October 18, 2017
When it became impossible to sell the Trans-Pacific Partnership (TPP) on its economic merits, proponents of the deal began to argue for it as a way to contain China’s power in the region. Thomas Friedman picks up this line and runs with it in his latest column.
“Trump came into office vowing to end the trade imbalance with China — a worthy goal. And what was his first move? To tear up the Trans-Pacific Partnership, the trade deal that would have put the U.S. at the helm of a 12-nation trading bloc built around U.S. interests and values, potentially eliminating some 18,000 tariffs on U.S. goods and controlling 40 percent of global G.D.P. And China was not in the group. That’s called leverage.
“Trump just ripped up the TPP to “satisfy the base” and is now left begging China for trade crumbs, with little leverage. And because he needs China’s help in dealing with North Korea, he has even less leverage on trade.”
Let’s see, we’re eliminating 18,000 tariffs. That sounds really impressive, except the vast majority of these tariffs were near zero anyhow. Admittedly, a zero tariff is more supportive of trade than a tariff of 1.0 percent, but it’s not exactly going to lead to a flood of exports. It has roughly the same impact as a 1.0 percent decline in the value of the dollar, the sort of change in currency values that we often see in a single day.
The touting of the number of tariffs, rather than the impact on trade is the sort of cheap trick propagandists resort to when they can’t make a serious argument. It’s worth also noting that the 18,000 tariff figure includes many altogether meaningless tariffs, like Brunei’s tariffs on ski boots made in the United States and tariffs on items that are already banned from international trade, like shark fins.
Serious efforts to evaluate the impact of the TPP on the economy showed it having very little impact since trade is already very open between the countries in the pact. (The U.S. already has trade deals with six of the eleven other countries in the pact.) The United States International Trade Commission projected that the pact would boost GDP growth by an average of 0.015 percentage points over the next fifteen years. And this projection did not include any negative impact from the higher patent, copyright, and related protections that are a major feature of the deal.
If the TPP was drafted as a pact against China, its drafters did not do a very good job. The rules of origin (ROO) provisions (the percentage of value added in a product that must come from the countries in the pact to benefit from special treatment) are considerably lower than in other trade deals. For example, the ROO in the TPP requires originating content of between 45 percent and 55 percent for vehicles and engines and some other car parts. For most parts, the requirement is between 35 and 45 percent. The TPP ROO are considerably weaker than the ones in NAFTA, which required 62.5 percent of the value-added come from the countries in the pact.
Given the proximity of the countries in the pact to China, the content that does not come from TPP countries is likely to come in large part from China. This means, for example, that a part that has 65 percent of its value-added coming from China, would get favored treatment under the TPP. And this assumes everyone is completely straight with their numbers. If we imagine companies might fudge a little in what they report, it is certainly imaginable that a car part with 70 tp 75 percent of its value-added from China could get favored treatment under the TPP. That doesn’t sound like a pact designed to contain China’s economic power.
As a practical matter, the United States is not going to contain China’s economic power. On a purchasing power parity basis China’s economy is already considerably larger than the U.S. economy. The IMF projects it to be almost 50 percent larger by 2022. Neighboring countries like Vietnam and Malaysia are not going to risk worsening relations with China for the slightly better trade terms offered by the TPP, and it is silly to imagine otherwise.
This doesn’t mean that the United States has no leverage with China in trying to negotiate ways to reduce its trade imbalance. The main route to a lower trade deficit would be a lower valued dollar relative to the yuan. China is officially committed to this policy already, we just might prefer a more rapid pace of adjustment.
We could offer concessions in other areas to persuade China to move more quickly in raising the value of its currency. For example, we could tell them we don’t care about the market access they grant Goldman Sachs and other firms in the financial industry. We could also say that we don’t care about the status of Microsoft’s copyrights or Pfizer’s drug patents in China. These concessions would almost certainly buy us a considerable movement in currency values.
Unfortunately, neither a Democratic or Republican administration would be likely to make such concessions. These corporations have much more political power than the workers who would benefit from more balanced trade. This is the real obstacle to reducing our trade deficit with China, not Donald Trump’s rejection of the TPP.