May 03, 2016
President Obama continued the administration’s boasting about how the Trans-Pacific Partnership (TPP) will eliminate Vietnam’s tariff on exports of U.S. whale meat. You may have missed it, but this tariff, along with Malaysia’s tariff on U.S. exports of shark fins, and Japan’s tariff on our ivory exports, are among the 18,000 tariffs that President Obama said would be eliminated by the TPP in a Washington Post column today.
This 18,000 tariff figure was intended to sound very impressive, but according to Public Citizen the United States doesn’t export at all in more than half of the categories and in almost all the ones in which it does export the tariffs are already low. One important exception is tobacco. Several of the countries in the TPP have high tariffs on U.S. tobacco exports, so the TPP will be making cigarettes cheaper for kids in Vietnam, Malaysia, and elsewhere.
President Obama framed the TPP as an anti-China measure, warning readers:
“As we speak, China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense, putting American jobs, businesses and goods at risk.”
Actually, this is not the way the economy works. If China reduces trade barriers with other countries in Asia, allowing the region to grow more rapidly, then it should also make the United States more prosperous. The region would be a bigger source of demand for U.S. exports and a more efficient provider of goods and services to the United States. That was exactly the logic of the Marshall Plan that helped to rebuild West Europe after World War II. Greater economic integration in the region, even if engineered in part by China, is something that the United States should applaud, not fear.
President Obama argued that the big difference between the TPP and the trade deals pushed by China is that the TPP will impose our rules. At the top of President Obama’s list was stronger and longer patent and copyright protection. These forms of protection raise the price of the protected items by several thousand percent above the free market price, in the same way that a tariff of 5,000 or 10,000 percent raises the price far above the free market price.
Higher prices due to increased copyright and patent protection can impose large costs on economies and slow economic growth. To give an example, the New Zealand government estimated that the increase in the length of copyright protection required by the TPP, from its current 50 years to 70 years, would cost it 0.024 percent of GDP, the equivalent of 4.3 billion annually in the U.S. economy. This figure is striking since this is a relatively small change for a country that already has strong copyright protection. The cost in developing countries like Malaysia and Vietnam would almost certainly be much larger.
The biggest cost from the increased protectionism in the TPP is likely to be with prescription drugs where it imposes stronger and longer patent and related protections. The goal is to make these countries pay as much for their drugs as the United States. Currently we spend more than $420 billion a year (@2.2 percent of GDP) on drugs that would likely cost about one-tenth this amount in a free market. If we succeed in making drugs as expensive in the TPP countries it will both be an enormous drain on their economies and also jeopardize the health of their populations.
It is also important to understand that in standard trade models, the more money that Pfizer gets for its drugs and Microsoft gets for its software, the less the U.S. gets for its other exports. The standard assumption is that the overall trade balance will not be changed if these companies get another $20 or $30 billion annually in royalties and licensing fees. This means that our trade deficit in everything else will rise by $20 or $30 billion.
There is no Team America in this story. If Team Pfizer gains from stronger protection, the rest of the country loses.
One other important rule that the Obama administration pushed in the TPP is the Investor-State Dispute Settlement (ISDS) mechanism. This is an extra-judicial process that is open exclusively to foreign investors. Under this process, foreign investors, including foreign subsidiaries of U.S. corporations, can challenge any law at the federal, state, or local level. It can impose large fines, which can make it impractical to keep the laws on the books.
These tribunals can rule on any regulations put forward for protecting labor, the environment or public health and safety. The ISDS tribunals are not bound by precedent, nor are their rulings subject to appeal. For those who think that the U.S. legal system does an adequate job of protecting foreign investors, it is difficult to see why we would want to establish this extra-judicial process.
In short, there is not a credible story that the TPP will be a big boost to U.S. prosperity. It does pose a threat to the countries of the region (including the United States) in the form of higher prices for prescription drugs and other protected items. It also creates a whole new extra-judicial system that can threaten regulations designed for important public purposes.
This is a hard deal to sell, which probably explains why President Obama is trying to promote fears of China. That should not be allowed to help his case.
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