The U.S., Free Trade, and TPP: A Discussion with International Law and Economics Expert Alan O. Sykes

Alan Sykes
Stanford Law Professor Alan Sykes

President Trump officially withdrew the U.S. president’s signature from the Trans-Pacific Partnership today. Could the U.S. still renegotiate TPP? Or is the door to this agreement closed?

It signals that the President no longer wishes the United States to become bound by TPP and that he does does not intend to submit the agreement to Congress.  Nothing prevents President Trump from deciding at some future point, however, that he wishes to renegotiate TPP, sign it, and submit the renegotiated agreement to Congress.  Whether our TPP partners would consider us credible negotiators and want to deal with us under these circumstances, of course, is a separate question.  The timeline would also be relevant, as existing trade promotion authority (the so-called “fast track”), which promises an up or down vote on a trade agreement by the Congress within a limited time and precludes Congressional amendments, expires July 1, 2018.  Without trade promotion authority, our trading partners know that the chance of Congressional approval of an agreement without Congressional demands for renegotiation diminish, and the United States will have even more difficulty persuading our trading partners that it is worthwhile to engage in negotiation.

Why are trade agreements good, and bad, for the U.S.? And has the U.S. been fairly consistent in advocating free trade with its neighbors and allies with negotiated agreements—perhaps since the 1934 Reciprocal Trade Agreements Act (RTAA)?

Paul Samuelson, the first American Nobel Laureate in economics, once suggested that the virtues of free trade are one of the very few things on which most every economist can agree.  Liberal trading rules allow nations to specialize in the production of tradable goods and services at which they are comparatively best, in turn allowing greater global output of goods and services for the same overall inputs.  In short, the pie gets bigger, and every nation in principle can enjoy a larger slice.

Modern trade agreements also do much more than simply lower barriers to trade at the border such as tariffs and quotas.  For example, they seek to open trade in service sectors where border measures are generally less important, to eliminate costs due to unnecessary regulatory heterogeneity, and to enhance protection for intellectual property rights (the latter is of uncertain value from a global perspective, but undeniable benefit to major producers of intellectual property such as the United States).

But even to the degree that the United States as a whole benefits from modern trade agreements, the internal distribution of gains is uneven at best.  Firms and workers in import-competing industries can suffer significant losses in the form of falling profits, wages and employment.  These losses, which are often more concentrated than some of the gains from trade agreements, beget political opposition.  This opposition tends to reach its zenith during difficult economic times when economic growth is absent or slow.  It produced the Smoot-Hawley Tariff of 1930 at the start of the Great Depression, dramatically raising U.S. tariffs, and sparking foreign retaliation.   The 1934 RTAA program was an initial response by the Roosevelt administration to the contraction of world trade that followed, and to the perception that it had contributed to the severity of the Depression.  The GATT followed after World War II, which gradually evolved into the WTO in 1994.   Along the way, smaller scale trade agreements, such as NAFTA, also began to proliferate.

Nevertheless, it would be a mistake to say that U.S. policy has favored “free trade” since 1934.  It has certainly favored trade liberalization for the most part, constrained by domestic politics to be something always quite a bit shy of free trade.  Particularly during times of a relatively weak domestic economy, such as the situation that has confronted the United States in recent years, movement toward trade liberalization can be halted or even partially reversed.

The TPP has strong detractors—but still also has strong supporters. Can you explain a few of its potential benefits and risks to the U.S. economy? 

The TPP would modestly reduce average tariffs on U.S. exports to other members relative to the tariffs that they now charge under WTO rules.  It would also modestly reduce average U.S. tariffs on imports from those countries.  A few of the tariff reductions would be substantial, but many would be small or in some cases zero because trade is already duty free. The TPP also addresses non-tariff barriers to a modest degree beyond the WTO obligations that sit in the background, adding some further market-opening disciplines in service sectors, for example, and enhancing transparency and cooperation in standard setting.  Modest increases in intellectual property protection are also included, along with some non-binding commitments on things like currency manipulation.  TPP also includes investor rights provisions, which create new investor protections to the degree that the United States does not already have an investment treaty with a particular TPP partner.  TPP also includes restrictions that go somewhat beyond the rules contained in GATT on the behavior of “state owned enterprises” engaged in international trade, a matter of particular significance in trade with current or former “non-market economies.”

The trading economy is enormously complicated and reliable predictions of the impact of such an agreement are challenging.  For what it is worth, typical studies of the impact of TPP suggest an eventual increment to U.S. GDP of a small fraction of a percent.  Non-members might well suffer a modest detriment because of the phenomenon “trade diversion,” whereby exports from non-members are diverted to members who receive trade preferences.

Rex Tillerson, the nominee for Secretary of State, has proposed renegotiating TPP.  What are the terms that you think could be renegotiated?

The TPP would largely eliminate tariffs on industrial goods after a phase-in period, and lower tariffs on agricultural goods.  It also does a number of other things as noted above.  I have no sense of what Mr. Tillerson finds objectionable or would wish to renegotiate.  The investor rights provisions have been a particular target of criticism from people on the left such as Elizabeth Warren and Public Citizen, which argue that they open up the United States to many lawsuits over legitimate domestic regulation.  That is a somewhat odd argument given that the United States is already a party to dozens of other treaties that contain similar investor rights provisions, including NAFTA.  Others have complained that the additional intellectual property protections in the TPP do not go far enough to protect U.S. firms.

How likely is it that the TPP could be renegotiated? I understand that China has come up with an alternative, one that excludes the U.S., and one that Australia has endorsed. 

Clearly, no party wants to see years of negotiating effort go down the drain, including many officials in our own government.  NAFTA was “renegotiated” at the last minute to add side agreements on labor and the environment, securing its approval by Congress.  Something similar might happen with TPP, but only if the administration wants to save it, which is entirely unclear.

China may well seek to take advantage of the situation to seek its own agreement with our TPP partners, on the premise that it may advantage itself by setting the terms to favor its own interests.  Whether that effort will succeed or not is difficult to predict.  Trade deals with China pose special challenges because of the extensive involvement of government in the Chinese economy, and Chinese commitments to let the market work as it does elsewhere are not always credible.  The United States has found this out in its own dealings with China, and our TPP partners are not ignorant of the issue.

China’s Premier Xi quoted Western thinkers like Dickens and Lincoln at Davos while advocating freer trade and globalization. Could China become the leading advocate for free trade and/or globalization? Or is that an over-blown concern?

Believers in the free market would welcome any sincere advocate for freer trade, and China certainly has a powerful interest in opening foreign markets to its exports.  The harder question is whether China can credibly reciprocate to open its own markets.  China’s trading partners are much more interested in what it does than in what it says in that regard.

Alan O. Sykes is Professor of Law and director of the Masters Program in International Economic Law, Business and Policy at Stanford Law School.