Seeing Is Believing

We don’t know yet what’s in the TPP. But knowing some things that aren’t in it—currency manipulation rules, notably—should make us nervous. A response to Michael Froman.

By Jared Bernstein

Tagged trade

Michael Froman provides what has to be the most robust, full-throated progressive defense of the Trans-Pacific Partnership (TPP) that’s ever been written about it or any other trade agreement. Froman, who is the United States trade representative (USTR) and thus our chief negotiator for the TPP, goes far beyond simply trying to comfort the nerves of those on the left who are deeply worried about the deal’s impact. From the outset, his argument pits the dour, protectionist conservatism of Herbert Hoover against the progressive vision and values of FDR. He’s not saying, “Don’t worry, Democrats, this won’t hurt your constituencies (and thus your electoral future).” He’s saying that if you want to promote progressive values on labor, the environment, health care, inequality, and more, then boy, has he got the trade deal for you! The TPP will even, Froman claims, block some of your junk emails. It will protect an endangered creature I’d never even heard of: “the pangolin, a scaly, ant-eating mammal.” (For the record, this proves that even in Froman’s world, trade creates winners and losers, with the ants in the latter class.)

I do not expect the TPP to be the disaster that some fear, and Froman’s case for the trade deal certainly supports that view. But for all the references he makes to FDR, the TPP is not the New Deal. I doubt it will have anything like the far-reaching positive effects that he advertises. No trade agreement has ever done so. Look around—we’ve had lots of trade deals and we still have lots of inequality, wage stagnation, large, persistent trade deficits, and vast power imbalances.

The TPP is also being negotiated in secret, so in evaluating all of its alleged progressive attributes, we must depend on Froman’s insider knowledge. While transparency should generally characterize policy-making in advanced democracies, there’s logic to the secrecy—it’s hard enough to get a dozen countries to agree on anything without the constant pressure that public negotiations would likely engender on even minor details. But there’s an unfortunate information asymmetry here, as well as a fundamental tension in Froman’s piece: We’ve got the lead negotiator from the major economy in the deal telling readers what’s in it. If he can do that, why can’t we see it then?

Full disclosure: I’ve worked with Froman over the years, and I know him to be an honest, knowledgeable person who understands the importance of progressive values. But one of my main reactions to his paean to the TPP is “trust but verify.”

In that regard, we could have used a more balanced presentation. Froman makes many important points about the progressive aspects of the deal, particularly regarding labor and environmental rights. But he’s clearly in salesman mode and oversells the deal, in part by leaving out or giving too short shrift to anything problematic, including issues around dispute settlement, drug prices, currency questions, and enforcement—the last matter being a huge potential constraint, on which the U.S. track record is far from strong. His discussion of the economics of trade is also too one-sided, as I’ll address below.

It’s worth remembering that these trade deals are no more or less than the rules of the road between trading partners, and it’s much more efficient to trade with rules that all sides agree on. Who gets to write the rules, however, is a matter of critical importance. Froman mistakenly sets this question up as: Who would you rather have writing the rules, us or the Chinese? The correct question for progressives, and not just here but in all the signatory countries, is: Who’s at the negotiating table? And to the extent that it’s representatives of low- and moderate-income people, is their input being heeded? What little evidence we have regarding this question is not comforting.

So while it’s good to learn about much of what’s in Froman’s piece, what we have is more of a stump speech than a fair assessment of costs and benefits. Based on what he wrote, what little we in the public know about the contents of the deal, and, importantly, what we do know about what’s not in there, I’ll try my hand at such an assessment.

The minute a trade deal enters the Washington debate, supporters and opponents go into a predictable crouch, with the advocates claiming an explosion of great jobs in the “tradable sectors” (i.e., exporting industries) and the opponents predicting job and wage losses for those hurt by more globalization.

While both sides make claims beyond the data, the opposition has a stronger factual case in that a) it is widely recognized by economists across the board that globalization is a factor in rising inequality, wage stagnation, and the loss of production jobs, and b) most economists do not believe trade agreements create much in the way of new jobs (some believe they lead to better jobs, not more jobs). The President himself has consistently cited globalization as a source of higher inequality and stagnant mobility.

The strong case for the pro-trade forces is less on jobs and wages, especially given our large trade deficits (a point I’ll return to below), and more on prices. The data, some of which Froman cites, are very clear on the consumer benefits of the increased supply of goods. But in both trade theory and practice, “everyday low prices” translate into low wages for those in import-competing sectors.

That said, what gets immediately lost in the hurly-burly of these debates is the distinction between trade and trade agreements. They are not the same. The latter are “rules of the road”: a set of technical, legal handshakes by which trading partners will operate.

For example, here’s a typical sentence from the (Wiki-)leaked version of the TPP chapter on intellectual property (IP) rights: “With regards to the protection and defence of intellectual property referred to in this chapter, any advantage, favour, privilege or immunity granted by a Party to the nationals of any other country will be accorded immediately and unconditionally to the nationals of the other Parties.” I’m not a trade lawyer—I don’t even play one on TV—but that sentence seems to allow the protection and even expansion of patents and IP that shows up in many trade agreements. Such legal constructs not only run counter to idealizations of “free trade,” but they can also be costly to consumers, who often lack a seat at the TPP table, and can be profitable to multinational businesses, some of which are comfortably ensconced there. Indeed, according to The Washington Post, 85 percent of the members of the outside committees advising the Administration on the TPP were from private businesses and trade associations. Whether the rules of the road favor the Lamborghinis or the Fords depends on who’s writing them—and on that point, it’s not the “good U.S. guys” versus the “bad Chinese guys”; instead, it is representatives of TPP-member multinational corporations versus workers and consumers.

Consider, for example, the potential for the TPP’s expansion of patent rules on medicines to lead to higher drug prices (by blocking the path to generics) both here and, most notably from a progressive perspective, in developing nations that are signatories to the deal. Froman cryptically references this possibility: “Our approach is focused on striking a balance between incentivizing the development of new lifesaving medicines and ensuring access to affordable medicines, particularly in developing countries.” As far as I can tell, the first part of that sentence—“incentivizing the development”—invokes the United States’s ongoing insistence that the patents on data on new drugs last for 12 years. The second part—“ensuring access”—reflects the stiff opposition to such extended patents from developing countries legitimately worried about the prohibitive prices of medicines under such patents.

Progressives are understandably concerned. Economist Dean Baker concludes, “While [TPP] provisions are likely to lead to higher drug prices in the United States, they will have their greatest impact in the developing world.” Rohit Malpani, director of policy for Doctors Without Borders, has voiced a related critique: “There’s very little distance between what Pharma wants and what the U.S. is demanding.” That may be changing; I suspect that Froman personally is more sympathetic to costs in developing countries than he is to the Pharma lobby. But we do not know, and we should not assume, that the USTR has more clout than Big Pharma in a deal that is likely to require Republican support.

Froman then asserts that “nothing in TPP will undermine or weaken” Medicare or Medicaid. But Paul Van de Water, a colleague of mine at the Center on Budget and Policy Priorities, worries that patent protections could “restrict Medicare’s ability to limit the prices it pays for drugs” (note that this is the first time CBPP has weighed in on a trade debate). It is critical in this regard that the TPP include explicit language allowing government health programs to use their bargaining clout to hold down drug costs without facing challenges in international dispute forums. Perhaps Froman is signaling us that such language is now in the deal. We do not know. Again, we must trust…but verify.

The larger point is that the rules of the road cannot be assumed to be benign or evil. In fact, they significantly influence the benefits and costs to the stakeholders of the agreement, the most important of which, from progressives’ perspective, are the least powerful among the workforces and consumers in the signatory countries. As Froman stresses, trade agreements are potentially useful tools to shape outcomes in ways that can boost efficiency and fairness…or not. And it’s notable in this pharmaceutical case that, according to the Post article cited above, every member of the “chemicals and pharmaceuticals” advisory committee was from either private industry or a trade association.

At the end of the day, you can’t evaluate a trade deal without looking closely at the rules and who’s helping to write them. Thankfully, the completed deal has to be made public for 60 days before it can be sent to Congress for ratification. It will be essential for progressives to scrutinize it carefully at that time (and we’ll need help from trade lawyers—this stuff is not an easy read).

This is the debate we should be having, but it has thus far been precluded by the fact that the majority of those with access to the agreement, like Froman, are solidly in advertising mode.

While Froman’s arguments regarding economic benefits to working Americans have an obvious thumb on the scale, he’s on his most solid progressive ground in his discussions of the labor and environmental standards allegedly in the deal. If the TPP stimulates positive movement in signatory countries on minimum wages, collective bargaining rights, freedom from employment discrimination, and protections of forests and wildlife, those will be important, notable, and even historic progressive gains.

But again, these claims will need to be verified. Froman writes that under the TPP’s labor rights provisions, Vietnam will “need to allow workers to form and join independent labor unions,” in contrast to the current state-run puppet union known to suppress workers’ rights and working conditions. However, Representative Sandy Levin, a Michigan Democrat and stalwart advocate for improved standards in trade agreements, questions the USTR on this point:

[T]he plan will fall far short of bringing Vietnam into compliance with basic [International Labor Organization] standards…. For example, the plan will not explicitly provide that Vietnam must allow industry-wide unions to form—because Vietnam refuses to acknowledge that fundamental right. Our negotiators also refused to accept our suggestion that an independent panel be established from the beginning to ensure compliance with the labor obligations and expedite a dispute.

It will also take more than verification to reap the potential benefits of elevated standards. It will take enforcement, and our record on prior trade deals is not great (even when factoring in the Obama-era enforcement efforts Froman cites). Opponents of the TPP, including Senator Elizabeth Warren and the United Steelworkers, have published critical assessments, citing, for example, the nonpartisan Government Accountability Office’s conclusion that “monitoring and enforcement [of labor provisions in prior trade agreements] remain limited.” Warren’s report includes detailed examples of human and labor rights violations in countries with which we have trade deals.

Enforcement is also dependent on other countries. In a recent news story supportive of Froman’s general thrust, The New York Times reported that in one section of the (leaked) intellectual property chapter, “the United States and Japan want language saying a lack of enforcement resources is no excuse for failure to ensure compliance. That position is opposed by New Zealand, Vietnam, Mexico, Peru, Australia, Malaysia and Brunei.” Before we can even begin to approach Froman’s confidence about enforcement, we need at the very least to see how this disagreement gets resolved.

Moreover, enforcement invokes another TPP issue of concern to progressives, one not discussed by Froman: Investor-State Dispute Settlement (ISDS) provisions. This is the process by which investors can circumvent a country’s court system and challenge its laws in front of an international panel of arbitrators. There is a rationale for such a mechanism: Investors might hesitate to invest in countries with legal systems they do not trust. TPP advocates correctly point out that we in the United States have never lost such a case and that some of the TPP countries have much less mature legal systems than our own.

But in part for that reason, progressives may worry less about the impact of ISDS here than in developing countries, as multinationals from advanced economies might prey on environmental and labor standards in countries with weaker defenses. Under NAFTA, for instance, a U.S. company called Metalclad sued the Mexican government and won more than $15 million when, because of public health concerns, it was denied a permit to operate a hazardous waste facility. And an ISDS case can have a chilling effect regardless of the outcome of the lawsuit. When Philip Morris used the ISDS provisions in an Australia-Hong Kong trade agreement to sue Australia for banning logos on its cigarette packaging (a case that remains open), the New Zealand government abandoned efforts to introduce a similar regulation. A recent WTO decision (in response to a case brought by the United States) undermining India’s solar energy program doesn’t inspire confidence about third-party legal involvement under the TPP.

While mostly ignoring legitimate concerns about enforcement and ISDS, Froman also engages in one of the most common selling tactics for trade agreements, one that many progressives (and many Americans of all political stripes) instinctively distrust: claiming they will raise the job and earnings opportunities of American workers.

Here he is on weak ground and some of his numbers are not defensible. His case for the TPP raising global GDP by about $300 billion by 2025 is bogus on various levels. First, he employs the timeworn trick of citing an impressive-sounding number (“billions”!) without scaling the number to global GDP, as economists agree is appropriate. Such scaling results in 0.3 percent of GDP (see Table 1 here). Moreover, this guesstimate rests on simulations by economists who haven’t read and don’t know what’s in the final deal. That’s partly because there is no final deal yet and negotiators are actively debating issues, like the patent ones noted above, that will have significant economic consequences, ones that could not possibly be in these models. Yet somehow these economists came up with a cumulative 0.3 percent gain to GDP 15 years down the road (their base year is 2010), an estimate that I strongly suspect is statistically indistinguishable from no change at all.

Froman also cites an International Trade Commission (ITC) estimate of how much “removing foreign barriers to digital trade” might bolster the economy, without mentioning that it comes from a survey of firms that were “asked to estimate, if possible, the impact on sales and employment in the United States and abroad if all obstacles to doing business across borders and over the Internet were removed.” Their squishy answer to this extremely fanciful question somehow gets mapped onto the extent to which removing such barriers will create, according to the ITC, either zero or a bunch of jobs; Froman references only the high-end number and also neglects to explain the connection between the ITC’s questionable calculation and anything specifically in the TPP.

He’s on more solid ground when he touts a) the impact of trade on lower consumer prices, and b) the wage premium of jobs associated with exports, particularly as regards manufacturing, IT, and high-end services (like financial services). Regarding price effects, however, we should (as I noted above) avoid conflating trade and globalization with trade agreements. The consumer benefits of trade are significant and positive, but they tell us little about the TPP (despite the tariff and non-tariff trade barriers that Froman cites, trade barriers between the United States and TPP countries overall are relatively low). Consider, by way of example, that we do not and will not in the foreseeable future have a trade agreement with China. And yet China has long been our largest source of low-cost consumer imports.

Froman’s point regarding the quality premium of jobs in the export sector is a good one, but it raises one more critical issue that he conspicuously ignores. As I’ve stressed, while we don’t yet know enough about what’s in the TPP, we do know what’s not in there: a currency chapter.

Nothing on currency?! I found it not just disappointing but striking that a search for “currency” in Froman’s piece turned up nothing. Compared to many other progressives, I’m sympathetic to TPP’s supporters’ argument that it would be difficult to include a TPP chapter on currency-management issues at this juncture. But by the Administration’s own admission, currency management has historically been an important problem in international trade, and I can guarantee you that it’s an issue progressives care about, one you can’t ignore if you’re trying to make the case to us.

At the heart of the currency debate is the U.S. trade deficit, which has been a negative factor slowing our growth and jobs for decades. One driving force behind our persistent trade deficits is currency misalignment, which occurs when trading partners suppress the value of their currency relative to the dollar, making our exports to them more expensive and their imports to us cheaper.

Though China’s currency, like its markets, is in the midst of some volatility (and devaluation), it has not been significantly misaligned in recent years. Yet China and other Asian exporters, including Japan, Singapore, Vietnam, and Malaysia—these latter four all TPP signatories—have at times employed this tactic. Thus, as long as we’re writing rules of the road, progressives argue that the deal should include a chapter with enforceable penalties against currency manipulation. And it’s not just progressives: Republican Senator Rob Portman, who used to hold Froman’s current post, took a strong stand on the need for currency rules in the deal. Where Froman sees bipartisan support, others will see bipartisan opposition.

Froman and the Administration have firmly said no. Part of their opposition is understandable; I’ve never been involved in such negotiations, but when the USTR argues that insisting on a currency chapter would scuttle the deal, I believe him. That said, if I were negotiating the deal and my counterparts uniformly opposed a particular rule of the road, I’d at least entertain the suspicion that they may intend at some point to engage in behavior that the rule was designed to prevent.

The pro-TPP forces also argue that we can’t write currency rules without putting our own Federal Reserve in the crosshairs, since the Fed’s monetary policy has exchange rate implications (when it lowers rates, for example, the value of the dollar falls against other currencies). But this argument makes no sense. As I and others (like economist Simon Johnson) have argued, countries manipulate currencies not by tweaking internal interest rates but by intervening in currency markets, generally by purchasing dollar reserves (to push up the value of the dollar). We neither do, nor would do, that. If we want more dollars, we’ll print them.

The progressive case for the TPP cannot ignore this issue. The President himself has acknowledged the past damage done to our exporters and import-competitors by currency manipulation. If the USTR can’t put currency rules in the TPP, it needs to offer rules outside of the agreement. In fact, since China isn’t part of the TPP, there are advantages to going the latter route.

It’s fine to tout exports, as Froman does, and he makes a good case for their importance on both macro and micro (benefits to workers and firms) levels. But this citation of exports without any mention of net exports—exports minus imports—is a very old trick by trade negotiators. Thanks to the work of shops like the Economic Policy Institute, progressives will not fall for it. Economist Josh Bivens, for example, nets out the impact of both imports and exports and finds that trade with less developed countries has cost the average non-college-educated worker almost $1,800 per year.

The fact that the global dynamics Bivens measures have hurt the living standards of many American workers is by no means the sole concern of progressives in this space. We recognize that open markets have the potential to lift the pay of workers in developing countries and, as stressed above, we stand ready to support rules of the road that could help them do so. In fact, our concerns about patent protections, labor standards, and enforcement are particularly germane for less advantaged populations in developing countries in the deal: Get these wrong—extend costly drug and IP patents, fail to enforce worker and environmental rights—and key benefits Froman touts will fail to materialize. And yet, we are constrained by our inability to fully evaluate the TPP, and the argument that it must be negotiated in secret is belied by Froman’s 5,500-word essay defending it in granular detail. The fact that his defense omits a discussion of the issues of dispute settlement and currency, and that he is unable to assure us that Big Pharma will not prevail on drug patents, raises further doubts about the balance of his argument.

Many of us understand and support the need for rules of the road. In fact, we’d like a frank and open discussion about them. We’re still waiting.

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Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and was formerly chief economist to Vice President Joe Biden.

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