The Debate Over the TPP

May 5, 2015

From last week:

And now:

So I guess I should write something else in addition to this.

Here it is: A rant on the TPP debate revoked by a Twitter exchange.

As one of the people who did the NAFTA economic impact estimates for the Clinton Administration. I definitely have some explaining to do.

Our models showed NAFTA as:

  • a small plus for the American manufacturing sector, including manufacturing workers;
  • a larger but still small plus for American consumers;
  • a substantial plus for Mexico; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

In reality, it turned out to be:

  • a substantial short-run minus for Mexico (the 1994–95 financial crisis;
  • a long-run plus for Mexico that I still hope Will be larger than the short-run minus (guaranteed tariff- and quota-free access to the US market is worth a good deal);
  • a bigger plus then I expected for Wall Street;
  • a plus for American consumers;
  • a small minus for American manufacturing; and
  • a minus for other developing countries that were potential competitors with Mexico for the American market.

It turned out that the most important aspect of NAFTA was not the increase in balanced trade from lower trade barriers, and was not the increase in factory construction in Mexico because of increased confidence in Mexico’s government and in US willingness to except Mexican exports and in US manufactured equipment exports to enable that construction.

It turned out that the most important aspect of NAFTA was the Mexican financial liberalization that allowed Mexico’s rich to cheaply purchased political risk insurance from Wall Street by getting their money into New York.

That experience–my personal analytical nadir as an economist, I might add–convinced me that analyzing modern trade agreements as if they were primarily Ricardian deals is likely to lead one substantially astray. One has to think, and think deeply, creatively, and subtly, about all the potential general equilibrium effects. One has to work hard to bound their magnitude.

Thus arguments saying that a Ricardian analysis tells us that the Trans-Pacific Partnership is a good thing tend to undermine my confidence in it. Those making such arguments seem to me either to have not done their homework, or to not particularly care whether the arguments they set forth for it are actually the true arguments for it.

I am ready to believe that dispute settlement is not a threat to American governance. I am ready to believe that regulatory harmonization will be at the top rather than a race to the bottom. I am ready to believe that increase in intellectual-property protection will actually be the benefit of the world–and if not of the world for the United States. I am perhaps willing to believe that America’s obligation to be a benevolent hegemon should not control.

But each time the Ricardian argument is made a chance to make the real arguments is lost. And my confidence that the real arguments are strong ones becomes weaker…

Thus much more effective than yet-another-Ricardian-argument is something like this from Gary Hufbauer:

Gary Hufbauer: Senator Warren Distorts the Record on Investor-State Dispute Settlements: “ISDS provisions enable a foreign investor to seek compensation in an amount determined by an impartial panel of arbitrators…

…if a host government expropriates its property, or regulates its business in an arbitrary or discriminatory manner. Such protections have been deemed necessary in agreements going back at least to a Germany-Pakistan accord in 1959…. Starting with the North American Free Trade Agreement (NAFTA) in 1994, the United States has also included ISDS in the investment chapters in nearly all its free trade agreements (FTAs), now numbering 20. Given this rich history, Senator Warren should be able to cite actual examples of the multiple abuses that she claims have occurred. She has not done so, because she cannot. Senator Warren makes a big deal about the hypothetical outcome of the old Methanex case against California’s regulations on gasoline additives, but the case was decided against the Canadian corporation….

Over the decades, only 13 ISDS cases have been brought to judgment against the United States.  The United States has not lost a single case. Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything. To be blunt, Senator Warren has no facts…. Her op-ed… resorted to hypothetical scenarios that had no basis in 50 years of ISDS history….

Senator Warren… warns that plaintiffs may succeed in suing such countries as Egypt, Germany, and the Czech Republic to overturn their laws. But these are hypothetical scenarios. The cases have not been decided and the countries in question may well prevail. Her descriptions of these lawsuits overlook something that Senator Warren should know as a former law professor: Lawyers often bring cases seeking huge damages precisely when the facts are against their claims. Just look at the 13 ISDS cases brought against the United States and dismissed, or the 175 cases dismissed worldwide. Sounding like a Tea Party politician railing against the United Nations, Senator Warren contends that international courts might replace the US legal system. Again she has the story backwards. The United States has been the chief architect of ISDS and other forms of international dispute settlement precisely because the United States has been able to export its legal principles to other countries….

Since NAFTA was ratified two decades ago, ISDS provisions have been amended to ward off frivolous claims involving environmental, health, and safety regulation of corporate practices. We do not yet know the precise terms of the ISDS provisions in TPP. A good guess is that they will follow the template found in the Korea-US FTA. That template might be further improved by requiring briefs to be published at a suitable time and establishing an appeals mechanism. But just because the existing ISDS template falls short of perfection is no reason to jettison the concept. It is even less of a reason to reject the entire TPP, though that seems to be Senator Warren’s objective.

But I can find nothing analogous and useful on the intellectual-property side…

Greg Ip:

Greg Ip: Obama’s Uphill Push for Free Trade – WSJ: “As American consumers gorged on a flood of cheap Chinese imports…

…American workers took a beating. A study by Gordon Hanson of the University of California at San Diego and four others think the surge cost the U.S. 2 million to 2.4 million manufacturing jobs between 1999 and 2011…. It wasn’t just the WTO at work; because China kept its currency artificially low, it limited the growth of U.S. exports to China, and the American trade deficit ballooned. “It’s entirely understandable that people have a hangover from the recent trade experience of the last two decades,” Mr. Hanson says. “But TPP isn’t about manufacturing. Globalization in that sector is a fait accompli.” The future of trade liberalization, he says, is in agriculture and services where the U.S. advantage is strongest….

Negotiators say it will lay down rules for the rest of the world in sectors such as services and intellectual property where nontariff barriers are especially onerous. This should benefit the U.S. insofar as services are a growing part of U.S. exports…. It would seek to curb new forms of hidden protection such as subsidies provided via state-owned enterprises…. If TPP lives up to its hype, it should demand far less adjustment from the U.S. than it does of other signatories that are expected to meet U.S. standards for how foreign investment, intellectual property, imports and subsidies should be treated…

May 5, 2015

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