The Strategic and Economic Implications of the TPP

Progress has been made with the Trans-Pacific Partnership (TPP) negotiations, but I don't believe it is moving smoothly to a conclusion.

In my paper on the strategic and economic implications of the TPP and all trade agreements, I argue that trade policy stands at the intersection of what might be called high diplomatic and security policy on one hand and very low domestic policy on the other. Whether the Vietnamese can export shoes to the United States is juxtaposed against U.S. and Vietnamese relations in terms of the situation in East Asia. The same is true with Japan and the United States. The fight over automobile imports from the United States to Japan stands against an enormously complicated and possibly even more threatening situation in terms of the diplomacy and security of East Asia. I would argue that inevitably other factors come into play when negotiating bilateral, trilateral, or regional trade agreements rather than purely trade-centered agreements such as the World Trade Organization (WTO). The U.S. president has to look not only at the free trade benefits but also at our diplomatic and security goals in a particular region or with a particular nation. Inevitably, political and security issues are equally to the fore.

From 1945 to 1990, the United States had roughly one trade policy. We negotiated within the General Agreement on Tariffs and Trade (GATT) where possible and then resolved disagreements with Japan or Europe outside the GATT, one-on-one, through diplomacy.

With the North American Free Trade Agreement (NAFTA), with Asia-Pacific Economic Cooperation (APEC), and with the free trade of the Americas, the Bill Clinton administration had a strong desire to advance democratic values. That was an argument used to support NAFTA. The United States proved correct in believing that NAFTA would move Mexico, which had a kind of single party democratic authoritarianism at the time, toward democracy. Mexico went on to negotiate some 25 or 30 other bilateral free trade agreements after NAFTA. Public documents of the George W. Bush Administration lay out the criteria that the United States would use in selecting free trade agreements to pursue with individual nations or regions: nations that accorded with our foreign policy and military goals. We negotiated with around 16 nations. Some agreements-for example, with Bahrain-were of very little economic importance. Others involved a combination of economic and strategic goals, such as the agreements with South Korea and Colombia.

The Barack Obama administration very much wanted to differentiate its stated foreign policy goals from those of the Bush administration. I would argue that they ended up being very much alike in terms of trade and the combination of trade with strategic goals. President Barack Obama had famously said that he would have opposed NAFTA had he been in Congress and that he opposed all of the free trade agreements the Bush administration was negotiating. I think he gradually changed for economic reasons. Obama inherited the gravest economic situation of any president since the 1930s. By 2010, the Obama administration was embracing free trade as a means of restoring the United States to economic growth.

The diplomatic and security situation President Obama faced in East Asia was even more important than the economic and political situation. In 2009, North Korea conducted a nuclear test, and was firing missiles across the Pacific. Chinese foreign policy and security policy also changed that year. The concept of "peaceful growth" changed to extraordinary pressure in the East and South China Seas and increasing diplomatic conflict with China's neighbors in Southeast Asia. Initially, U.S. Secretary of State Hilary Clinton took the lead in advocating a pivot to Asia. At the end of 2009, the Obama administration agreed to continue participating in the TPP negotiations it had inherited from the Bush administration.

Given the deteriorating security situation, it would have been very difficult to convince the world that the United States was actually pivoting to East Asia if we walked away from the TPP negotiations. This complex array of issues pulled the president into the TPP and a more vigorous trade agenda. We are now seeing the most comprehensive set of trade negotiations that the United States has entered into since the early 1990s with NAFTA, the WTO, APEC, etc. The TPP, with the follow-on potential of the U.S.-European pact, would change the terms of the services agreement potential in the WTO and the technology agreement in the WTO.

I'd now like to talk about issues that weren't among the focuses of the paper, as it doesn't address events after November 2014. In terms of the TPP, we are in the so-called end game. For more than six months, the focus has been on making that end game a success in terms of the politics of trade both in Japan and in the United States. Picking up where I left off with the paper in November 2014, we have moved into a time where, in the jargon of the trade negotiators, we were looking for "landing zones" in various areas. They have a general view of where things are going to end up, but they haven't put it on paper. I don't think that the secrecy of the negotiations has been much of an issue in Japan, but, in the United States, there has been a big focus on this over the last six to eight months that the TPP will be dumped onto Congress and the American people, who will not know what they're getting into. I don't agree with this position. We don't know what the legal terms are going to be, but if anybody has read the trade press or the political press in the United States, Congress and the Obama administration have made a point of including non-government organizations (NGOs) to a much greater degree than the Bush administration would have. What the specific language is going to be may not be known, but the parameters will be known.

I've alluded to the political situation. One reason for the Obama administration's initial reluctance to move vigorously in trade policy is the deep divisions within the Democratic Party on this issue. Major constituencies, such as the labor unions and environmentalists, are very strongly opposed to the TPP and to trade promotion authority (TPA) for the president. This antipathy is as old as NAFTA but has actually deepened since then. Environmentalists were divided on NAFTA in the 1990s. Today, opposition to the TPP by environmentalists is nearly unanimous. The position of the labor unions has not changed. President Obama also faces the fact that, since NAFTA, a majority of Democrats from the U.S. House of Representatives (House) have voted only once or twice for a free trade agreement. In most cases, two-thirds of House Democrats vote against it. So that is where he starts. He will also start with about one-third of the Democratic Senators. I would say that the Obama administration is hoping to get maybe 30 or 40 democrats in the House. The so-called Clinton era "New Democrats" are more favorable to trade, but they are a much smaller group. We do not know yet what the House leadership under Nancy Pelosi will do, but it looks like she may oppose the TPP.

This is not to say that all Republicans are free traders or will vote for the TPA and TPP. Generally, from the 1970s through the 1990s, the international wing of the Republican Party in the House and the U.S. Senate has been supportive, and the president can count on two-thirds to three-fourths of House Republicans for a free trade agreement. However, two sources of opposition exist. The first is Congressional Republicans from districts that may be harmed by free trade. The second is the so-called "Tea Party" Republicans. In 2011, approximately 40–50 Republicans were elected who fall under this category. They are, to varying degrees, insular, nationalistic, and probably anti-foreign. However, they also oppose the government and government action, and they perceive free trade as part of their agenda to reduce the role of government. Since 2011, they have voted in favor of free trade agreements in larger percentages than ordinary Republicans. The problem is the question of TPA. Since President Richard Nixon, Congress has had the final say on all matters of trade. It's in the U.S. Constitution, in the interstate and foreign commerce clause. In most other nations, the executive does all of this. The Tea Party's strong belief that President Obama has overextended his executive authority-on immigration and on environmental rules-makes them very nervous about giving TPA to the president, even though it has been done since the 1970s.

That brings us up to the present, and to the 2014 election. The Republicans won a sweeping victory in November and now hold a larger majority in the House than at any time since the 1940s. They believe that they have a mandate. President Obama has been defiant in the face of this.

The TPP and TPA are proceeding in an atmosphere that is no less partisan than it was at the beginning. Surprisingly, it looks as if both sides are acting responsibly. Despite the president's defiance of their warnings on his unilateral immigration action, the Republicans have sensibly treated trade as a Republican issue and have not been deflected from it. Republicans have continued to work with the administration to put together a trade promotion authority bill and are also trying to bring in pro-trade Democrats. The president gave a very strong statement in his State of the Union address on January 20, 2015 as to why he thought that the TPA, the TPP, and the U.S.-European pact are necessary. Last week, it was reported that President Obama actually instructed his cabinet to lobby for the TPP and TPA, including his labor secretary, who is known to oppose trade agreements. The hope is that they will get a TPA to the floor of the House and Senate sometime in early to mid-February 2015, or possibly by the end of February 2015. Another surprising event was the appointment of Michael Froman as the U.S. Trade Representative, another signal that the administration is serious about trade. President Obama's first U.S. Trade Representative had no authority whatsoever. It was known that trade policy was never made by the United States Trade Representative (USTR); it was made by the White House by Mr. Froman. His presence greatly changes the situation. He said last week that he thought the negotiations on the TPP might be concluded by the end of March 2015. The trade ministers of Mexico and Peru agreed that this was not impossible.

What could end these negotiations in the United States? What could disrupt the process? The political atmosphere could cause problems. President Obama and the Republicans dislike each other. A foreign policy or domestic issue could arise having nothing to do with trade that could disrupt relations between the two sides. The Democrats are demanding the expansion of "trade adjustment assistance," namely, assistance by the government for workers who have allegedly lost their jobs because of trade agreements. Republicans have always thought that this was a bad idea.

The question of whether the TPP should include a legal dispute settlement system with regard to currency manipulation is another difficult issue. There are Republicans and Democrats who have voted in favor of doing something on this. It is something that the Ministry of Economy, Trade and Industry or RIETI could hold many sessions on. Economists are deeply divided on the issue. Most think it is impossible to write such a regime. Unfortunately, one of our best known trade economists have come out in favor of this, and opponents of the TPP are latching on, and the administration has so far been very responsible. They've refused to name China as a currency manipulator for the last six years even though there was a case early on. Also, House Republicans who could have taken cheap shots at President Obama have not done so. For the United States to throw this highly controversial issue into the mix at this point would explode the talks. It is hoped that it can be avoided. As a footnote, if you have to accept some language in the TPP on currency, you also have to give the president ultimate authority and flexibility.

I don't think the labor and environmental parts of the agreement will ultimately be important. The Obama administration is touting the TPP as the most progressive and liberal trade agreement that has ever been signed on labor and the environment. However, the same language that has been included in our other recent trade agreements will be used. The TPP commits countries to living up to International Labour Organization (ILO) obligations. The United States does not now and will not do so. The language does not refer to the conventions but to a declaration that was made in the 1990s which is not a formal legal obligation. The Republicans have said they are not going to go beyond that and the administration knows that.

Lastly, I would like to mention that because so much reporting has been fixed on TPA and the Japan-U.S. negotiations on agricultural products and on automobiles, the implicit assumption within the political community in the United States is that if you can settle those things, it's all over. If you get the TPA, the TPP vote won't be difficult, in other words. I doubt that. This is a highly complex trade negotiation that goes beyond anything in terms of state-owned enterprises, regulatory issues, government procurement, and all sorts of issues that relate to regulations. I just don't believe you're going to walk right through it just because President Obama has TPA. On the other hand, Mr. Froman astounded me by saying he thought they could wrap this up if not by the end of March 2015 then sometime in the spring.

URATA Shujiro
The TPA bill has been presented and discussed. Currency manipulation is included, and the issue is whether it can be tighter, isn't it?

Claude BARFIELD
There's no currency manipulation language at all in the TPA right now.

Q1. You mentioned that the U.S. president would need flexibility. What do you mean by this? Is this in relation to the currency manipulation clause or border flexibility or before or after the president gets TPA?

Claude BARFIELD
Some sort of dispute settlement mechanism related to currency manipulation must be established. I hope they don't write this into the TPP, but the majority of Congress voted for a resolution last year to include it. It's very attractive to people, but the mechanism cannot be automatic. I think this should be something that President Obama should be given the power to decide. The president should be able to decide in the end whether the United States would take Japan to a dispute settlement procedure over alleged currency manipulation.

Q2. What is the reality of the deadline for the negotiations?

Claude BARFIELD
Most people think that Mr. Froman's prediction is unrealistic despite his intelligence. However, assuming that they do finish in April 2015, the president then has to notify Congress and it will be 90 days before anything happens. Then, if he sends them the agreement, another 90 days will pass before Congress votes. However, with an agreement this complex, if they finish in April or May 2015, it will take four to five months just to reach agreement on the legal language. Opponents and proponents will have to be shown the legal language. I think it will take until the end of 2015 or early 2016 before any of this is wrapped up.

Q3. What is your assessment of the executive decision issue bleeding over into a bigger issue than just that subset of Tea Party Republicans?

Claude BARFIELD
The Democrats on the left have not really raised it. Executive authority is contributing to the perception among Nader et al. that this is a secret agreement that will be dumped onto the American people. You can make that case if you don't know the nature of TPA. People don't realize what a small grant this is for Congress. The weakness of the authority given to the president by Congress was exposed in 2007. Democrats in Congress disagreed with the Bush administration about sending up the Korea, Colombia, and Panama agreements that had been negotiated before the earlier TPA ended. A fight then developed over their contents, followed by a fight over when they would be sent to Congress. After some haggling, the Bush administration eventually decided to proceed. House Democrats showed how weak the TPA was when they passed a resolution overturning it. People don't realize that the TPA is not a regular piece of legislation. For Constitutional reasons, it is merely two separate changes in the House and Senate administrative rules, respectively. It can be overturned by a vote by either the House or the Senate. The president doesn't have the leeway to do anything he wants.

URATA Shujiro
Is my understanding correct that the TPA is nearly necessary for the TPP?

Claude BARFIELD
The role of the TPA is to assure our trading partners.

URATA Shujiro
From what you said, the TPP for the Obama administration is something of a China containment policy. Is this correct, and, if so, how do you interpret U.S. negotiations on a bilateral investment treaty with China? Is that consistent?

Claude BARFIELD
It is one thing to say that the TPP is a central part of it. To say that the United States wants to maintain a leadership role in Asia is not to say that it wishes to confront China. It is a proactive policy. Having said that, it is certainly true that you can't separate trade from security, and you have to remember the politics. In the State of the Union address, the president knew he was talking both to Congress and the American people. After voicing strong support for TPA and the TPP, he said,"China wants to write the rules for the Asian region. Why would we let them do that?" He was invoking this so Congress would see the vacuum we would create by walking away from this, and that China could move into that vacuum. This is not the same as saying that the TPP is aimed at China. Also, look at the Chinese reaction over the past four or five years. It went from openly condemning the TPP as being aimed at China to saying that it may consider joining it. It's been all over the map since then, likely watching to see whether it succeeds.

URATA Shujiro
What if China wanted to join?

Claude BARFIELD
Politics at the moment and for the foreseeable future are not good in the United States, but I think the U.S. position under any president would be favorable, provided the Chinese were willing to live up to the terms of the agreement.

URATA Shujiro
Is that what you are doing with the bilateral investment treaty with China?

Claude BARFIELD
I think that's separate. I don't know what the Chinese are willing to do in terms of their state-owned enterprises, and if you talk to them about investment, that has got to be front and center in an agreement between China and anybody else.