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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New and Improved Trade Agreements?

WASHINGTON, DC – Trade is high on the agenda in the United States, Europe, and much of Asia this year. In the US, where concern has been heightened by weak recent trade numbers, President Barack Obama is pushing for Congress to give him Trade Promotion Authority (TPA), previously known as fast-track authority, to conclude the mega-regional Trans-Pacific Partnership (TPP) with 11 Asian and Latin American countries. Without TPA, trading partners refrain from offering their best concessions, correctly fearing that Congress would seek to take “another bite of the apple” when asked to ratify any deal.

In marketing the TPP, Obama tends to emphasize some of the features that distinguish it from earlier pacts such as the North American Free Trade Agreement (NAFTA). These include commitments by Pacific countries on the environment and the expansion of enforceable labor rights, as well as the geopolitical argument for America’s much-discussed strategic “rebalancing” toward Asia.
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Give Obama Trade Promotion Authority

Trade is now high on the agenda in Washington. President Obama is pushing hard for Congress to give him Trade Promotion Authority (TPA), once known as fast-track authority.  He intends to use it to complete negotiations with 11 trading partners under the Trans Pacific Partnership.  A majority of trade-skeptical Democrats in Congress have lined up on the wrong side on this one, along with some Tea Party Republicans who automatically oppose anything that Obama is in favor of.

Without TPA, trading partners hold back from offering their best concessions to the president’s trade representative in negotiations, fearing correctly that Congress would seek to take “another bite of the apple” when the White House brought the agreement to them for ratification.  Other countries wised up to this trick 40 years ago.  That is why the Congress has given every president since Richard Nixon fast-track authority, which allows only up-or-down approval of the final agreement.  If they don’t give TPA to Obama, it will not only mean no TPP.  It will also be another step in the ongoing self-inflicted American abdication of global leadership.

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Asia Games: Not Zero-Sum

Two hostesses are rivals in a popularity contest throughout the social season.  When they hold soirees on the same night invitees must choose which one to go to.  The hostesses guard their social ranking jealously, and may even punish a guest who goes to the rival’s party by withholding an invitation next time.

To read about the roles of China and the US over the last month, one would think that Asia/Pacific relations are a zero-sum game like that of these two hostesses in some fictional time and place.   Are countries signing up for China’s Asian Infrastructure Investment Bank?  Or for America’s Trans Pacific Partnership?  Will China’s currency be admitted to the SDR club, or will it be kept humiliatingly waiting at the entrance?  Is the United States still number one globally in economic size, or did China pass it in 2014?

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Does the Dollar Need Another Plaza?

We are at the 30th anniversary of the 1985 Plaza Accord.  It was the most dramatic intervention in the foreign exchange market since Nixon originally floated the US currency.   At the end of February 1985 the dollar reached dizzying heights, which remain a record to this day.  Then it began a long depreciation, encouraged by a shift in policy under the new Treasury Secretary, James Baker, and pushed down by G-5 foreign exchange intervention.  People remember only the September 1985 meeting at the Plaza Hotel in New York City that ratified the policy shift; so celebrations of the 30th anniversary will wait until this coming fall.

The dollar has appreciated sharply over the last year, surpassing its ten-year high.   Some are suggesting it may be time for a new Plaza, to bring the dollar down.   In its on-line “Room for Debate,” the New York Times asked, Will a strong dollar hurt the economy and should the Fed take action?”   Here is my response:

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Will Fed Tightening Choke Emerging Markets?

CAMBRIDGE – As the Federal Reserve moves closer to initiating one of the most long-awaited and widely predicted periods of rising short-term interest rates in the United States, many are asking how emerging markets will be affected. Indeed, the question has been asked at least since May 2013, when then-Fed Chairman Ben Bernanke famously announced that quantitative easing would be “tapered” later that year, causing long-term US interest rates to rise and prompting a reversal of capital flows to emerging markets.

The fear, as IMF Managing Director Christine Lagarde has reminded us, is of a repeat of previous episodes, notably in 1982 and 1994, when the Fed’s policy tightening helped precipitate financial crises in developing countries. If the Fed decides to raise interest rates this year, which emerging markets are most vulnerable to a capital-flow reversal?

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The End of Republican Obstruction

CAMBRIDGE – What a difference two months make. When the Republican Party scored strong gains in last November’s US congressional elections, the universally accepted explanation was that voters were expressing their frustration with disappointing economic performance. Indeed, when Americans went to the polls, a substantial share thought that economic conditions were deteriorating; many held President Barack Obama responsible and voted against his Democratic Party.

Now, suddenly, everyone has discovered that the US economy is doing well – so well that Senate Majority Leader Mitch McConnell has switched from blaming Obama for a bad economy to demanding credit for a good one. Recent favorable economic data were, he claimed, the result of “the expectation of a Republican Congress.”

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8 Policy Recommendations for Newly Elected Members of Congress

On December 3, 2014, I participated in a panel of Harvard University’s Bipartisan  Program  for  Newly Elected Members of Congress.   After establishing that the median US household has not shared in recent strong economic gains, I went on to consider policy remedies.

I offered the Congressmen eight policy recommendations.  Some will sound popular, some very unpopular; some associated with “liberals”, some with “conservatives.”   I would claim that they all have in common heavy support from economists, regardless of party – even the very unpopular ones.

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A Pre-Lima Scorecard for Evaluating Who is Doing their Fair Share in Pledged Carbon Cuts

Those worried about the future of the earth’s climate are hoping that this year’s climate change convention in Lima, Peru, December 2014, will yield progress toward specific national commitments, looking ahead to an international agreement at the make-or-break Paris meeting to take place in December 2015.

The precedent of the Kyoto Protocol negotiated in 1997 is more discouraging than encouraging. It was an encouraging precedent in that countries were politically able to agree on legally binding quantitative limits to their emissions of Greenhouse Gases, to be achieved with the aid of international trading and other market mechanisms. But it was discouraging in that China and other big developing countries would not countenance limits to their own emissions and, largely for that reason, the United States never ratified Kyoto.

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What Do Obamacare and the EITC Have in Common with Cap-and-Trade?

My preceding blog post described how market-oriented mechanisms to address environmentally damaging emissions, particularly the cap-and-trade system for SO2 in the United States, have recently been overtaken by less efficient regulatory approaches such as renewables mandates.   One reason is that Republicans — who originally were supporters of cap-and-trade — turned against it, even demonized it.

One can draw an interesting analogy between the evolution of Republican political attitudes toward market mechanisms in the area of federal environmental regulation and hostility to the Affordable Care Act, also known as Obamacare.   The linchpin of the program is the attempt to make sure that all Americans have health insurance, via the individual mandate.  But Obamacare is a market mechanism, in that health insurers and health care providers remain private and compete against each other.

As has been pointed out countless times, this was originally a conservative approach, designed to work via the marketplace:  The alternative is to have the government either (i) directly provide the health insurance (a “single payer” system, as in Canada; or under US Medicare for that matter) or (ii) directly provide the health care itself (”socialized medicine,” as in the UK; or the US Veterans Administration hospitals).  The new approach was proposed in conservative think tanks such as the Heritage Foundation. It was enacted in Massachusetts by Republican Governor Mitt Romney. By the time President Obama adopted it, however, it had become anathema to Republicans, most of whom forgot that it had ever been their policy.

One can trace through the parallels between clean air and health care.  The market failure in the case of the environment is that pollution is what economists call an externality:  In an unregulated market, those who pollute don’t bear the cost. The market failure in the case of health care is what economists call adverse selection:  Insurers may not provide insurance, especially to patients with pre-existing conditions, if they have reason to fear that the healthy customers have already taken themselves out of the risk pool.

Government attempts to address the market failure can themselves fail.  In the case of the environment, command-and-control regulation is inefficient, discourages innovation, and can have unintended consequences.   For example, CAFÉ standards (Corporate Average Fuel Economy) were partly responsible for the rise of the SUV.  Corn ethanol mandates raised food prices and accomplished nothing for the environment.  When “New Source Review” requires that American power companies adopt the most stringent available control technology if they build a new power plant, they respond by keeping dirty old plants running as long as possible (Stavins, 2006).

In the case of health care, a national health service monopoly can forestall innovation and provide inadequate care with long waits.  In general, the best government interventions are designed to target the failure precisely – using cap-and-trade to put a price on air pollution or using the individual mandate to curtail adverse selection in health insurance — and otherwise let market forces do the rest more efficiently than bureaucrats can.

American conservatives often talk as if the alternative they would prefer is no regulation at all.  But few in fact would want to go back to the unbreathable pre-1970 air of Los Angeles, London, or Tokyo.  Even those few who might want to should recognize that most of their fellow citizens feel differently.  Political reality shows that the alternative in practice is an inefficient rent-seeking system in which solar power, corn-based ethanol, and fossil fuels all get subsidies or mandates.  Analogously, few conservatives in fact will say that they want hospital emergency rooms to turn away critically ill patients who lack health insurance.  Even for those who might want this, reality shows that the alternative in practice is hospitals that give emergency care to those who lack insurance, whether because of personal irresponsibility or for reasons beyond their control, and then pass the charges on to the rest of us.

A third example is the Earned-Income Tax Credit.  It was originally considered a conservative idea: an implementation of Milton Friedman’s proposed negative income tax, it was championed by Ronald Reagan as a pro-work market-friendly way of addressing income inequality.   President Obama proposedexpanding the EITC in his State of the Union address last month.  But conservatives, again forgetting that it was their own creation, have opposed expansion of the EITC as verboten redistribution.   So proposals to increase the minimum wage get more political traction as a way to address income inequality, even though that approach is more interventionist and less efficient.

[This is the second of a two-part post, which in turn is the extended version of an op-ed published atProject Syndicate.  Comments may be posted there; or join the debate at Economist’s View.]