Washington Perspective on TPP and Trade Policy in the Clinton (Trump?) Administration

Date October 19, 2016
Speaker Sherman E. KATZ (Senior Advisor, Center for the Study of the Presidency & Congress (CSPC))
Moderator FUKUYAMA Mitsuhiro (Consulting Fellow, RIETI / Director for APEC Office, METI)



Sherman E. KATZ's Photo

Sherman E. KATZ

I would like to share some thoughts about the Washington D.C. environment regarding the Trans-Pacific Partnership (TPP).

I will divide my talk into six parts. First, I will talk a bit about my background. I will then place the TPP in its international context. I will next turn to my main subject, the U.S. environment for the TPP, and I will talk about the lame duck prospects. Finally, I will talk about the TPP in the very likely event of a Hillary Clinton administration. I'll talk about the trade policies that she will pursue.

Personal perspectives

The benefits of trade outweigh its negative impacts, but it does cause some harm. Once-great industrial cities cease to exist. A major transition and transformation of industrial cities toward services, including medical services, has occurred. This underscores dislocation, in terms of the loss of jobs, and is a theme to which I will return.

I spent my junior high school years studying in Stockholm, Sweden. A remarkable collaboration existed there between Volvo and the Swedish government to retrain former shipbuilders as auto workers. Industry-government job training collaboration is rare in the United States. This has affected the climate for the TPP. Workers who have lost their jobs have not been given a way forward through training.

I worked in an international trade practice in Washington for 33 years. My practice has advocated international investment and free international trade without government interference.

International context

Increased global trade and investment have brought people into the middle class in remarkable numbers: 200 million in China, 90 million in India, and 30 million each in Egypt, Brazil, and Indonesia. Trade has also helped reduce poverty. Poverty is defined as $1.25 in earnings per day, and at one time 44% of the world's population were in poverty. The number is now 23%.

These were facilitated by Tokyo in the Uruguay Round. We had great expectations for the Doha Development Round which were not met. China's and India's refusals greatly contributed to its failure. Many countries began pursuing regional solutions, such as free trade agreements (FTAs). We also had the Great Recession. An ongoing crisis is taking place in the Middle East. We've seen an increase in nationalism. There are signs of anti-globalization sentiment. Numbers in the last few months have indicated that trade may be slowing down a bit or may be stagnant. Trade progress is not necessarily a one-way street. Internationally, China entered the World Trade Organization (WTO). We hoped this would move it toward a market economy, but it has remained a state-controlled economy to a much greater extent than we wished. As a result, we have U.S. President Barack Obama turning toward a regional approach, a pivot to Asia, and we've had substantial and important help from Japan on this.

U.S. TPP environment

The United States has seen a major loss of its manufacturing jobs. In the 1960s, 30% of our workforce was engaged in manufacturing, and now it is 12%. The number of workers in the service sector has risen dramatically. We've had a decline in union membership and a loss of employee bargaining power which have contributed to wage stagnation while other sectors are skyrocketing. This has resulted in an increased perception of income inequality. We have not yet solved the problem of college costs. The second largest expenditure people have after buying a house is paying for their children's education. It is the ticket up and out of poverty. These workers, many without college degrees, see the world changing around them and see their position eroding.

I have a footnote story about Bridgestone Corporation in the United States. Because of my interest in trade adjustment assistance, I had occasions to talk to the U.S. Department of Labor about a program it has combining trade adjustment assistance with community college career training. The Bridgestone people in the state of Tennessee recognized that their tire manufacturing process was increasingly becoming automated, and they needed workers who understand what they call "mechatronics" to operate, maintain, and repair these assembly lines. Bridgestone collaborated with Motlow State Community College on a training program using materials obtained from Siemens AG in Germany, which has a deep tradition of training young people through apprenticeships. Bridgestone and Motlow created a three-month course, and 75% of its graduates are getting industrial jobs. Industry needs more programs like this. It's the non-American companies such as Bridgestone that have taken the initiative. Government and business have been in an antagonistic relationship since the foundation of the United States, but we need to change this to improve the climate for trade. We need to show people a way out and a way up. We haven't done that.

I highly recommend the book Hillbilly Elegy. It's about a boy from a family with alcohol and drug problems who was effectively raised by his grandmother. She pushed him very hard. He attended Ohio State University and Yale Law School, and he's now in California in the hedge fund business. He has used his experience to write a book about something most people don't know about our culture. Family structures have broken down. The author says that Donald Trump is very alluring to these poor working people who do not take responsibility and who have created a culture of learned helplessness. Trump will lose. He makes promises without any substance, but he says what people without prospects want to hear.

With regard to Clinton's views on trade, she once said that the TPP is going to be the "gold standard." Later, she had second thoughts. With Bernie Sanders challenging her, she said she would withhold approval of any trade agreement unless it helps the working people. However, I believe Clinton is committed to increasing trade and to making workers' rights a greater focus in the trade deals that we do. She's a realist; she knows that the United States cannot withdraw behind protective walls or oceans. She knows we must engage confidently to protect our interests and remain true to our values, which include helping those in poverty and the oppressed.

I want to talk about the three-ingredient recipe for the stew making up the American TPP climate: demography, what the polls tell us, and what the census data tell us about incomes in the United States.

With regard to demography, the supporters and opponents of trade have changed to a certain extent in the United States. Now, more Democrats are supporting trade, including minorities, women, and millennials. At the same time, white males feel besieged by feminism, civil rights, gay rights, and immigrants seeking jobs. These are many of the traditional Republicans who have reservations about or are opposed to trade. The traditional thinking was Democrat—opposed to trade, Republican—business, supportive of trade, but that is changing.

The polls run in the opposite direction. The Chicago Council on Foreign Relations polled 2,000 voters in June 2016. When they asked people in this group, "Do you support trade?" 60% said yes. "Do you support globalization?" 64% said yes. However, when asked, "Do you think trade contributes to jobs?" only 40% said yes. Our business sector has failed to educate workers about the extent to which their jobs depend on exports.

Obama has been touting the U.S. Census Bureau statistics since their release about three months ago. It has data for the entire country, comparing household incomes in 2015 and 2014. It found a 5.2% increase in household incomes; the biggest increase in the approximately 50 years that the bureau has been keeping track of these numbers. It also found that if you leave off the top 10% of income earners, the remaining 90% show a decline in income inequality. The doom and gloom is not accurate despite what Sanders and Trump are saying. These numbers need to become part of the perception.

Obama asked the U.S. Congress to approve the TPP in the lame duck session after November 8. The Senate and House of Representatives leaders say they don't know whether they have the votes and cannot push it until they do. This is a chicken-and-egg situation in every parliament. In general, after an election (the TPP was a punching bag during the election), the leaders will be more inclined to bring it to a vote as they will be able to express their viewpoints in a less turbulent environment. But they have to do it quickly. There is little time, and the TPP isn't the only thing they have to deal with in the lame duck session.

The environment is not going to change on trade overnight because of Hillary Clinton's election. Longer-term and underlying issues exist which will influence Congress.

U.S. TPP issues

There are three nagging issues: intellectual property protection for biologic drugs (drugs made from biological organisms), localization of financial data, and tobacco.

We have 12 years of protection for biologic drugs. Other countries have five years. The United States is being pressured to move to five to eight years, or even more. The background global issue is that the United States, Japan, and other countries which prioritize innovation see intellectual property as the crown jewel when it comes to international competition. To these countries, this reduction in protection appears to be a giveaway, and reducing the protection period for drugs affects the whole realm of intellectual property. I was told that Kevin Brady, the chairman of the House Ways and Means Committee, is considering a remedy. He has found that the labor chapter of the TPP makes it possible to deny TPP benefits to countries that fail to take action on labor rights. He has raised the possibility of taking the same approach to biologic drugs: punish those who don't increase the period.

U.S. banks do not want data localization. Another set of negotiations is taking place in Geneva regarding provisions to limit the responsibility to localize financial data which I believe will satisfy U.S. industry.

The investor-state dispute settlement (ISDS) allows corporations to challenge national regulations which the corporations say diminish the value of their investments. Draconian regulations on tobacco potentially limit the value of their investments, but tobacco is very unpopular so it was carved out of industries able to challenge regulations under ISDS. Greens and others pushed to get tobacco out of the ISDS and succeeded. Other agricultural commodities in the future also want the right to challenge not given to tobacco. I think if the TPP passes in the United States, it will still have a tobacco carve-out.

The views of Mike Froman, the United States Trade Representative (USTR), are insightful and important. Regarding China, "China is on its regional strategy with the Asian Infrastructure Investment Bank, with RCEP, with its ambitions in the South China Sea and the East China Sea. The choice is whether to allow countries to throw their weight around with behavior that is statist and mercantilist or to pass the TPP and strengthen the rules-based system that has delivered an era of peace and prosperity unequaled in history. Those who are more optimistic than I, who hope that the TPP will pass during the lame duck session, place great emphasis on the security aspects. If I were President Obama during the lame duck, calling people into the White House to persuade them to vote for the TPP, that would be the argument I would make. Yes, it's about economics but it's also about security in Asia."

Froman also says that, traditionally, "the majorities for trade agreements in Congress have been Republican," but he notes that some polls are showing increased Democratic support. "Notwithstanding the headlines," he says in reference to Trump in the presidential election, "there is more bipartisanship on trade than meets the eye."

Vice President Joseph Biden: "In the lame duck period, I am not over-promising, but sometimes when there is no election to face and people are retiring and others have to consider their conscience, they may see the wisdom of the TPP. However, it's going to be hard. I think it's a less-than-even chance. But there is a genuine chance. It's possible we can get it passed."

My prediction is that no greater than a 30% chance of passage exists. A colleague of mine mentioned a 40% chance. Others put the chance even lower. I hope we are wrong.

The Clinton administration and the TPP

My assumption is that Clinton will win the U.S. presidential election. People are afraid of Trump. Some people are saying it's a 95% chance Clinton will win. I also believe there's a good chance of the Democrats taking control of the Senate. I don't think they will take control of the House, where they would need 30 new seats to take control. There may be an anti-Trump wave that will help the Democrats, but that's a lot to ask. Clinton will have to deal with a divided Congress which makes it harder to get things done.

I would also like to quote Bob Zoellick and Charlene Barshevsky, both former USTRs. Zoellick thinks that, "If there's no TPP in the lame duck, Hillary Clinton will take as much as one to two years to act on TPP. She has other priorities, all of which depend on Congress, and she is not going to want to pick a fight early on over TPP, which, as we know, is a difficult issue. She wants to do infrastructure investment, tax reform, investment in renewable energies, increasing the minimum wage, and many other goals, and these all depend on Congress." I agree with Zoellick on this. She will delay and quietly make a number of changes. She will strengthen labor and environmental rights. She will want to improve trade adjustment assistance. Congressional staff have hinted that Republicans would be more open to approving that.

Here are some suggestions from Zoellick and I. She needs to appoint a strong, aggressive, creative U.S. Trade Representative and not what we call in Washington a "seat warmer." She will need to make strong additions to the TPP while it is under consideration to give it a better political profile. One aspect might be currency manipulation. She needs to help workers with training and relocation. While we had a 62.5% rule of origin under the North American Free Trade Agreement (NAFTA), the rule under the TPP is only 45%. That means that you can have automobiles coming from Japan or elsewhere in Asia with significant Chinese content.

Barshevsky made a few interesting points. "Because of concerns about China in Asia, our TPP partners will carefully consider the changes that the United States wants to make to the TPP...They will not want to rebuff Clinton in the first year of her administration." Barshevsky suggests that our TPP partners may be receptive to making changes because of China and the new administration, so the United States should try to structure some revisions to the TPP which will make it more acceptable in the United States and abroad. Two of those ideas may be ISDS and the financial data localization.

Other Clinton administration trade policies

On the Transatlantic Trade and Investment Partnership (TTIP), the United States and the European Union (EU) are trying to come to terms on the harmonization of domestic regulatory schemes. This is very difficult. They have only gotten together on three of thousands of systems. This process will slow further due to Brexit and the TPP delays. Clinton will not be anxious to take on the TPP or TTIP until she gets a better relationship with Congress.

Plurilateral talks on an environmental goods agreement and a trade in services agreement will go much faster. I think that whether the TPP is approved, it will be used by the United States as an opportunity to talk to non-TPP countries about expanding their environmental goods and trade in services disciplines, e.g., limits on fishing subsidies. This is a global problem for Japan and others. The TPP contains effective language on this.

A wise person in Japan suggested that I address the possibility of the United States and the EU working together on their initiatives in Asia. Our interests are often very similar. Why couldn't we have a three-sided discussion instead of parallel, competing two-sided talks? The current toxic climate for trade may not support that. It is a potentially important initiative to make progress on in the future.

I don't think the United States will try to breathe new life into the Doha Round unless China changes its mind. I think the United States will explore a bilateral agreement with England. That is something to keep our eyes on. The United States and Japan could possibly do that together.

Importantly for Japan, I think the United States will continue to support closer Japan-South Korea relations, for obvious reasons. I also think despite all of the bad feelings about Vladimir Putin in Washington, Washington will leave a policy space for Japan to pursue what Japan thinks is in its best interests with Russia. I think there will be tacit support for what Japan seeks in that realm.

Obama leaves Clinton with a challenge: how to cement ties with countries in Asia as China's power increases. He has taken important steps forward on defense with Japan, South Korea, Australia, and even with Vietnam and Burma. However, if the TPP does not pass in the lame duck session, can we really say that Obama's legacy from his Asia pivot is a success? That is a heavy and serious question. If it does not pass, wouldn't it be great if Clinton's first trip abroad as president would be to Japan? This would show the United States' continued involvement in Asia.


Q1. I have two comments and two questions. Some argue that if you renegotiate the TPP, a 40% rule of origin might be unacceptable to the United States, but 50% of the value added might be favorable to the United States. However, if this is proposed, Japan may request that the United States eliminate the U.S. tariffs on automobiles immediately without the 25-year grace period. It seems to me very favorable for the United States. My second point is that if the United States drags its feet on the ratification of the TPP for one or two years, rebalancing with a bigger picture than just trade, and the Clinton administration may lose its attractiveness. You said that great frustration exists among Trump's supporters. If Trump loses, this frustration will linger in the United States. It will be very difficult to cope with that and convince Americans of the advantages of free trade. My first question is how can that be addressed? My second question is that I think you placed a great deal of emphasis on the Regional Comprehensive Economic Partnership (RCEP). If the United States encounters difficulties in ratifying the TPP, the agreement may fail and Japan may consider moving forward without the United States, through RCEP, which includes China and India and other countries. What do you think is the possibility of this?

Sherman E. KATZ
40% or 45% of voters will vote for Trump and will continue to be frustrated. Trade adjustment assistance, even if I could wave a magic wand and do everything I proposed, is the beginning of a many-year process. Bridgestone did it in three and a half months, but on a bigger scale? Also, older people have a harder time with computers. CEOs are preparing contingency plans for increased trade barriers. They have not done their part in terms of speaking up for and supporting trade and the TPP as much as they should have. There are many forces that will make the job we need to do harder.

RCEP doesn't have the same quality standards as TPP. India also is in the room, which has been a source of delay in both the RCEP and Doha Round negotiations. It's a fallback, and it may be one for Japan. We need to adopt standards for the future. The TPP addresses the digital realm, whereas RCEP doesn't have much on that. You are right that it's a risk and it's another reason we have to move forward on the TPP.

A certain amount of care and attention will be needed during any renegotiation. No other country has the economic power of the United States, and with China looming, if the United States suggests these things, I think countries in Asia will listen very carefully.

Q2. I have two questions. The first is on Robert Zoellick's TPP suggestions. What kind of currency provisions could be introduced and how likely would their adoption be? These measures could put TPP countries at a comparative disadvantage. Second, many commentators say U.S.-Russia relations are at their lowest point since the Cold War. Are you expecting a reset?

Sherman E. KATZ
There is talk of strengthening and making more implicit the treasury's power to engage in counter-cross interventions in currency markets. If South Korea is buying lots of dollars and selling won, the United States would do the opposite. The treasury already has the implicit power to do that, but that's the kind of intervention we are talking about. By making the authority more explicit—currency markets are psychological—a threat to use the new authority may be enough to discourage other countries from intervening in the way they have in the past.

On Russia, I want to emphasize that in a quiet way there may be an interest in foreign policy circles in the United States in allowing a policy space for Japan. The relationship is bad, but you can keep quiet and policy space can come from not registering opposition. The only positive path to Asia for Russia should not necessarily be through China.

Q3. First, I understand that expanding the scope of trade adjustment assistance (TAA) into the public sector is being pushed. How could you provide this program, which was originally designed to support people affected by free trade, to the public sector? On trade promotion authority (TPA), the fast track, U.S. politics go through this every five or six years, but your legislature is positive in terms of its trade objectives. What changes do you think are needed to make this process easier for U.S. politics? Also, if the TPP doesn't get done during the lame duck session, what can Japan and the United States do to show the world that this expanding rule-based economic order is important?

Sherman E. KATZ
On the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) TAA program, I too am puzzled by how to bring in public sector workers. Despite the fact the AFL-CIO is for labor, it has been sometimes skeptical about TAA because it perceives that TAA is often combined with the approval of trade agreements as a band-aid or payoff to labor to secure their support. That's regrettable. Expansion of the program is important, but I don't have a direct answer, though.

On the TPA, you will remember that Article 2 of the U.S. Constitution gives the commerce power to Congress. Everything the president does on trade is pursuant to authority delegated by Congress to the president. Congress takes that prerogative very seriously. The fact that the president is compelled to come back every five or six years is an important way for Congress to reassert that prerogative. Also, the objectives are spelled out often in the absence of a specific agreement, but there doesn't need to be a roaring war to plan contingencies against what the war might bring. They know what objectives we need to get out of trade agreements in general.

A Clinton trip to Japan would be symbolic. Symbols are not without significance. One can imagine, after Diet approval, that Japan will want to work with the United States to bring forward whatever revisions, not renegotiations, may be necessary in the TPP, since it is in as much if not more of Japan's interests than the United States. I can imagine the United States and Japan meeting to discuss which country is in the best position to talk to certain other countries about getting the revisions made.

*This summary was compiled by RIETI Editorial staff.