first period’s INDCs at low cost will in turn be important for willingness to take further steps in future periods.

Some may be disappointed that the Paris Agreement did not explicitly commit to more aggressive environmental goals, particularly limiting warming to 1 ½  degrees centigrade (above pre-industrial levels) or zero greenhouse gas emissions in the second half of the century, leaving these as aspirations.  And in truth the INDCs are nowhere near enough in themselves even to limit warming to 2 degrees Celsius (3.6 degrees Fahrenheit), the long-term global goal that was agreed at an earlier Conference of the Parties in Cancun in 2010.

Actually achieving such environmental goals would of course be desirable, in order to minimize risk of disaster scenarios.  But proclaiming ambitious collective numbers is very different from achieving them.  It is almost beside the point that, by now, a goal of 1 ½ degrees would be very high-cost economically. The plan needs to be credible if it is to determine myriad business decisions made today.   But collective goals are not credible without assignment of individual responsibility; and leaders in any case can’t make credible commitments 35 years into the future.

Others, from developing countries, are disappointed for another reason:  the figure of $100 billion in finance from rich countries does not appear in the legally binding body of the agreement.  They did get an admission of moral responsibility to help small island states, for example, cope with “loss and damages” from sea level rise.  But the rich countries rejected demands for concession of legal liability.  I judge this a reasonable outcome in a difficult situation.

Rich countries can’t deny that their past emissions have inflicted harm on the world.  The entity whose land was flooded would have a claim to compensation from the entity that had caused the damage, if they were operating within a domestic legal system.  But sovereign countries are not operating in such a legal system.  The $100 billion in finance has always seemed to me problematic.  The developing countries fear that the rich countries won’t in the end deliver it, not in cash; and they are right.  The rich countries fear that if they did send “reparations,” much of it would disappear into the pockets of local elites; and they are right.  Better, then, not to make promises in the first place.

The poor countries do have a strong case.  The average American still emits ten times as much greenhouse gases as a citizen of India.  India cannot be deprived of the right to develop economically.  But the best place to take account of these fairness concerns is in the agreed emissions targets.  The efforts that the richer countries promise in these agreements should be – and generally are — greater than the efforts of poor countries.  The richer a country is, the earlier the date at which its emission targets should peak.  The richer it is, the more sharply its target should cut relative to emissions baseline.  With targets that take into account countries’ stage of development, i.e., that continue to grow in the short term, the poor countries can get paid for additional emissions cuts under the international linkage mechanisms.  This fulfills the important principle of “common but differentiated responsibilities and respective capabilities” that was and is a key feature of the UNFCCC under which the Paris Agreement has been reached.

The Paris Agreement incorporates both fairness and efficiency.  In light of the very big obstacles and long odds that they faced, the negotiators were surprisingly successful in converging on a plan that offers hope of practical progress.

shorter version was published by Project Syndicate.

 

Japan’s Economic & Foreign Policies

In a sort of year-end look back on Prime Minister Abe’s record and on Japan’s current situation, Reuters Japan has asked for action points or policy suggestions regarding economic and foreign policy.  Here are the responses I offered.

  1. Economic policy

To address the problems of the Japanese economy, all three arrows of Abenomics are necessary. The monetary arrow was shot well; but a big fiscal arrow was aimed in the wrong direction; and the structural reform arrows have hardly been taken out of the quiver.

When the new monetary policy (Quantitative and Qualitative Easing) was enacted in early 2013, the intended effects showed up immediately in the financial markets: an increase in stock market prices and an increase in the price of foreign exchange. Although both effects worked to stimulate demand for Japanese goods, the boost to GDP turned out to be short-lived.  Growth faltered after April 2014. The most obvious explanation is the increase in the consumption tax from 5% to 8%.  As many had warned, it apparently turned expansion into contraction.

It is true that the long-run debt situation in Japan is unsustainable. But a further large increase in the consumption tax before the economy has recovered is not advisable. Much better would be to enact a 20-year schedule of very small annual increases in the consumption tax. This would assure long-run fiscal sustainability and investor confidence (thus continuing to keep real interest rates low) while still helping to maintain positive expected inflation and growth in the short-term.

2. Foreign policy.

Moving beyond the “history issue” is important both for diplomatic reasons (if Japan wants a seat on the UN Security Council, for example) and for economic reasons (frictions with other Asian countries have become a serious obstacle to business).  But moving beyond the history issue requires Japan to face up to some unpleasant historical realities that it has not wished to confront.

Other countries also have dark chapters in their past, but are readier to acknowledge them. The US and European countries were guilty of subjugating native peoples in previous centuries, which took such forms as slavery and high rates of mortality, but today nobody defends that history. If Germany had not already thoroughly apologized for the historical sins of World War II, it could not today be the economic and political leader of Europe. In my view, Japan should both re-commit to the peace constitution and decide henceforth to avoid actions that are unnecessarily provocative to the Asian neighbors that suffered so much earlier in the 20th century.

 

Games Countries Play

Calls for International coordination of macroeconomic policy are back, after a 30-year hiatus.  To some it looks anomalous that the Fed is about to raise interest rates at a time when most major central banks see a need to extend further monetary stimulus.

The heyday of coordination in practice was the decade 1978-1987, beginning with a G-7 Summit in Bonn in 1978 and including the Plaza Accord of 1985, of which this year is the 30th Anniversary.  Economists were able to provide a good rationale for coordination based in game theory: because each country’s   policies have spillover effects on its trading partners’ economies, countries can in theory do better when agreeing on a cooperative package of policy adjustments than in the non-cooperative equilibrium where each tries to do the best it can while taking the policies of the others as given.

Then coordination fell out of fashion.  The Germans, for example, regretted having agreed to joint fiscal expansion at the Bonn Summit; reflation turned out to be the wrong objective in the inflation-plagued late 1970s.  Although the Plaza Accord and associated intervention in the foreign exchange market were successful in bringing down an overvalued dollar, the Japanese had come to regret the appreciated yen by 1987.   Some of the other G-7 summit communiques had little effect, for better or worse.  Furthermore, as the economies and currencies of Emerging Market (EM) countries became increasingly important, their lack of representation in global governance became problematic.

Since the Global Financial Crisis of 2008, attempts at coordination have made a come-back.   The larger EM countries got more representation when the G-20 became the pre-eminent leaders group.  The G-20 leaders agreed on coordinated economic expansion at the London Summit of April 2009.  They agreed at the Seoul in 2010 to give EMs quota shares in the IMF that would be more commensurate with their economic weight (though the US congress has yet to pass the necessary legislation, to its shame).

Many calls for coordination lament the outbreak of “currency wars,” a phrase that Brazil’s Finance Minister in 2010 adopted for the old phenomenon of competitive depreciation.  The concern recalls the competitive devaluations of the 1930s. The idea is that a single country can depreciate its currency, gain international competitive for its exporters and thus improve its trade balance; but if all countries try to do this at the same time they will fail.  One manifestation of the currency wars concern has been foreign exchange intervention by China and other EM countries to prevent their currencies from rising.  Another manifestation arose from successive rounds of quantitative easing by the Federal Reserve in 2010-11, the Bank of Japan in 2012-13, and the European Central Bank in 2014-15; the results were in turn depreciations of the dollar, yen and euro, respectively.

The US has led some international attempts to address competitive depreciation, including an agreement among G-7 ministers in February 2013 to refrain from foreign exchange intervention and a November 2015 side-agreement to the Trans-Pacific Partnership to address currency manipulation.  But critics are agitating for a stronger agreement backed up by the threat of trade sanctions.

The most recent fear — articulated, for example, by Raghuram Rajan, Governor of the Reserve Bank of India in 2014 — is that the US central bank will not adequately take into account adverse impacts on EM economies when it raises interest rates.

To interpret the various calls for coordination in terms of game theory is challenging, in that some players think they are playing one game and other players seem to think they are playing another game.  Consider, first, fiscal policy.  When the US urges German fiscal stimulus, as at the G-7 Bonn Summit of 1978, the G-20 London Summit of 2009; and the G-20 Brisbane Summit of 2014, it has in mind the “locomotive game.”  The assumption is that fiscal stimulus has positive “spillover effects” on trading partners.  Each country is afraid to undertake fiscal expansion on its own, for fear of worsening its trade balance, but the world can do better if the major countries agree to act together as locomotives pulling the global train out of recession.

But Germans think they are playing a “discipline game.”   They view budget deficits as creating negative externalities or “spillover effects” for neighbors, due for example to the moral hazard of bailouts, not positive externalities.  Their idea of a cooperative equilibrium is the Fiscal Compact of 2013 under which euro members agreed yet again to rules for limiting their budget deficits.

When two players sit down at the board, they are unlikely to have a satisfactory game if one of them thinks they are playing checkers and the other thinks they are playing chess.  Think of the “dialog of the deaf” that took place between the Greek governmentelected in January 2015 and its euro partners

Interpretations vary just as much when it comes to monetary policy.  Some think monetary expansion in one country shifts the trade balance against its trading partners, due to the exchange rate effect; but others think it is transmitted positively, via higher spending.   Some think that the problem is competitive depreciation and too-low interest rates; others that the problem is competitive appreciation or too-high interest rates.  Some think that the way to solve competitive depreciation for good is to fix exchange rates, as the architects of Bretton Woods did in 1944.  Others, such as some US politicians today, think that the way to do it is the opposite:  an agreement against seeking to influence exchange rates at all, even enforced by trade penalties.

Yes, regular meetings of officials can be useful.  Consultation can minimize surprises. Crisis management often requires coordination.  Exchange of views might help narrow differences in perceptions.  But some calls for international coordination are less useful, particularly when they blame foreigners in order to distract attention from domestic constraints and disagreements.

Two examples of calls for coordination obscuring domestic problems.  First: Brazil’s budget deficit was too large in 2010.  The economy overheated.  Private demand was going to be crowded out one way or another: if not via currency appreciation then via higher interest rates.  When Brazilian officials blamed the US and others for a strong real, it may have been a way to divert attention so as to avoid confronting the domestic issue.  Second:  US politicians’ ongoing efforts to ban currency manipulation in trade agreements may be rhetorical attempts to scapegoat Asians for stagnation in the real incomes of American workers.

Officials would often be better advised to improve their own policies, before they tell others what to do.

TPP Skeptics Should Switch Sides

Now that the TPP text has been released, I have read at least some parts of it in detail.  It seems to me that it does what the negotiators said it does.  There is a lot to like in the way it came out that many of the critics seem not to know about.   I hope that those Democrats who have been fervently opposed to the TPP  — in particular some of the Massachusetts congressional delegation — will now consider it with an open mind!

I have an op-ed appearing in the  Boston Globe this week, making the case.

I don’t discuss the currency manipulation issue there, but have done so elsewhere.

 

Full Legal Text of TPP is Now Available

I have written a few columns this year supportive of the Trans-Pacific Partnership.  (E.g. “Critics Should Keep an Open Mind,” The Guardian, Oct. 11, 2015.)   Commentators on my column and critics of TPP more generally have expressed great eagerness to know when and where they could read the full legal text of the agreement.  The full text is now available.

Many skeptics seem confident in their ability to understand the significance of the detailed legal language even when they have only had a few hours to read it. I am less confident of that myself, not being a lawyer.  Fortunately there is also a user-friendly summary at the USTR site.

 

TPP Critics’ Nighttime Fears Fade by Light of Day

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.”  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 what we are seeing was 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.

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