Trans-Pacific Partnership Summary, Pros and Cons
What Does Trump's Executive Order to Withdraw from the TPP Mean?
The Trans-Pacific Partnership is a free-trade agreement between the United States and 11 other countries that border the Pacific Ocean. On January 23, 2017, President Trump signed an executive order to withdraw the United States from the agreement.
Officials from each country signed the agreement on February 4, 2016. The negotiations were successfully concluded on October 4, 2015. Each nation's legislature had to approve the agreement before it went into effect. Before that could happen, Trump's executive order removed the United States from the process.
The TPP was between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The countries involved produce 40 percent of the world's total gross domestic product of $107.5 trillion. They supply 26 percent of global trade and 793 million of the world’s consumers.
The TPP trade area would have been bigger than the North American Free Trade Agreement, currently the world’s largest. In 2012, the estimated trade value between the countries was $1.5 trillion in goods. In 2011, it was $242 billion in services. It would have been smaller than the Transatlantic Trade and Investment Partnership. The TTIP is the other large regional trade agreement being negotiated. It’s between the United States and the European Union. Talks went into limbo when Trump took office.
Notably, the TPP excludes China. That's deliberate. It's meant to balance the trade dominance of both China and India in East Asia. The TPP would give the United States an excuse to intervene in trade disputes in the oil-rich South China Sea. China has been beefing up its military to back its incursions in that area.
But all parties have signaled that other members can join in the future. So far, the Philippines and China have indicated an interest.
Like most other trade agreements, it removes tariffs on goods and services and sets reciprocal trade quotas. Unlike most agreements, it removes non-tariff blocks to trade. It also harmonizes regulations and statutes. It shares those features with the TTIP.
The TPP covers a broad range of goods and services. These include financial services, telecommunications, and food safety standards. In this way, it affects foreign policy and even laws within countries. For example, it suggests that countries set up an agency like the U.S. Office of Information and Regulatory Affairs. It analyzes the costs and benefits of new regulations.
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
On March 8, 2018, the other 11 TPP countries signed a modified agreement without the United States. The new deal follows the TPP, with the suspension of 20 minor provisions. China is considering whether to join the trade pact. Doing so would significantly alter the balance of power in international commerce.
On April 12, 2018, Trump signaled the United States might be willing to rejoin the TPP. Trump said he would only do so if he could get "a better deal" than Obama did. But many countries feel they already gave enough concessions. For example, they agreed to let U.S. drug companies keep their patents longer than is the norm in other countries.
A big concern is whether China would use such a deal to avoid the tariffs imposed by Trump's trade war. China could send raw materials to TPP members, such as Vietnam. Factories there would send finished products to America, avoiding the tariff.
The original TPP boosts exports and economic growth. This should create more jobs and prosperity for the 12 countries involved. It will increase exports by $305 billion per year by 2025. U.S. exports would increase by $123.5 billion. It would benefit the machinery, auto, plastics, and agriculture industries.
It increases exports by removing 18,000 tariffs placed on U.S. exports to the other countries. The United States has already withdrawn 80 percent of these tariffs on imports. The TPP evens the playing field.
The agreement adds $223 billion a year to incomes of workers in all the countries, with $77 billion going to U.S. workers.
All countries agreed to cut down on wildlife trafficking. That helps elephants, rhinoceroses, and marine species the most. It prevents environmental abuses, such as unsustainable logging and fishing. Countries that don't comply will face trade penalties.
Most of the gains in income would go to workers making more than $88,000 a year. Free trade agreements contribute to income inequality in high-wage countries. They promote cheaper goods from low-wage countries.
This would be particularly true for the TPP because it protects patents and copyrights. Higher-paid owners of intellectual property would receive more of the income gains.
The agreement regarding patents will reduce the availability of cheap generics. That will raise the cost of many drugs. Competitive business pressures will reduce the incentives in Asia to protect the environment. Last but not least, the trade agreement could supersede financial regulations.
The Negotiators Overcame These Obstacles
These five sticking points stood in the way of the deal. Here's how they were overcome.
The United States agreed to shorter patents, especially for biologic drugs. Pharmaceutical companies can keep their formulas secret for five to seven years instead of 12 years.
All state-owned enterprises must comply with global trade standards that protect their workers and the environment. The United States had to overcome objections from Vietnam, Singapore, and Malaysia. Those countries must now allow labor unions or face penalties.
The United States, Japan, and Canada agreed to lose some tariff protection for dairy, beef, and poultry producers. This was the biggest sticking point. Farming subsidies received by U.S. and EU companies prevented the success of the Doha round of trade talks held by the World Trade Organization. The fact that farmers were willing to lose tariff protection was a big win for negotiators.
These countries also agreed to open up their automotive industries. That could cost local jobs while lowering the price of cars and trucks. The United States won the battle over the Investor-State Dispute Settlement Mechanism. That gives foreign companies more rights to sue the government than domestic firms have. In return, the United States agreed to restrictions on the trade of tobacco. It will no longer allow cigarette companies to use arbitration panels to sue countries that tax or otherwise restrict cigarette advertising.
Trump's executive order throws the entire agreement into question. The other countries may continue the pact without the United States. They may also wait until the United States initiates bilateral agreements with each of them. They would do so knowing their negotiating position would be much weaker. It is remotely possible they may ask China, the world's largest economy, to take America's place in the agreement. That would radically shift the balance of power in Asia.
Before the executive order, the agreement was in the ratification stage. That meant each country's legislature must ratify the agreement before it can go into effect. The U.S. Congress had 90 days to review and debate the agreement. It can only vote "yes" or "no" on the deal. It cannot change any of the terms of the agreement. That's because Congress gave the president the fast-track trade promotion authority on June 29, 2015. Trump's withdrawal from TPP means Congress no longer has the opportunity to vote on the agreement.