What is the Trans-Pacific Partnership?
The TPP is a trade agreement between 12 Pacific rim countries that seeks to lower tariffs, protect intellectual property, and provide a common framework for trade disputes. It potentially includes the US, Japan, Australia, Vietnam, and eight other nations, but it does not include China. Initially, the agreement was sold to US lawmakers as a way to “check the rise of China,” which seems foolish. We ought to celebrate the peaceful rise of a developing nation—if only for the market opportunities.
It’s a little disappointing that the biggest trade news in a decade involves a regional deal with limited impact. Yes, it covers 40% of the world’s economy and could lower thousands of tariffs. And yes, it could serve as a model for the TTIP—the “Trans-Atlantic Trade Investment Partnership” which would include the US and Europe. But it faces significant challenges winning approval from a divided Congress during a heated presidential campaign. Donald Trump thinks it’s a terrible deal; Bernie Sanders called it “disastrous”; Jeb Bush is in favor of it; Hilary Clinton is weighing her options.
But seems like a weak substitute to GATT, the General Agreement on Tariffs and Trade, with its Kennedy Round and Uruguay Round and the establishment of the 132-nation World Trade Organization. These multilateral trade pacts lowered duties as a share of total imports in the US from almost 20% in the 1930s to 1.4% today. In many ways, our limited trade negotiations are a victim of their own success—the low-hanging fruit has been picked. But there’s a darker side to the story. As technology advances and millions of semi-skilled jobs have gone away, it’s easy to blame foreigners for our woes. Over the decades I’ve seen the trade bogeyman shift from Japan to Mexico to China.
Source: Wall Street Journal
Still, a limited agreement is better than no agreement. By reducing the cost of imports, the TPP will make consumers better off, and they can spend that money on other products, advancing our economy. Yes, there are winners and losers in the horse-trading—there always are. On balance, though, the deal promotes innovation and opens markets that would otherwise be closed.
Ever since David Ricardo, economists have understood that specialization and freer trade make us better off. The TPP is the biggest trade deal to come along in a long time. That’s both the good and the bad news.
Douglas R. Tengdin, CFA
Chief Investment Officer