TPP Is Surprising Vote of Confidence in Globalization

Globalization has looked pretty sickly of late. Immigration, multinational companies and free trade are under fire from populists on both the left and right in Europe and the U.S. Trade activity is stagnant, with total exports and imports recently growing more slowly than global output.

This makes it all the more remarkable that 12 countries just agreed to unprecedented new rules governing both domestic and international trade policies in the Trans-Pacific Partnership. Even more remarkable is the broad political support TPP enjoys in most of those countries.

To cite one example: Canada’s centrist Liberal party fought a losing battle in 1988 to stop a free-trade agreement negotiated with the U.S. by the then-governing Conservative party. This week, the Liberals won an election while largely supporting the TPP that the losing Conservatives negotiated. The left-wing New Democratic Party, which campaigned against TPP, finished a distant third.

This suggests that among governing parties at least, support for the expansive American model of free trade—rather than China’s narrower variant—remains intact. It is thus ironic that the one country where passage looks precarious is the U.S.

TPP would be the U.S.’s first major multilateral trade agreement in more than 20 years. Free trade has become a harder slog as trade itself has evolved. In the decades after signing the General Agreement on Tariffs and Trade in 1947, countries cut tariffs and quotas primarily on manufactured goods. (Agriculture largely remained restricted.) As barriers to goods fell away, the focus shifted to services, intellectual property, foreign investment and government procurement.

The Canada-U.S. agreement was a watershed in those areas. The 1994 North American Free Trade Agreement went further by requiring Mexico to abide by special provisions on labor and the environment.

These “behind the border” barriers are politically more sensitive than tariffs because they affect domestic policies, from human rights to how much public health systems pay for drugs. Classical arguments for free trade are also less relevant: a country that grants foreign drug companies longer patent protection is raising prices for its own consumers, and more restrictive labor laws erode its competitive advantage of cheap labor. Yet these sorts of rules are the conditions the U.S. and other advanced countries insist on if developing countries are to have access to their markets.

This is why TPP’s significance lies not in its economic impact—modest for most signatories—but how it restricts its members’ domestic sovereignty. Vietnam’s only labor union is an organ of the ruling communist party. Under TPP, it will have to allow independent unions. Malaysia has long favored ethnic Malays in its government procurement policies; it will have to relax those rules for foreign suppliers. Brunei, which has no minimum wage, will have to institute one.

Five TPP countries provide no period of exclusivity for producers of complex, and costly, biologic drugs; four provide just five years. The details are complex, but all will have to raise that to effectively eight years.

Japan will have to crack open further its highly protected rice market, and Canada will have to do the same for dairy, poultry and eggs. Data-heavy companies such as Facebook can’t be forced to house data on customers in TPP countries on servers in those countries.

Every country will bear some political price. Thousands have taken to the streets in New Zealand to protest potentially higher drug prices and the threat of lawsuits by multinational companies claiming discrimination. Australians have similar concerns. Japanese farmers complain of betrayal. Yet in all three, as in Canada, opposition parties back the agreement, though this is contingent on the still-unreleased text rather than the principles agreed to in Atlanta on Oct. 5.

By contrast, TPP asks relatively little of the U.S. Tariffs on auto parts will disappear, while tariffs on vehicles imported from Japan will fall over a glacial, 25- to 30-year period.

Yet, political support for TPP in the U.S. is far more tepid than in other countries. Between the two major parties, the top four presidential candidates all oppose it. Passage in the House of Representatives is far from assured.

Opponents complain there is no prohibition on holding down currencies to boost exports. The mechanism for settling disputes between companies and governments is either too strong, or not strong enough. The American biotech industry and its supporters in both parties are upset that biologics don’t get 12 years of exclusivity in TPP countries, as they do in the U.S., and worry they will be pressured to accept shorter limits at home.

The pact is, at its core, an effort to shape globalization according to American standards of economic conduct. So what happens if commercial and political concerns derail TPP in the U.S.?

“These aspirations about how other countries run their economies will have to be shelved for at least a decade,” predicts Gary Hufbauer, a TPP proponent at the Peterson Institute for International Economics.

In the end, whether TPP passes or fails will matter far more for American economic leadership than the modest costs and benefits it poses to American companies and workers.