Business Ethos Blog

Another Deal and More Controversy

A few months ago we talked about Congress considering “Fast Track Trade Authority”, legislation aimed at providing President Obama the ability to negotiate a Pacific Trade deal that would be subject to an up or down vote in Congress without the ability to make any changes to the agreement.  Fast Track passed and now the Obama administration has reached an agreement for a Trans-Pacific Partnership or TPP.  What’s next?  What are the terms of the deal?  Should Congress pass the agreement?  What is the “Right Thing to do?”  Let’s look at some issues:

1. Fast Track Trade authority was critical for the negotiations of the trade deal because our trade partners would not negotiate if any agreement was subject to Congressional changes.  The bill passed the House 218-206 and 60-38 in the Senate.

2. The agreement includes 12 countries, the US and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  It does not include China.  It is estimated that the 12 countries represent 60% of the world’s GDP and 50% of global trade.

3. TPP promises large economic benefits adding about $285 billion to global GDP by 2025.  It is estimated that the US will gain $14 billion by 2025.

4. TPP will eliminate or reduce about 18,000 tariffs, taxes and non-tariff barriers like quotas.  The US already has relatively low tariffs on most products, so the agreement will do more to open foreign markets to which 44% of US goods exports now flow.

5. The US enjoys big comparable advantages in agriculture, for example, corn, soybeans and fruit and high value manufacturing like aerospace, computer equipment, auto parts, organic chemicals and more recently oil and gas.  Other domestic winners include software, insurance and finance.

6. Most tariffs will fall immediately, but other schedules stretch out over a long period.  The Japanese beef tariff will drop to 9% from 38.5% over 15 years, while the US will phase down its 2.5% tariff on Japanese cars for 25 years and the 25% levy on light trucks for 30.  Other controversies included the dairy industry which will see only a small fraction of the Canadian market open to foreign milk and cheese products.

7. The most contentious disagreement was intellectual property.  The US pushed hard for 12 years of data exclusivity for advanced biologic medicines made from living cells and organisms.  Australia and others wanted 5 years.  The US was able to maintain 12 years, but the average breakeven point for a company to recover the cost of innovation is between 12.9 and 16.2 years.  Other countries will have only 5 years of protection.

8. To ratify the pact, President Obama really needs the support of free traders.  A bi-partisan group of 4 chairs and ranking members of the Senate Finance and Ways and Means Committee wrote an open letter to the US negotiating team to take the time necessary to get the best deal possible for the US.  Hillary Clinton and Bernie Sanders have already announced their opposition to the pact.  Unions are also opposed, in particular in the auto industry.

9. The other countries must also approve the deal.

10. TPP probably won’t come to a vote until after the 2016 election.  Congress has to review the agreement to be sure that the pact complies with the 150 or so congressionally mandated “negotiating objectives” built into fast track.

Is this agreement the best the US can do?  Was speed more important than substance?  Should the US continue to pursue trade agreements?  Is the deal important politically to provide a united economic front to blunt China’s expansionism?  What is the “Right Thing to do?”  In general free trade agreements are important for the US economy because of our competitive strengths.  However, the devil is in the details.  After the Iranian deal, there are major questions as to the negotiations and concessions the US made to get this agreement.  It is important that Congress take the time to fully analyze the agreement, but why wait until after the election?  Will lame ducks vote for what is best for the US rather than best for their campaign?