How to sell a trade deal in the post-crash era

The Obama administration has now advanced quite far in negotiating something called the Trans-Pacific Partnership, a proposed free trade agreement (FTA) among a grab bag of countries including the United States, Peru, Chile, New Zealand, Australia, Singapore, Brunei, Malaysia, and Vietnam.

Whereas the FTAs between the United States, South Korea, Colombia, and Panama that the White House has been trying to move through Congress are all essentially the spawn of the Bush administration, this would be a deal with the Obama brand on it.

It’s not clear exactly why the administration originally wanted this deal which originated a long time back in the minds of some key figures in Singapore’s Ministry of Foreign Affairs and its embassy in Washington, D.C. It is clearly to the benefit of a small country with no significant domestic market like Singapore to promote such deals as a way of ensuring guaranteed markets for its large amount of excess (over domestic demand) production. The benefits for the United States are less clear, particularly in view of the fact that the markets involved are all small and the United States already has FTAs with several of them.

I am told that this is part of a strategy to assure Asian countries of America’s continued commitment to the region. Why Asian countries need this assurance is not immediately obvious, especially in view of the vast investment of U.S. companies and the fact that we keep the 7th Fleet and well over 100,000 troops in the area. But I am also told that this deal would be the first step toward a larger arrangement that would eventually tie Japan, South Korea, Taiwan, and ultimately China into something that might come to resemble a Pacific Free Trade Area and even an equivalent to the European Union.

Whatever the objective, one thing is clear in the case of this deal that has not been clear in the case of earlier FTA negotiations. In the past, Washington has often done free trade deals without regard for their impact on the U.S. economy. Given America’s current high unemployment and rising international debt, that will no longer be the case. Indeed, this will be the first trade negotiation of the post-World War II era in which Washington will have to demonstrate that the deal will raise U.S. exports more than imports and create American jobs by reducing the chronic U.S. trade deficit. This is not something to which Washington is accustomed or naturally knows how to do. So here is some advice for the White House on what it must achieve if a Trans-Pacific Partnership is ever to see the light of day.

Currency manipulation

Many Asia-Pacific countries intervene in foreign-exchange markets to keep their currencies undervalued as a kind of indirect subsidy to their exports and indirect tariff on their imports. Currencies have never been the subject of trade agreements in the past. Yet, currency movements can easily far outweigh and nullify any impact of reduction of tariffs or other classic trade barriers. Consequently, inclusion of provisions that prevent management of currency values for the purpose of promoting exports is a must in any Trans-Pacific deal. Such a provision has not yet been discussed by the negotiators. The administration should not waste any more time in getting it on the negotiating agenda.

Financial investment incentives

Many countries aggressively recruit foreign direct investment by offering extensive packages of tax abatements, free infrastructure building and worker training, and capital grants that effectively subsidize the investment. This may make it advantageous to move investment and production to a country where there is no real production advantage and where operating costs may actually even be higher than in the country of original production. The result is a distortion of trade and comparative advantage and growing international resentment over beggar-my-neighbor attitudes. Here too, some discipline on the offering of such incentives must be included in the deal if there is going to be any chance to show that it would really increase U.S. exports and jobs.

Competition policy (anti-trust)

Most countries in the Asia-Pacific region do not have effective competition or anti-trust policies. Buying, marketing, and production cartels are frequently the rule, and closed distribution channels are common. The existence of these along with "buy national" attitudes and policies belies official commitments to national treatment and to free trade. Inclusion of competition policy rules is thus also a must for a Trans-Pacific deal.

The days of doing trade deals for the sake of binding geopolitical allies more closely to us or of providing cheaper goods to American consumers are over. The litmus test from here forward is going to be rising exports and jobs and declining trade deficits. Only if the Trans-Pacific Partnership can meet these criteria should the Obama administration even consider further negotiation.