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Rebalancing U.S. Trade Priorities

September 11, 2015
The United States is in the process of negotiating two major trade agreements, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. Together with various smaller bilateral and multilateral agreements, including the Trade in Services Agreement, the United States is entering a new era of global trade standards.

by Frederick Claessens, W’17

Of the many ongoing global trade negotiations, TPP is nearest to completion and ratification. Thus, the standards set in the agreement will serve as the benchmark for U.S. global trade throughout the 21st century, especially in the evolving global service sector. TPP will be more comprehensive in establishing standards for global trade in the service sector. The influence of TPP will extend towards future trade daels, both with Europe and China. Thus, TPP will serve as a preview of an new rulebook for global trade.

The Trans-Pacific Partnership (TPP) includes 12 economies, 38% of world GDP, and 24% of world exports. Market Access is a key negotiating point in U.S. trade negotiations, especially with regards to services. The U.S. hopes the agreement will open these 12 economies to global competition. Previous trade agreements focused on improving the global flow of goods, not services. However, high labor costs have left the U.S. with limited competitive advantages in low-tech goods trade. In services, the United States has significant advantages in technology and human capital, and generally runs a surplus against most nations. Opening up these service markets through TPP has the potential to reverse widening of U.S. deficits.

Gains and Losses for the U.S.

The U.S. accounts for 56.9% of aggregate GDP covered by TPP and about 41% of U.S. trade will be covered under TPP. The United States is expected to experience income gains from TPP ranging from 0.2% to 0.4% of GDP, assuming the removal of most trade costs, including non-tariff barriers.  These relatively low gains are partly due to the agreement’s gradual implementation period. The lowering of tariffs on goods is expected to cause a drop in U.S. manufacturing welfare of about $30-40 billion. However, this decrease is expected to be offset by a large increase in welfare gains from the service sector, with estimates ranging from about $70 to 80 billion. Relative to previous trade agreements, the focus on the service sector has the potential to alleviate the drop in manufacturing. In the past, trade agreements have focused on reducing tariffs on goods trade; that is, tangible materials or products traded across countries. The service sector includes a huge range of industries, from financial services to architects and accountants. Opening up these sectors will allow U.S. service firms to compete more easily abroad, and vice versa, by reducing regulatory barriers.

The U.S. Trade Representative has introduced many new negotiation topics into TPP debates, accelerating attempts to open the global service sector. For example, trade-in-services in TPP will be covered by a ‘negative list approach’ which covers all types of services unless specifically excluded, which is seen as more comprehensive than the ‘positive list approach.’  This means that more categories of services will fall under the agreement, and thus open up new areas for U.S. service firms to compete in. This comprehensive approach will open the widest possible range of services that U.S. firms can compete in. Another issue, Intellectual Property Rights (IPR), will likely be protected similarly to U.S. law, which will provide much stronger protections than previous agreements. Strong IPR will be extremely important for many U.S. firms, particularly the pharmaceutical industry. TPP thus has the potential to protect R&D investments of U.S. firms globally.

Current tariff levels for TPP members range from 0% to 10%, and most are expected to be removed under TPP. These tariffs are low compared to barriers in the services sector, which are often difficult to measure as they involve national standards and regulations, rather than a single goods-tariff. Non-tariff barriers like government procurement rules, food safety, and product safety standards are high in Malaysia and Vietnam, thus increasing the potential for U.S. gains by removing those barriers.

The U.S. position in ongoing negotiations will likely focus on limiting regulatory advantages for state-owned financial service firms. These firms are considerably influenced by the respective state government, and often benefit from implicit or explicit subsidies by those governments. This puts private U.S. firms at a disadvantages when they compete, as U.S. firms generally lack similar subsidies. The free flow of information is also a crucial part of the U.S. negotiating position. Government procurement: the U.S. is a member of the WTO Government Procurement Agreement (GPA), which limits government preferential procurement provisions. ‘Buy American’ provisions at a federal level would likely be fully halted under TPP.

Future Expansion of TPP

The expansion of TPP will serve as the next phase of global trade expansion. Potential new members face long delays before they can join TPP, as the agreement will likely take years for members to ratify/implement. The successful growth of TPP would allow the United States to project its trade standards globally. However, its failure would leave future trade standards increasingly in the hands of other regional bodies and countries, particularly China.

If China eventually joins TPP, the agreement will become the unquestionable source of global trade standards, largely due to the overwhelming economic authority of member countries. The U.S. has indicated that it would like to negotiate a ‘business and investment treaty’ China to reduce FDI (Foreign Direct Investment) restrictions for U.S. firms, which would be a first-step in more comprehensive agreements. The addition of China to TPP in the agreement’s current form would be difficult, as the U.S. positioned TPP to discipline state-owned enterprises, which the Chinese government has still largely avoided reforming. Until recently, less comprehensive goods-based FTAs (Free Trade Agreements) were generally preferred by China, as they recognized their competitive advantages in goods trade. The comprehensiveness of regional agreements and bilateral agreements currently under negotiation by China will serve as signals of its intent to join TPP. Chinese participation in the WTO’s Trade in Services Agreement (TISA) and Information Technology Agreement (ITA) may also set them up to converge to TPP standards. The China question will remain the linchpin in the successful globalization of TPP standards.

Role of TPP as Benchmark for WTO/Future FTAs

TPP will be more comprehensive in trade liberalization and standards than most previous agreements. The major legacy of TPP for future FTAs will be those standards established in new and emerging fields, especially: global value chains, digital policy, and intellectual property rights. It is unlikely that these TPP standards will transfer to the WTO until the EU and China converge with the standards set under TPP. Thus, TPP will serve as the first stepping-stone in a long process of reform for the global trade’s rulebook.

Sources:

Petri, Peter. “Understanding the Estimated Gains from Trade Pacts.” Trade and Investment Policy Watch. The Peterson Institute for International Economics, 17 June 2015. Web. 27 July 2015.

Schott, Jeffrey. “Asia-Pacific Economic Integration: Projecting the Path Forward.” The Peterson Institute for International Economics, 2012.

Fergusson, Ian, Mark McMinimy, and Brock Williams. “The Trans-Pacific Partnership (TPP) Negotiations and Issues for Congress.” January 30, 2015. Accessed July 28, 2015. 

 

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