Did we just get played on the TPP?

obama tpp

When it comes to international trade there are two essential challenges to the U.S.:

  1. Import tariffs / restrictions imposed by other nations
  2. Cheap production cost in other nations

The United States has always operated under the principle of free trade. Our economy is open and, with some exceptions, people can import into the U.S. with pretty low or no import duties. Other countries either prohibit the import of certain goods or charge significant duties. This creates a low barrier to enter the U.S. and high or impregnable barriers to enter other countries.

When we think of cheap production costs, we typically think of cheap labor. But the factors go beyond labor. Lack of environmental regulations, working conditions, and subsidies all contribute to low production production costs as well. In addition to low pay, workers in other parts of the world must also endure living in squalor and environment impact of business is not regulated.

Manufacturers are fine with the production cost setup. They can’t import into the country but they can set up a factory and produce the products cheaply. Then they sell them to the wealthier people in the host country and export to other countries, including the United States.

The question is, “how does the U.S. deal with this?”

One way, you impose stiff tariffs for imports.

The effect?

Manufacturers either decide to pay the tariffs, passing the cost to the consumer (us), or they shift manufacturing to the United States, increase employment, and also increase the cost to the U.S. consumer.

As for the foreign factories, they stay open. While we can produce and sell things domestically, the price to produce makes us uncompetitive internationally. The big corporations will keep the foreign factories producing and exporting to the the world from there, not here.

The alternative way? Get foreign countries to eliminate trade barriers / tariffs, improve working conditions and remove subsidies.

The effect?

The production cost to the big corporations increase in those markets. The labor is not as cheap anymore. The expense of operating in a non-regulated environment becomes regulated – no more dumping toxic byproducts in the local waterways, workplace safety becomes a requirement, no child labor, etc.

Additionally, for people in those countries, the living conditions improve, their ability to organize labor increases, and their ability to demand fair compensation for their labor also increases.

This, in effect, decreases the difference between the cost to produce in the U.S. and other nations, improves regional stability (good for business) and helps protect future production of new technologies for the United States.

The downside, this is a long term play.

Why would corporations not support the TPP?

While the U.S. is the largest single economy, it is not the largest future potential. If the cost in foreign production increases, the squeeze on corporate profits will take a hit, as the other countries’ don’t have the ability to absorb price increases like the U.S. .

If you are a large multi-national, what would you rather do:

  1. Increase production cost / taxes in one market that can absorb most of the increase through higher prices, or
  2. Increase the global cost and take a hit to profits because global markets are not as able to absorb the increases?

In the scenario where we have a global increase in wages, improved working conditions and better standards of living, multi-nationals take a big hit. Their entire cost basis goes up.

TPP did exactly that. It:
-removed tariffs and restrictions over time (we, and others, phase out existing tariffs)
-enforced improved working conditions, safety and provided the right to organize for labor*
-eliminated child and forced labor*
-removed government subsidies
-set path for environmental regulations*
*something NAFTA failed to do, and why big business liked it

Large corporations with no intention of building factories in the U.S. to export to these other countries don’t care about tariffs. They build factories in these country for export to others.

TPP had almost no chance to be ratified. Even before President Trump pull out of it, congress had all but signaled its death.

Opposition based on fear not the deal

The opponents to the agreement were not opposed to the agreement itself. Their concern was that we (the U.S.) would not enforce those aspects of the agreement that prevented dumping. They were afraid that one or more of the countries would break the rules and we would sit by and let them do so.

Fixing NAFTA in Mexico

If ratified, the TPP would have improved working conditions in Mexico. Why should we care? Improved working conditions, the right to organize and the more stringent regulations would not only improve the lives of the people in Mexico (you don’t care? ok), it would have increased the cost of production, decreasing the incentive to ship more manufacturing jobs down their. TPP allows Mexico to export to other TPP member, also increasing employment and decreasing the pressure to migrate north.

One of the shortcoming in NAFTA is that it left in place working conditions that allowed for much lower production costs. The TPP not only rectified that for Mexico, but also for most of the Pacific Rim trading countries.

We had a chance to lay the groundwork for long term international trade. We gave it up under the false pretence that it would encourage more jobs to ship overseas. It feels better to hit importer with Taxes now than to work for a longer term solution.

All killing the TPP did was ensure large multi-nationals a continued low cost production base for exporting from poor countries, and lay the groundwork for increased prices here in the United States.



Fear Mongering
Beside fear of unenforced agreements, critics have used fear of lawsuits, going so far as to claim people or companies can sue any government in any country under the TPP, and do so for loss of expected future gains. This is blatantly false. The TPP is very specific in the Investment Chapter. All claims must go to binding arbitration after a period of 6 months as the parties try to resolve the dispute. Further, the TPP is also explicit that any award is limited to actual investment or assets lost in direct connection to the alleged contractual violations.


Sources:

 

https://www.mfat.govt.nz/en/about-us/who-we-are/treaties/trans-pacific-partnership-agreement-tpp/text-of-the-trans-pacific-partnership

2.10(1)
“Unless otherwise provided in this Agreement, no Party shall adopt or maintain any prohibition or restriction on the importation of any good of another Party or on the exportation or sale for export of any good destined for the territory of another Party,..”

Article 2.14: Administrative Fees and Formalities
“Each Party shall ensure, in accordance with Article VIII:1 of GATT 1994 and its interpretative notes, that all fees and charges of whatever character … imposed on or in connection with importation or exportation are limited in amount to the approximate cost of services rendered and do not represent an indirect protection to domestic goods or a taxation of imports or exports for fiscal purposes. “

Article 2.15: Export Duties, Taxes or Other Charges
Except as provided for in Annex 2-C (Export Duties, Taxes or Other Charges), no Party shall adopt or maintain any duty, tax or other charge on the export of any good to the territory of another Party, unless such duty, tax or charge is adopted or maintained on that good when destined for domestic consumption.

Article 2.21: Agricultural Export Subsidies
1. The Parties share the objective of the multilateral elimination of export subsidies for agricultural goods and shall work together to achieve an agreement in the WTO to eliminate those subsidies and prevent their reintroduction in any form. 2. No Party shall adopt or maintain any export subsidy on any agricultural good destined for the territory of another Party.12

Article XIII of GATT 1994
https://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_05_e.htm

SANITARY AND PHYTOSANITARY MEASURES
“Protection of food sources through common agreement and enforcement of conditions designed to, as best as possible, ensure non-contaminated food sources.”

TECHNICAL BARRIERS TO TRADE
“ facilitate trade, including by eliminating unnecessary technical barriers to trade, enhancing transparency, and promoting greater regulatory cooperation and good regulatory practice.”

INTELLECTUAL PROPERTY
Grants protections and procedures for the protection of IP as well a recourse in violation.

LABOR
https://www.mfat.govt.nz/assets/_securedfiles/Trans-Pacific-Partnership/Text/19.-Labour-Chapter.pdf

https://www.epa.gov/sites/production/files/2015-03/documents/finishing.pdf
Example, acid washing metals. We have strict requirement for handling acid wash waste. But we also have guidelines on the acid wash process recommended by the EPA. This costs money. In many other countries, once done, acid wash is literally dumped in the closest stream.

INVESTMENT
https://www.mfat.govt.nz/assets/_securedfiles/Trans-Pacific-Partnership/Text/9.-Investment-Chapter.pdf

The more you read the TPP, the more you realize big corporations are happy it’s gone. Makes you wonder what the real motive was for killing it. In congress, it had little chance even before Trump. Congress, controlled by big corporations.

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