Daniel Gordon: After PPP, It is Time to Reconsider TPP
By Daniel Gordon
At times of such great economic despair, it is worthwhile to step back, reassess and develop a new way forward to rebuild the American economy for long term growth and prosperity. Despite the stock market having rebounded to its pre-COVID highs, the rest of the American economy is faced with tremendous uncertainty, incredible job losses and wholesale destruction of business and industries. Unfortunately, the same misguided tropes and strategies continue to infect the American economic psyche. Claims that “globalization is dead” and “bring all the jobs home” are completely disconnected from fundamental economic reality. Globalization is not dead; if COVID 19 has taught us anything it is that globalization is here to stay. Despite not being able to travel, meetings across the world have migrated to Zoom Video Communications, Inc. and other communication platforms. Cross border supply chains that had been under stress are quickly returning to normal. And while an over-dependence on China may be rightly encouraging businesses (and countries) to diversify their supply chains and manufacturing bases, very few companies are seriously looking at returning labor intensive manufacturing functions to the United States.
What has been missing from the recent discussion about economic rebirth has been an open and honest debate as to the importance of international trade. Despite the generalized criticisms and dire warnings to the contrary, increased levels of trade in America have historically driven American prosperity. According to the Peterson Institute for International Economics, real incomes in the United States are 9% higher than they would otherwise have been in the absence of increasing levels of trade[1]. In 2018, that 9% represented more than $1.5 trillion in additional American income. History tells us that international trade also plays an important role in human and economic development. For every 1% increase in income as a result of trade liberalization, pollution concentrations fall by 1%[2]. Furthermore, every 10% decrease in tariffs leads to a 1% drop in the gender wage gap[3]. Enhanced trade also reduces discrimination based on race and immigration status while also improving human rights conditions. We also know that when the US leads in shaping the rules of trade, better protections for labor, climate and human development are achieved.
Recent discussions about trade have been dominated by Phase 1 of the China trade deal. Yet, there is an opportunity and necessity for the United States to pursue trade apart from China. One opportunity is known as the Trans Pacific Partnership – or TPP. Negotiation of TPP began in 2008 as part of the Bush Administration and then became part of the Obama Administration’s “strategic pivot” to Asia. The Agreement envisioned a trade pact among 12 countries comprising 40% of the global economy and more than 800 million people[4]. In 2013, TPP countries received $698 billion in US merchandise exports and $199 billion in US service exports making the TPP countries the top export market for the United States[5].
TPP envisioned expanded trade and investment, lower consumer prices (through reduced tariffs) and new jobs in certain high growth industries. The negotiations for TPP were long and arduous with many signatories seeking to protect key industries and making difficult compromises. TPP was focused on reducing tariff and non-tariff barriers to trade. Total tariff reduction among TPP members would have reached 98%[6]. The services sector – a growing and significant portion of the American economy – would have been liberalized in TPP signatory states. Economists predicted that gains to the US economy from TPP would have topped $130 billion a year by 2030[7]. More importantly, TPP would have served as an economic and political bulwark against China’s Belt & Road Initiative and its other intimidating financial tactics aimed at its neighbors and abroad.
Opposition to TPP in the US came from a variety of sources. Unions in the US and elsewhere opposed the pact out of fear of a continued loss of manufacturing jobs. The election of Donald Trump, a known skeptic of multi-lateral agreements, also left TPP without a political sponsor to usher the agreement through an America still weary from past experiences with NAFTA. Numerous studies examined the likely economic impact from TPP. One study found that “TPP is not likely to effect overall employment in the United States” and that it instead would result in a shift in labor and capital to more productive sectors of the economy[8]. From an employment perspective, we know that reducing foreign trade barriers increases demand for US-made goods and services – demand which has been shown to increase employment in furtherance of same. It is also important to recognize that with or without TPP, the isolationist status quo will not maintain manufacturing jobs in the US. American manufacturers are already seeing significant productivity gains from artificial intelligence and other forms of automation – gains that cannot be extracted from human labor. As a result, the defeat of TPP did nothing to address future declines in US manufacturing sectors while simultaneously depriving the US economy of potential gains from increased trade with TPP countries.
Criticism of free trade agreements is oftentimes fair in terms of the damage that is done at the micro-economic level. However, that damage comes not from the trade agreement itself but from the disproportionate allocation of the net gains created by the trade agreements. Disruption from free trade agreements often impacts labor in a disproportionate manner while over-compensating capital. This is not a basis for discrediting trade agreements; rather it is a basis for discrediting domestic policies (or the lack thereof) in response to trade agreements. Instead of allowing most of the gains to go to “capital”, policies could be adopted that serve to “reallocate” some of those gains for the benefit of labor. Such policies could include “exit fees” payable by companies seeking to move domestic jobs “offshore”, job training grants to retrain displaced workers, long term unemployment and job dislocation compensation benefits, and expansion of Medicare and Social Security to younger age groups that are impacted as a result of trade disruption. Tax incentives (perhaps a retooled Opportunity Zone program that allows for tax deferral based on job creation) could be provided to American businesses to locate their operations in cities and counties disproportionately affected by trade agreements. These efforts would help to retrain an American labor force that is strong, capable and eager to work. More importantly, these workers would be retrained for higher skilled and higher paying jobs – rather than disregarding workers altogether and forcing them to discount their talent and capabilities in lower wage sectors in order to survive. Creating new markets for American goods and services through trade agreements will create increased jobs that need to be filled. There is no better way (or cheaper way) to fill those jobs than by retaining impacted workers.
When President Trump withdrew the United States from the TPP, the other 11 members went ahead without the United States. In our absence, they formed the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP)[9]. The CPTPP “suspended” the strong intellectual property protections and labor/environmental standards secured by prior US negotiating teams. These items were “suspended” in hopes that the US might one day “reconsider” its decision and rejoin the TPP. Now is the time for America to “reconsider” TPP. The entire world economy has been disrupted by COVID 19. The US economy has been rattled but its resilience is significantly greater than that of others throughout the world. A re-entry to TPP would be a powerful boost to the US economy and to its key strategic allies. Current economic conditions would likely enable to the US to negotiate even stronger deal terms in exchange for its “re-entry” to TPP. A reinvigorated TPP would serve as an unmistakable check against China its destabilizing economic policies in the region. A “free trade zone” in Asia would greatly facilitate shifts in the global supply chain away from China and would rebalance the economic and political leverage held by the United States in the Asian region. Furthermore, there is the opportunity for other countries to join TPP (including South Korea, Thailand, Colombia, Taiwan and even the United Kingdom) further enhancing the overall reach and benefit of TPP.
The current administration has stated a determination for an “America First” approach to global affairs. However, too often “America First” means “America Alone.” In a global, inter-dependent world, “America Alone” risks placing “America Last”. American cannot afford to cede economic leadership in Asia to China. We are presented with a unique opportunity to rejoin TPP, extract concessions favorable to US priorities and positions, adopt domestic protections for impacted groups and enjoy the political and economic benefits from partnering with our allies. Such an approach redeems the very construct of “America First” and is an opportunity that neither the United States, nor the world, can afford to squander.
About Daniel Gordon
Daniel Gordon is the founder and Managing Director of GLD Partners, LP, a diversified alternative investment firm based in Los Angeles, California. Daniel and GLD Partners, LP believe in the power of long-term investment approaches that span industries and geographies.
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FOOTNOTES:
[1] https://ustr.gov/issue-areas/economy-trade
[2] Economic Benefits of US Trade. May 2015. Council of Economic Advisors. Executive Office of the President of the United States.
[3] Ibid.
[4] What Is The Trans-Pacific Partnership? McBride, James and Chatzky, Andrew. Council on Foreign Relations. January 4, 2019.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] The Economic Effects of the Trans-Pacific Partnership: New Estimates. Petri, Peter A. and Plummer, Michael G. Peterson Institute for International Economics. January 2016.
[9] The Trans-Pacific Partnership, explained. Lee, Timothy B. July 25, 2016. www.vox.com.
