A Look at Two Potential Trade Deals

Clyde Prestowitz, former Secretary of Commerce, has done some reporting for our new issue on the two big potential trade deals that are on deck here in Washington—the Trans-Pacific Partnership and the Transatlantic Free Trade Agreement:

Right now its primary focus is on a deal known as the Trans-Pacific Partnership, or TPP, which President Obama wants finished up by October. If concluded according to plan, the TPP will include the United States, Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam, with the possibility that Japan and Korea might also join. The treaty would also be open for other countries to join if they could meet the required standards.

Beyond this, as Obama announced in his State of the Union address, the White House is looking for a deal gazing in the opposite direction. Known as the Transatlantic Free Trade Agreement (TAFTA), it would tie the United States and the European Union into the world’s largest trading block.

Prestowitz highlights several little-known facts about the TPP which ought to see wider discussion before any treaty is signed. For example, it has the potential to seriously alter many of our existing trade agreements, especially in Latin America and the Caribbean:

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.

TAFTA, though, comes out as a better deal, according to Prestowitz. It should spark some nontrivial economic growth, for starters, and would have little of the labor market undercutting that is such a problem when dealing with countries like China:

This experience is one reason why TAFTA deserves a second look, but there are also others. First is the need for growth in an age of high debt and austerity. Neither the U.S. nor Europe is politically prepared to stimulate its economy through any significant increase in deficit spending. That means growth must come from some other source, and the efficiencies that would come from further integration of European and American economies are a plausible answer.

Labor unions in the EU are strong and wages are high, so there will be no race to the bottom. And the EU and the U.S. largely share a commitment to free markets, free trade, and democracy. Much of what has gone wrong with the WTO derives from systemic conflicts between the U.S. and the EU on the one side and the more interventionist and authoritarian political economies of the rest of the world on the other.

The biggest economic gain from TAFTA would be from harmonizing regulation. Inconsistencies in regulation raise the costs of transatlantic trade in automobiles, for example, by 27 percent, and by 6.5 percent in the electronics sector alone. The United States and Europe both have safe headlights, for instance, but EU cars exported to America must have different headlights than those sold in Europe and vice versa. That non-tariff barrier inhibits exports while raising costs by forcing producers to keep extra stocks of different headlights. The same holds true for electronics and most other products. Mutual recognition of essentially equivalent standards and removal of similar non-tariff barriers would boost U.S. GDP by 1 to 3 percent ($150 billion to $450 billion), according to a 2005 study by the Organisation for Economic Co-operation and Development.

In any case, this is a detailed report on a very much underdiscussed topic. These trade deals are one of the few things that have a real change of making it through Congress, and they deserve closer scrutiny than has hitherto been applied. Take a look.

Ryan Cooper

Ryan Cooper is national correspondent for the Week, and a former web editor for the Washington Monthly.