March/ April 2013 A Tale of Two Trade Deals

Never mind Asia, time to pivot to Europe.

By Clyde Prestowitz

We have done this despite no longer having to worry about the Soviet Union or the spread of world communism. We have done it despite China’s lacking any motive to interrupt its trade with us, and any desire to attack us. Meanwhile, most of the Asian countries benefiting from our security umbrella pursue industry targeting and strategic trade policies that have contributed to the chronic U.S. trade deficit and the offshoring of millions of U.S. jobs even as our Navy dutifully patrols the trade lanes. Geopolitically, the question should not be what we can do for prospering Asian countries made anxious by the growth of China. Rather, it should be what they can do to help relieve us of the economic burden of our continuing military commitment.

Then what about the economic case for the TPP? The Peterson Institute for International Economics has done an analysis showing that the TPP might result in a 0.0038 percent increase in GDP for the U.S. by 2025. In actuality the economic benefits, if any, are likely to be still less.

The agreement would virtually abolish tariffs. It also has provisions for liberalizing textile trade, and for reducing agricultural subsidies and barriers. It would ensure that state-owned enterprises compete fairly with private industry, and provide for stronger protection of intellectual property and investment rights. And it would reduce barriers to entry in a variety of service industries, including telecommunications and environmental goods and services.

No doubt, many multinational companies headquartered in the U.S. would benefit from these provisions. Companies such as Apple and General Electric, for example, would find it easier and safer to offshore R&D and production and to avoid U.S. taxes by keeping profits in Asia.

But whether it will be good for the U.S. economy as a whole is doubtful. That’s because the TPP ignores the most important drivers of global trade and investment. For example, it has no provisions for dealing with currency manipulation, even though several of the countries in the negotiation, and others that are likely to join later, routinely drive down the cost of their exports and drive up the cost of their imports by keeping their currencies artificially low.

The effects of this easily negate any benefits that might result from lowering trade barriers. For example, new Japanese Prime Minister Shinzo Abe’s first policy action to restart the Japanese economy was to devalue the yen by about 20 percent versus the dollar. That is a multiple of Japan’s average tariff level.

Nor does the TPP address the many structural issues that lock foreign producers out of Asian markets. Consider the Japanese car market, for example. Because of the strong yen and high wages, Japan has become a high-cost location for automobile production. At the same time, the United States has become a low-cost production center, thanks to the recent restructuring of its industry and the stagnation of American wages. One would expect that in view of its high costs, Japan’s imports of foreign cars would be soaring and Japan’s producers would be closing factories as U.S. and European producers have done under similar circumstances.

But none of that is happening, despite the fact that Japan imposes no tariffs on imported cars. So what else is at work? Complex Japanese rules and taxes that favor its domestic industries, plus a dealer network designed to exclude foreign-built cars. Joining with Japan in the TPP would not fix any of that. Indeed, by reducing the 2.5 percent U.S. tariff on cars built in Japan, it would help Japanese automakers to avoid having to reduce their costs.

Nor does the TPP deal with the problem of investment incentives. These are the packages of tax holidays, free land, state-financed worker training, regulatory exemptions, and capital grants that countries use to attract investment in production, R&D labs, and other facilities by global companies.

For example, Intel recently opened a new plant in China to make Pentium chips, the microprocessors that drive most of the world’s computers. Why China? Chip fabrication is highly automated, making labor costs insignificant. In the absence of distorting subsidies, the low-cost places to produce Pentiums would be Intel’s facilities in New Mexico and Arizona. But Intel CEO Paul Otellini has pointed out that the financial incentives offered by China are not available in America, and that they are worth about $100 million in annual Intel profits. These kinds of incentives are far, far more important as drivers of trade, production, and jobs than anything the TPP is talking about.

An additional problem is how the TPP would destroy the Caribbean Basin Free Trade Agreement (CAFTA) and poke big holes in the North American Free Trade Agreement (NAFTA). For example, under both agreements, textile producers in the Caribbean and Mexico who use U.S. yarn receive duty-free access to the U.S. market for textiles and apparel. The U.S. struck these deals partly in response to the discriminatory trade and industrial policies of some Asian countries that were distorting markets and causing the loss of U.S. jobs. A second objective was to help create jobs in Mexico and the Caribbean and thereby reduce the number of undocumented immigrants from these countries while also providing an alternative to employment in the drug-trafficking trade.

By removing tariffs on textile imports from Vietnam, the TPP would displace an estimated 1.2 million textile workers in the Caribbean Basin and Mexico along with about 170,000 in the United States, according to Mary O’Rourke, an industry analyst. Some see that as simply the price of achieving true free trade and optimizing the planet’s division of labor. But Vietnam is dominated by state-owned enterprises and is far from being a market economy. Furthermore, under a situation of true free trade, it would be China, not Vietnam, that would take most of the textile business, because China has gigantic excess capacity in textiles, as it does in just about everything else.

Meanwhile, it isn’t even clear that the TPP will change trading patterns within Asia to the advantage of the U.S. economy. Beijing is now pushing its own Regional Comprehensive Economic Pact, and so far all ten member countries of the Association of Southeast Asian Nations, plus Japan, Korea, Australia, New Zealand, and India, have signed up. This China club has more members—and more important members—than the American TPP club. Indeed, all the TPP members except those from the Americas are also in the China club.

None of this is to suggest that the United States couldn’t prosper from a deeper trading relationship with Asia if it were done on the right terms. Indeed, imagine if the U.S. went for the whole enchilada and proposed something like a trans-Pacific European Union? Take the advanced democratic economies of the Pacific—Canada, the U.S., Mexico, New Zealand, Australia, Japan, and Korea—and make them one integrated economy with a common antitrust regime, a common set of employment and environmental standards, one banking system, and eventually one currency—call it the Yollar or the Yelarso or the Denso. Make the union open to new entrants if and when they reform their economies enough to qualify for membership.

Clyde Prestowitz is the founder and president of the Economic Strategy Institute. He formerly served as counselor to the secretary of commerce in the Reagan administration, as vice chairman of President Bill Clinton’s Commission on Trade and Investment in the Asia-Pacific Region, and on the Advisory Board of the ExIm Bank. His most recent book is The Betrayal of American Prosperity.


  • Jim Eckland on April 10, 2013 10:31 PM:

    These two deals will only hurt America's economy and jobs. These "Partnerships" are more about "Regional Government" than trade and should be avoided !!

  • clarence swinney on April 30, 2013 5:05 PM:

    TAX CUT FOR 2%-----

    A typical Republican contribution to Wall Street Ultra Rich
    Once known as CCP (country club party) now known as WSA party (wall street of america)

    2% get 70 Billion per year from the tax cut
    2%--get 30% of our Total Income
    2%--took 75% of total income gain from 2001-2007
    2% wealth--own about 50% of total financial wealth
    2% are among the Forbes richest 400.
    2% are among Fortune highest 400 incomes
    2% pay 17% in income taxes
    2% own major corporations that pay 16% income taxes
    2% that 1980-2009 got 281% increase in Income while middle 20% got 25% or less than inflation for a net loss. 3 million investors/gamblers versus 120 million workers

    What did we get from Bush 1700B Tax Cuts from which 2.7% got four times as much as bottom 80%.
    2% that in 8 under Bush sent 2,300,000 jobs to just China.
    2% that in 8 under Bush created 31,000 net new jobs or worst since Hoover.

    Tell the people the Republicans are the PARTY OF WALL STREET with a goal of eliminating the MIDDLE CLASS. Since 1980 their policies have made America number ONE in major nations in INEQUALITY of Income-Wealth. Declining Ame