Statement of Issue:
With President Trump upending the Trans-Pacific Partnership, what can be done to move the United States policy on trade towards an open market scenario?
Executive Summary:
The United States economy has made some positive strides with the Trump Administration. However, President Trump’s decision to upend the Trans-Pacific Partnership has caused a setback in the desire for the country to become a global trader. The drive for open markets has created a need within the United States government to adopt policy that will allow for trade to expand over to international waters, thus allowing the United States to grow in terms of becoming the main contender in the global economy.
Without the introduction of policy that can promote open trade, the United States may face increasing competition from other foreign powers like China. It is up to the United States government to choose to continue the progress towards an open market and trade system. Doing so may see great improvements in United States manufacturing and promote the country for foreign investment and trade.
Background:
Home to one of the strongest and richest economies, The United States has taken aim at constructing a truly international trading system that must begin with support for an open market. For the United States to adopt an approach towards global integration there must be changes in how the government sees trading and adoption of an open markets policy. For example, free trade, an open market, allows consumers the best changes and most choices for improving their standard of living.
After World War II, the United States saw a dramatic increase in foreign trade as well as the formation of an international trading framework based on an open economy principle. The United States at the forefront of such changes, needs to take the same position again and open up trade with the world economy. In the past, global trade talks stalled leading to a turn to bilateral and regional free trade agreements.
For instance, Former President Barack Obama won passage of the free trade agreements with three countries: South Korea, Colombia, and Panama, before leaving office. He also negotiated Asia-centered Trans-Pacific Partnership furthering the goal of an open market and open trade. However, the Trans-Pacific Partnership (TPP) was something President Donald J. Trump did not want continued and, so it was upended. The decision to upend the TPP has led to a desire to advocate for a more open market to provide a boost in U.S. manufacturing and make it easier for American businesses to compete in global markets.
But what is the current U.S. trade policy?
After World War II, the institutions of international trade policy evolved, led mainly by Europe and the United States. Twenty-three countries signed the General Agreements on tariffs and Trade (GATT) in October of 1947 and within thirty-nine years it expanded to include one hundred and twenty-three nations. Every country within the agreement remained committed to the principles of open economies, freer trade and lower tariffs.
During those years global tariffs fell from 30 percent to under 5 percent. However, in 1986, President Ronald Reagan helped launch the creation of the World Trade Organization (WTO), via the Uruguay Round of negotiations, that would be finalized under President Bill Clinton in 1994 and aimed to address the GATT system’s perceived limitations like intellectual property, cross-border investment, agriculture, and trade in services. Although development continued even as far into 2001 with the last round of negotiations, there was still problems regarding agriculture policy. Meaning, India and China sought retaining flexibility in imposing safeguard duties of import tariffs, while also pushing for less farm subsidies both in Europe and the United States.
Government Interest in the Issue:
With a stalled WTO process, the shift for U.S. policymakers have been to focus on finishing smaller bilateral and regional investment and trade deals. Through the North American Free Trade Agreement enacted in 1994, Canada and Mexico were able to trade freely with the United States. However, with Trump ordering the withdrawal of the TPP deal in January 2017, instead, pushing for an emphasis on bilateral deals, the United States may be largely setback in creating the coveted open market, and globalist trade agreement Trump’s predecessors wanted and worked towards. This then presents the main issue, the withdrawal from the Trans-Pacific Partnership (TPP).
The TPP is the often called a ‘megaregional’ deal because it spans several continents. What began in 2002 and a few Pacific Rim countries culminated in Former President Barack Obamas push towards a trade agreement with Asia-centered negotiations. By 2015, TPP included twelve nations, one of which was Japan. China was not part of the list of participating countries.
TPP countries make up 44 percent of the exports from the United States with a whopping 85 percent total United States agriculture exports. While tariffs for trade were already low, the TPP deal aimed to set up reform to include streamlining regulations and customs, promotions of transparent and competitive business laws, liberalization of protected sectors, reinforcing intellectual property safeguards, and enforcement of environmental and labor standards. The objective was to generate a complete integrated financial region as well as establish ongoing rules for the increasing rise of global investment.
President Trump aimed to remove the United States from TPP as well as renegotiate the terms of NAFTA. In a recent round of NAFTA renegotiations on October 17, 2017, everything ended in a stalemate with Mexico and Canada, the partners in the NAFTA agreement. The Trump Administrations list of demands may hinder any progress and could stall renegotiations through March 2018. These changes in agreements may signal a dramatic shift away from the open markets and trade scenario and put the United States back in relation to becoming the biggest trader in the world. Trump’s January 2017 executive order to renegotiate NAFTA has generated rounds of renegotiations that have led to a waste of resources and time that can affect the American economy in Canada, Mexico, and the United States.
Government’s Previous Policy Decisions/Actions:
Changes that sparked a renegotiation of NAFTA and an upending of TPP started through the Trump Administration. For example, for NAFTA, the Trump Administration wants to lower Mexico and the United States trade deficit. The stats point to American buying climbing to $55.6 billion more for imports from Mexican buying. Canada has a smaller trade deficit with the United States because Canada imports close to as much as the United States. To close the trade deficit with Mexico, the United States under the Trump Administration, wants elimination of unfair subsidies and stronger protection for U.S. intellectual and trade properties. The additional demand of turning Mexico’s state-owned companies like Pemex into private corporations is to keep competition reduced for Mexican products into the United States.
Canada is not excluded from renegotiations. The Commerce Department threatened imposing a 20 percent tariff for Canadian lumber imports citing that low-cos lumber from Canada’s subsidies saturates the American market and keeps American lumber at low prices. U.S. Commerce Secretary Wilbur Ross wants to make 62 percent of a car’s parts be sold in North America, allowing parts to come tax-free from Asia.
Regarding subsidies in the TPP agreement, some previous decisions during the Obama Administration allowed for a loss of some tariff protection for poultry, dairy, and beef producers. Because EU and U.S. companies received farming subsidies, it prevented the success of the Doha round of trade talks. This was a major win for negotiators in the countries within the TPP agreement. These policy decisions aimed to promote negotiations pertinent to labor unions and formation of adherence of international standard. However, when the upending of the TPP was confirmed through the Trump Administration, it allowed much of the progress made in the TPP agreement to be setback.
Policy options/Pros and Cons:
The push for upending the TPP has removed the United States government’s leverage against China. A big pro of the TPP is that China’s manufacturing competitors would increase their governance standards and it may lead to China increasing adherence to international standards in the long-term. Additionally, having more countries that manufacture other than China would allow the United States businesses to expand their reach in the global market by relying on other countries other than China for production of goods. If the United States is not leading the way towards East Asian integration, China might take its place and do so, leaving United States with potential problems in the future regarding trade agreements.
The TPP also allows for a boost in exports that related to economic growth. Job creation would increase in all the twelve countries involved. The plan was to increase exports by $305 billion each year through 2025. United States exports alone would increase to an estimated $123.5 billion. Industries that benefit from the TPP are machinery, agriculture, plastics, and auto. The TPP also helps remove 18,000 tariffs typically places on U.S. exports. U.S. workers would also net a $77 billion dollar increase from the agreement. The last important pro is that through the TPP there would be a decrease in wildlife trafficking, helping marine species, elephants, and rhinoceroses the most. Countries that do not comply would face harsh trade penalties, helping to prevent environmental abuses like unsustainable fishing and logging.
There are problems regarding the state in which the United States economy will be if the TPP is enforced. For example, the Trump Administration built a campaign platform on creation of American jobs. If the manufacturing jobs go to other countries, then it will keep American business interest away from the United States and in countries like Malaysia. Another con is the instability of the TPP regarding income equality. Free trade agreements some suggest leader to greater income inequality in countries with high wages. The gains seen from the TPP would go to those earning more than $88,000 annually. Additionally, promotion of cheaper goods via production in low-wage countries does not promote United States manufacturing and could further derail it. Additionally, the TPP’s agreement regarding patents will decrease cheap generic availability, raising the price of numerous drugs. The last potential con is TPP could supersede financial regulations.
Some of the ways such obstacles were circumvented in previous negotiations was through introduction of labor unions in the TPP agreement so countries like Vietnam, Malaysia, and Singapore would comply with international trade standards to protect the environment and their workers. The United States also agreed to short patents, meaning Pharmaceutical companies can keep their patents for drugs secret for 5-7 years rather than 12 years. If the Trump Administration wants to keep TPP and NAFTA, it will have to renegotiate towards allowing more job creation for lower-earning Americans and promote additional incentives for the twelve countries involved in TPP and Canada and Mexico for NAFTA.
Policy Recommendations:
Because the pursuit of an open market rests on NAFTA and TPP and currently the NAFTA renegotiations are taking place, there are certain key points that should be addressed regarding policy recommendations. The first is the time in which NAFTA was enacted (1994). Back then Netflix and Google did not exist and neither did the smart phone. Intellectual property and online business transactions have come at the forefront of trade. Second, NAFTA’s major flaw was the inclusion of labor and environmental regulations that create non-trade issues, keeping actual trade problems in the backburner.
Recommendations would lean towards a shift away from labor and environmental regulations and a focus on trade issues such as subsidies. The last major point is United States trade agreements must be designed to augment economic freedom and move away from government control. The aim is to promote economic stability for the entire continent to serve as a potential model for a global trade agreement where all countries can participate and promote a truly open market and open trade. For this to happen, government control must be lessened in favor of economic gains.
The TPP agreement should be revisited and allow for the right level of trade openness to keep satisfied the United States and the other eleven countries involved. To do that, the recommendation is for substantial openness to reflect the basic economic forces that generate gains from trade. The agreement should renegotiate to include clear rules that can be enforced via transparent dispute settlement processes. One such simplification if removal of some farming subsidies for Europe and the United States to promote interest in collaboration with the other countries part of the TPP and potentially China. South Korea wants to join the TPP and if the TPP is allowed, China may become incentivized to join, creating a truly open market and trade for the world. The need for non-tariff services and barriers will ultimately increase the need to promote talks about the TPP.
It is estimated that the TPP would generate hundreds of billions of dollars of additional GDP per year for the 12-member countries, and many additional jobs. While all nations would, on balance, benefit, the smaller and developing economies will probably gain the most, relative to their size. These are significant benefits, but because tariffs in the TPP member countries are already low, with exceptions for some specific products, they are modest compared to the gains from some earlier trade liberalizations when tariffs were higher and reduced more (Parker, 2015).
Talking Points:
· The Trans-Pacific Partnership is a free-trade agreement between the United States and 11 other countries bordering the Pacific Ocean. The Trump Administration through President Trump’s executive order, withdrew the United States from the agreement on January 23, 2017.
· Canada has lumber subsidies that make lumber prices low in the United States, something the Trump Administration wants to renegotiate.
· The TPP agreement is meant to balance China and India’s trade dominance in East Asia. The TPP would allow the United States to arbitrate trade disputes in the oil-rich South China Sea.
List of References:
Amadeo, K. (2014, June 14). Trans-Pacific Partnership: Pros, Cons, Obstacles. Retrieved from https://www.thebalance.com/what-is-the-trans-pacific-partnership-3305581
McBride, J. (2017, January 31). The Trans-Pacific Partnership and U.S. Trade Policy | Council on Foreign Relations. Retrieved from https://www.cfr.org/backgrounder/trans-pacific-partnership-and-us-trade-policy
Parker, C. B. (2015, November 11). Trans-Pacific Partnership may produce import competition, Stanford scholar says. Retrieved from https://news.stanford.edu/2015/11/11/tpp-boskin-trade-111115/
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