Last summer I described the then three pending free trade agreements (FTAs) with South Korea, Panama and Colombia as “clunkers” (see here). Each failed to meet the only standard which matters: Is it in the best interests of American workers and the U.S. economy? Regrettably, these three agreements won Congressional approval last October, despite the fact that the promises of job and net exports growth from all eleven previous FTAs, dating back to the first one in 1985, have proven to be empty ones indeed.
Now the U.S. is aggressively trying to advance, by the end of this summer no less, the ‘mother of all FTAs’ to date: the so-called Trans-Pacific Partnership (TPP). The TPP would be an agreement among the U.S. and the eight Pacific Rim nations of Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. Every Pacific Rim nation – including, notably, Japan, China, Russia, Indonesia, Canada and Mexico – could eventually be included.
But if advanced, I believe that TPP could very likely dwarf the negative impacts from all prior FTAs combined, including the still notorious multilateral NAFTA (which went into effect in 1994) and the multilateral CAFTA (signed in 2003).
While every promise associated with FTAs is impossible to assess, looking back at NAFTA and CAFTA as primers for TPP, these are the facts:
Neither Agreement has come close to meeting the fundamental promises made to the American people about the increase in U.S. net exports and the creation of American jobs which it would produce.
“One size never fits all” in multilateral trade agreements, especially when the differences in the states of development are extreme (NAFTA) or when the export mix among the countries is extreme (CAFTA, which includes OPEC member Nicaragua alongside largely agrarian Costa Rica, El Salvador, Guatemala and Honduras). For example, from 1993 when NAFTA was signed to five years later, the U.S. trade deficit with Canada widened from $10.8 billion to $16.7 billion; during the same period, America’s trade balance with Mexico went from a surplus of $1.7 billion to a deficit of $15.9 billion. By 2011, the U.S trade deficit with Canada and with Mexico was $35.6 billion and $65.6 billion, respectively, or, in the aggregate, an almost unbelievable $92.1 billion more than when the Agreement was signed.
FTAs were a popular mainstay of the last three Republican Presidents, and regrettably even President Clinton, urged on by the consummate free-trader Bob Rubin, embraced them as well, especially in his case, NAFTA. Now the Obama administration, against the advice of economists from the left almost universally and from the right in increasing numbers, seems similarly anxious to drink the free traders’ Kool Aid, with the deeply flawed TPP as the straw in the drink.
In a compelling Council on Foreign Relations posting (“U.S. Trade Policy: Is America AWOL?, 7-18-11), Stewart M. Patrick praised the restraint showed by major trading nations in avoiding “a descent into 1930s-style, beggar-thy-neighbor trade discrimination.” And my criticism now of TPP is not born out of a desire for protectionism. Rather, like Mr. Patrick, I believe that “the developed versus developing country dichotomy at the heart of the Doha Round [and now of TPP] obscures the surging global importance of the biggest emerging market economies (EMEs),” especially China, India and Brazil.
What the Obama administration should be doing, rather than rushing pell-mell into TPP, with its own extreme mix of economic maturity and exports, is acknowledging the near impossibility of negotiating complex multilateral trade agreements that prove fair to American workers. Instead it should be spearheading more realistic efforts that reflect the growth of the emerging market economies and demand more burden-sharing by them. To this point, China’s GDP already exceeds that of Japan and is second only to our own, just as India, now among the world’s largest economies, will soon overtake in the Pacific Basin each of Australia, Canada, Indonesia and Mexico and in the Greater Atlantic Basin the major countries of Europe.
Bilateral and thoughtfully constructed ‘smallish’ regional agreements are always preferable to massive multilateral agreements among widely disparate trading partners. In fact, the only reasonable justification for such multilateral agreements is to address security and common defense concerns, but this particular justification, no matter how well intentioned, is insufficient to warrant such a dramatic mixing of trade and economic practices as is TPP.
Some fear that the demise of multilateral agreements will erode global support for the dispute settlement mechanism of the WTO, but this concern would be better addressed by reforming and strengthening the WTO than by further capitulating to ill-conceived multilateral FTAs. The esteemed Jagdish Bhagwati of CFR and Columbia University worries that if multilateral agreements such as Doha and TPP collapse, then the world will be “overtaken by regional trade agreements and other bilateral arrangements which will be discriminatory.” I dispute his conclusion that such agreements will inevitably be “discriminatory” – they needn’t be – and if effected without discrimination, they are, Mr. Bhagwati, far preferable to inherently and structurally flawed multinational agreements.
President Obama has said that TPP would be a template for a “21st-century [trade] agreement” which would eventually be open to all the countries of the Pacific region.
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