September 29, 2017
In elite circles you are supposed to be for anything called a “free trade” agreement, otherwise, people will call you names. And names really hurt highly educated people. This is why most highly educated people supported the Trans-Pacific Partnership (TPP), even though they had no clue what was in it. As NYT columnist Thomas Friedman famously said:
“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'”
The rationale given for the TPP has constantly shifted in response to the political climate. It was originally pushed for its economic benefits in terms of more growth and jobs. However, no serious analysis could show anything other than trivial benefits for the economy.
While removing trade barriers might generally be good for growth, there are relatively few barriers remaining between the United States and the other eleven countries in the TPP. It already has trade agreements with six of these countries.
In fact, the TPP actually increases protectionist barriers in the form of longer and stronger patent and copyright and related protections. For some reason, the economic analyses don’t include the negative effects of increasing these protections, even though their impact on the prices of the affected products, most importantly prescription drugs, dwarfs the impact of lowering a tariff of one or two percentage points to zero.
Since economics won’t sell the TPP, the alternative is to make it a geo-political pact, with the main target being China. The NYT goes this route with an article that tweaks Donald Trump for his opposition to the TPP.
“Faced with such an enemy, one might imagine the United States would gather allies in a concerted effort to contain China’s mercantilist ambitions. Except that Mr. Trump, in one of his earliest actions, revoked American participation in the Trans-Pacific Partnership, a pact promoted by his predecessor as a means of doing precisely that. He walked away while extracting no discernible benefits from China.”
The main problem with seeing the TPP as a pact designed as a weapon against China is that it doesn’t seem to have been designed that way. Most obviously, the rules of origin (ROO) provisions, which determine which items can benefit from the preferential treatment provided by the TPP, are extremely weak. For example, the ROO in the TPP require originating content of between 45 percent and 55 percent for vehicles and engines and some other car parts. For most parts, the requirement is between 35 and 45 percent. These TPP ROO are considerably weaker than the ones in NAFTA, which required 62.5 percent content from the countries in the agreement.
This matters in reference to China since China is likely to be the main provider of inputs from countries outside the pact. This means that for some car parts, China can legally provide 65 percent of the value, and still get favorable treatment through the TPP. Given the ability of companies to fudge numbers presented to customs agents, we can envision the share of Chinese content rising to 70 or 75 percent, and still getting preferential treatment under the TPP. This doesn’t sound like a pact designed in opposition to China.
Comments