Opponents of giving President Obama fast-track authority to negotiate the Trans-Pacific Partnership (TPP) — the pending trade pact between the United States and 11 countries in Asia and the Americas — cite the job-killing impacts of globalization as a prime reason for their objection. The free-trade agreement would lower tariffs and remove other barriers to imports from member countries, which opponents fear would create steep competition for U.S. industries domestically. There is indeed substantial evidence that import competition from low-wage countries has contributed to the momentous decline in U.S. manufacturing employment in the last two decades. We even researched and published some of that empirical evidence. Still, we believe blocking the TPP on fears of globalization would be a mistake.
There are several reasons to support the TPP despite globalization concerns. First, the TPP — which seeks to govern exchange of not only traditional goods and services, but also intellectual property and foreign investment — would promote trade in knowledge-intensive services in which U.S. companies exert a strong comparative advantage. Second, killing the TPP would do little to bring factory work back to America. Third, and perhaps most important, although China is not part of the TPP, enacting the agreement would raise regulatory rules and standards for several of China’s key trading partners. That would pressure China to meet some of those standards and cease its attempts to game global trade to impede foreign multinational companies.
Since 2000, America has lost 5 million manufacturing jobs. Regions that specialized in apparel, footwear, furniture, home electronics, toys and sports equipment — industries in which China achieved explosive growth — have seen factories close and wages for local workers flatten. Our research indicates that rising import competition from China accounted for 21 percent of the overall decline in U.S. employment in manufacturing industries during the 1990s and 2000s. The wave of automation that replaced middle-class jobs available to workers without a college education added to those losses. We sympathize with the regions and families that suffered, but halting TPP would not assist U.S. manufacturing or benefit U.S. workers. The reality is that the globalization of manufacturing is a fait accompli. Those manufacturing jobs are not coming back.
Further, the TPP’s lower trade barriers would barely affect import competition faced by U.S. manufacturers. The World Trade Organization counts 160 members, including every major economy and most importantly China, which joined in 2001. According to the World Bank, WTO members can export manufacturing goods to the U.S. market at an average tariff of just 2 percent. Within the proposed TPP, the United States already has bilateral trade deals that have eliminated all manufacturing tariffs with five of the 11 members: Australia, Canada, Chile, Mexico, and Singapore. Cutting already rock-bottom U.S. manufacturing tariffs to zero for the remaining TPP countries would thus have negligible effects on U.S. producers. These countries already enjoy largely unfettered access to U.S. markets. The results of existing economic analyses on the responsiveness of global trade to manufacturing tariffs suggest that the consequences of the TPP for U.S. manufacturing employment likely would be slight.
But if the TPP has little downside for the U.S., what’s the upside? Why bother with the deal at all? The reason is that the TPP is about much more than manufacturing. Most notably, it promises to liberalize trade in services and in agriculture, sectors in which the United States runs large trade surpluses, but which the World Trade Organization, despite 20 years of trying, has failed to pry open internationally. Successfully exporting information and computer services, where the U.S. maintains substantial technological leadership, requires more than low tariffs. It also requires protecting patents against infringement and safeguarding business assets and revenues against expropriation by foreign governments. To the extent that Obama succeeds in enshrining these guarantees in the TPP, the agreement would give a substantial boost to U.S. trade.
Americans have to take advantage of a new reality: Today, U.S. companies rely on global production networks for their success. When a trading partner exports a product to the U.S., the domestic economy gains because the U.S. often has exported the parts, components, or ideas for that product to that country. China’s manufacturing growth, for instance, would have been inconceivable without its import of U.S. technology from multinational companies, which generates income for the domestic economy and gainful employment for engineers, programmers and other skilled occupations. The phenomenal sales of the iPhone 6, which Apple designs in California, rests on the capability of Foxconn’s plants in China to assemble handsets at reasonable cost.
Rising Chinese consumer affluence also generates a virtuous circle for U.S. firms. China is poised to surpass the U.S. as the largest consumer market for the iPhone. Apple’s experience is unusual, but not unparalleled. The Bureau of Economic Analysis reports that 24 percent of U.S. service exports are now accounted for by telecommunications, information technology, and royalties from licensing intellectual property. For the U.S. to derive maximum benefit from its advances in technology-intensive products, such as smartphones, U.S. companies need strong global protection of intellectual property. The TPP seeks to harmonize such protections across member countries.
If passed, the TPP also would create a powerful template for future trade deals, including with China, which would move the U.S. closer to resolving conflicts the WTO has been unable to handle. Consider, for example, the case of Qualcomm, a highly successful San Diego-based maker of chipsets for wireless communications that earns half of its global revenues in China. The company’s substantial share of the Chinese chip market attracted the attention of the Chinese government, which proceeded to extract $1 billion in fines for alleged anti-competitive practices. In the U.S., where Qualcomm also sells its chipsets, the company has faced no such anti-trust penalties.
Under current trade law, Qualcomm has little recourse to appeal its treatment by the Chinese government. Under a trade agreement with China like the TPP, however, Qualcomm and other U.S. companies would have access to an investor-state dispute settlement mechanism. Contrary to criticism from Sen. Elizabeth Warren (D-Mass.), this mechanism would protect U.S. firms against predatory regulatory interventions by member governments. Anti-competitive asymmetries in the world trade system disproportionately harm U.S. firms at present. Enactment of the TPP would establish protections against these asymmetries for U.S. companies.
Expanding global trade has remade manufacturing, forcing workers, businesses, and entire regions to endure often painful adjustments. However, much as we might like to return to 1970 when manufacturing comprised a quarter of U.S. nonfarm employment, that’s impossible without massive protectionist barriers that would isolate the U.S. economy and lower U.S. living standards. Blocking the TPP because of justified unhappiness over manufacturing’s lost glory would amount to refighting the last trade war — beggaring the future as retribution for the past. A responsible trade agenda should instead seek to provide the supporting policy structure – protections for intellectual property and freedom from confiscatory regulations – that allows U.S. companies to excel in the sectors where they are strong.
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