Elephants in the Room
Trump’s Five Mistaken Reasons for Withdrawing from the Trans-Pacific Partnership
It's still not too late to save America's trading future.
President Donald Trump has recently reversed himself, endorsing Article 5 of the NATO Treaty and accurately calling the House of Representatives health care legislation “mean.” He should also reconsider U.S. withdrawal from the Trans-Pacific Partnership (TPP), a decision that was made with no serious analysis by the new administration of its significant economic and geopolitical benefits for the United States. Exiting the agreement was apparently based on five key assertions Trump made during the presidential campaign, none of which were accurate.
1) “The number of jobs and amount of wealth and income the United States have given away in so short a time is staggering, likely unprecedented. And the situation is about to get drastically worse if the Trans-Pacific Partnership is not stopped.” —Donald Trump, “Disappearing Middle Class Needs Better Deal on Trade,” USA Today, March 14, 2016.
Critics of TPP cite a Tufts University study claiming the agreement would cut 448,000 U.S. jobs and reduce American economic growth. However, many economists, including TPP skeptics, note that the study ignored the pact’s benefits, including lower consumer prices and job-generating foreign investment in U.S. businesses. The Tufts researchers therefore absurdly concluded that TPP would have reduced employment in every country in the world. Using more realistic assumptions, the U.S. International Trade Commission (USITC) and the Peterson Institute for International Economics (PIIE) estimated that TPP would have modestly increased U.S. annual real income by $57.3 billion (0.23 percent) and $131 billion (0.5 percent), respectively.
Other TPP opponents argue that while the agreement’s overall effects would have been slightly positive, manufacturing workers would have suffered greatly by losing their jobs to foreign competition. Even USITC models estimate that manufacturing employment would have been 0.2 percent smaller than it will be without TPP, although the U.S. economy would have had 128,000 more total jobs by 2032. However, USITC also projects that manufacturers of products the United States exports abroad, including passenger vehicles and apparel, would see employment gains. USITC economist David Riker observes that jobs in these “export-intensive industries” pay more than other positions. According to PIIE models, the movement of workers to more competitive sectors would have increased real wages by 0.5 percent. Moreover, the PIIE study shows that TPP-related job displacements would have been less than 0.1 percent of existing “job churn,” or temporary unemployment as workers go to other companies. The United States should seek to empower workers to take better jobs with adjustment assistance and training programs, but canceling TPP weakens the U.S. economy without addressing the problems many workers face.
2) “[The TPP] would make it easier for our trading competitors to ship cheap subsidized goods into U.S. markets — while allowing foreign countries to continue putting barriers in front of our exports.… The TPP creates a new international commission that makes decisions the American people can’t veto.” — Donald Trump, “Declaring America’s Economic Independence,” speech, June 28, 2016.
TPP would have accomplished the opposite and altered unfair foreign business climates without changing U.S. policy. The agreement would have eliminated over 11,000 tariffs on goods the United States exports by 2030, which, according to PIIE models, would have increased annual U.S. exports by $357 billion by that year. TPP also would have limited the ability of foreign government-run businesses (state-owned enterprises, or SOEs) to subsidize products and undercut U.S. firms with cheap goods. Additionally, it would have addressed child labor practices and introduced minimum wages in Vietnam and other member nations, making it easier for U.S. workers to compete. At the same time, TPP would have had minimal effects on existing U.S. practices. Eighty percent of U.S. imports from TPP countries face no tariffs, and for many that do, such as Japanese autos, tariffs would not have expired for at least 25 years. Far from a bad deal, TPP would have forced member states to reform their markets with few U.S. concessions.
Objections that TPP would enable “corporate attacks on our laws” and undermine U.S. sovereignty are similarly misplaced. These arguments refer to the pact’s Investor-State Dispute Settlement (ISDS) system, which is actually a measure allowing U.S. firms to seek remedies for unfair treatment abroad using panels of independent arbiters instead of potentially ineffective foreign courts. For this reason, the United States pushed against resistance from other nations to include ISDS in TPP. Since it entered trade agreements with ISDS systems included, the United States has not lost a case. Moreover, TPP’s Article 9.16 specifically grants member states the right to “ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” In effect, ISDS would curb anti-free market practices that hurt U.S. businesses, not critical laws that protect ordinary citizens.
3) “[The TPP is] a deal that was designed for China to come in, as they always do, through the back door and totally take advantage of everyone.” — Donald Trump, Republican primary debate, Nov. 10, 2015.
TPP excluded China, granting the United States economic and strategic advantages. PIIE models estimate that China’s economy would have been $18 billion smaller had TPP passed. It would also have been difficult for China to join after-the-fact; according to Center for Strategic and International Studies (CSIS) researchers, TPP’s rules limiting SOEs and protectionism would have forced China to adopt substantial free-market reforms before entering. Critics claiming China would have exploited TPP’s rules of origin to profit from TPP products ignore that rules for sectors like apparel would have been tougher than current standards and that the United States would have maintained pre-TPP automotive tariffs after the deal’s passage. Exclusion from a trade area worth 40 percent of global GDP would have slowed China’s economy.
TPP was also a crucial measure to counter China’s use of economic tools for geopolitical purposes. China uses such methods of geoeconomic coercion, including trade restrictions and its SOEs’ activities abroad, to punish countries opposing its aim of regional hegemony. Without TPP, the United States will be less equipped to protect its allies from Beijing’s pressure. Furthermore, U.S. allies in Asia saw TPP as a symbol of the U.S. commitment to the region. Without it, they are more likely to increasingly doubt America’s willingness to defend them and therefore be tempted to acquiesce to China’s hegemonic agenda. Withdrawing from TPP also helps China’s campaign to negotiate its Regional Comprehensive Economic Partnership (RCEP), designed to be a rival regional trade deal excluding the United States. It also gives China a greater ability to build infrastructure in Asia as part of its massive and geopolitically based Belt Road initiative. Both of these will increase China’s geoeconomic leverage over its neighbors at America’s strategic expense.
4) “The Trans-Pacific Partnership is an attack on America’s business. It does not stop Japan’s currency manipulation. This is a bad deal.” — Donald Trump, tweet, April 22, 2015.
TPP included a side agreement obligating members to “avoid manipulating exchange rates … to gain an unfair competitive advantage,” and it mandates that each country disclose currency interventions. Without TPP, there is no effective way to regulate these practices. Still, tougher enforcement measures and punishments would have done more to promote Pacific free trade and stop currency manipulation, which PIIE analysts argue has cost millions of U.S. jobs.
Yet despite Trump’s complaints, many past offenders, including Japan, have not recently manipulated their currencies. Although the yen is currently weak compared to the dollar, this is because of domestic policies designed to spur Japanese consumption, not from purchases of dollars to boost exports. Moreover, CSIS observes that Japan is a critical partner in any U.S. strategy to compete with China due to its support for American troops and Western institutions. The PIIE model projects that TPP would have increased Japanese annual real income by 2.5 percent by 2030. A stronger Japan would not only build its security forces and resist Chinese geoeconomic coercion, but would also help other U.S. allies do the same. Leaving TPP on the falsehood that Japan manipulates currency weakens U.S. allies and benefits China.
5) “It is the policy of my Administration … to begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages.” — Donald Trump, Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement, Jan. 23, 2017.
Bilateral agreements have significant disadvantages. Unlike multilateral arrangements like TPP, one-on-one deals involve separate rules for trade with each country. In past negotiations, this approach has created a complex “noodle bowl” of regulations, and companies doing business in multiple foreign countries face excessive costs as they attempt to comply with each set of laws. According to a survey from the KPMG auditing company, 77 percent of firms contacted did not use all available trade agreements; 23 percent named “complexity of rules” as the “biggest challenge” they face to international trade. TPP would have made Pacific trade laws simpler and uniform, giving U.S. businesses and workers more economic opportunities. Bilateral talks also provide fewer incentives for countries to make concessions to the United States. Canada and Mexico accepted fairer agricultural prices and stricter labor laws than they did in NAFTA to join TPP and gain access to Asian markets.
Despite the U.S. decision to leave the agreement, TPP is not yet dead. The other 11 member countries are attempting to negotiate a revised version that does not include the United States. It is not too late for President Trump to change course and join that effort. A revised pact would benefit the U.S. and global economies, strengthen America’s Asian allies, and serve as a bulwark against the rise of Chinese power. We urge the self-proclaimed master of The Art of the Deal to again reverse himself to America’s enduring strategic benefit.
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