November 14, 2016

TPP: A Strategic Blueprint for the Asia Pacific – What’s at Stake During the Lame Duck Session

Mexican Economy Secretary Ildefonso Guajardo (L-R), New Zealand Trade Minister Tim Groser, and Peruvian Minister of Foreign Trade and Tourism Magali Silva participate in a news conference in Lahaina, Maui, Hawaii July 31, 2015.

New Zealand Ambassador Tim Groser was originally scheduled to speak at the Council on November 4, but the event was unfortunately canceled. The text of his speech is available below.

Thank you so much for this invitation to come to address the Council on Global Affairs in this great city. Everyone – not just people who live here - has their own mental image of Chicago, reflecting their impression of its energy, its complicated politics, its music and culture. Before coming here, I came across a blog on ‘choose one word to describe Chicago’. Among the one-word answers, all of which were positive by the way, I liked "charismatic", "unpredictable", "awesome". I thought the most intriguing was "insouciant" – what a deeply ambiguous word that is; but the best had to be - "homesick".

And it is such a great time for me to come to Chicago as Ambassador of New Zealand. I am here primarily to support our national rugby team, the All Blacks. We have two matches in Chicago. One tonight – the quite separate team called the Māori All Blacks against the US national rugby team, the Eagles. The Māori All Blacks is our first peoples’ team - and a much loved institution and tradition it is. You have to be of Māori heritage to be eligible but the only test of that in NZ is a self-declaration test; and frankly, given the emphasis in Māori culture on whakapapa, or genealogy, an imposter wouldn’t last five minutes.

Then on Saturday night, at Soldier Field, we take on the formidable Irish national team. And they are truly formidable – in two of the last three years they were the European champion team. Whichever way it goes, it will be a great match.

I would like to encourage you all to come along to the matches. But if you don’t have a ticket, you can’t - there are no tickets left. The show’s SRO on both nights.

I wish I could say the same thing about the show called "Let’s ratify TPP" that’s taking centre stage in a stadium somewhere in Washington during lame-duck. There are, I understand, 12 performances, or sitting days, and regrettably there are lots of unsold seats to that show. I am sure Speaker Ryan is 100% on the button when he tells us – “we don’t have the votes”. The question is however – will your political leaders make the effort to put the votes together brick by brick? That’s what I want to talk to you about today and what’s at stake.

Politics usually comes down to timing and numbers. We know what the timing is – lame-duck. On this occasion, and for a multitude of political reasons, most of which are too sensitive to talk about in a public speech, the can cannot be kicked down the road. And on the numbers, assuming TPP ever comes to the floor of the Senate and the House, and to use Vince Lombardi’s memorable words, the congressional head-count, particularly in the House, ain’t the most important thing, it’s the only thing.

Is recent history any guide? Well, the last time a trade bill came up for a Vote in June 2015 (the vote was the TPA or the Trade Promotion Authority Congress granted to President Obama), 191 House Republicans voted for it, compared with only 28 House Democrats. It passed the Senate 60-38. Mid-2015 is not ancient history.

So what’s changed?  If we judge the American public’s attitude to trade from what we hear through the banner headlines, Americans are ambivalent about trade and don’t like trade agreements.

Right? Well, maybe, maybe not. Let me use your own data. On September 7 the Council on Global Affairs published research findings in an article entitled “Actually Americans like Trade”. There is a mass of data your researchers used in your article, but here I will just quote your headline conclusion:

“Despite criticism from political figures on both sides of the aisle, 60% of Americans support the TPP, down slightly from support in 2015 (64%) and 2014 (63%). Specifically, 71% of Democrats and 58% of Republicans (58%) support the trade deal.”

With respect to opinion amongst Democrats, your findings are consistent with more recent polling by the independent Pew Institute. That showed only weeks ago 58% of Democrats believing that ‘Free Trade Agreements have been a good thing for the US’ compared with 34% of Democrats believing FTAs were bad.

I cannot possibly comment of course on what appears to be a puzzling and rather large difference between this number and the fact that only 28 Dems voted in the House in support of their own president last year on TPA – the authority that allows the United States to engage in trade negotiations.

It reminds me of the comment of the great Will Rogers - “I don’t make jokes, I just report the facts.”

With respect to the right hand side of the political aisle, the more recent Pew numbers show a much sharper negative change – I repeat change - in Republican voters’ attitudes to trade agreements: one year ago, only around 30% of Republicans thought trade agreements were bad for the United States. In only 12 months, that number has roughly doubled. Can anyone work out why? Well, I will leave that to you to answer.

By the way, the best negotiator I ever met – and he was an American - told me decades ago – “Never ask a question you don’t know the answer to.”

But once you have worked out why polling clearly suggests opinion amongst Republicans has completely flipped in a matter of only months, the next logical question is - how solid are those numbers? I am pleased to inform you – and I know this only because I have done cutting-edge research in Newtonian physics - that sometimes things that go up, can come down.

This is no small issue. What is at stake? On this Let me give you two reasons. The first is about the substance of TPP and what it achieves. The second – and finally it may be even more important – is the broader strategic implications for US leadership.

There is a harsher way of putting this second strategic consideration. This is what people like me call elliptically "the counterfactual", or, in plain language, what on earth is the United States supposed to do then? Sit on the side-lines, while the rest of the world gets on with business? Because that is exactly what would happen. 

We just had this tested over a Chinese proposal to establish the Asian Infrastructure Investment Bank, or AIIB. It’s all on the public record. Washington wanted no part of it and made that clear to its closest friends and allies. What did we do? None of us stayed in the political hole. We all – UK, Canada, France, Germany, Australia, NZ, Singapore – we all went with China. It wasn’t "pro-China" and "anti-US," it is just the way world is these days. If TPP is stalled in Congress, it will be a matter again of deep regret to us, but we will all use whatever alternatives there are.

But that is so far removed from our preferred option. The US is, after all, the chief architect of the post-war system based on two powerful and connected ideas – open political markets and open economic markets. And right now, ladies and gentlemen, the TPP is the biggest deal around that expresses those ideas. It involves 40% of the global economy with more to come, if it gets over the cut-line in lame-duck.

For the US to walk away now would be a bit like the great architect Gaudi, who spent his lifetime on the extraordinary cathedral in Barcelona, La Segrada Familia, turning around to his followers saying "No, I don’t like that very much." Actually, my understanding is that that is pretty much what happened to Gaudi, the point of my story being that to this very day, the cathedral is still being built and added to.

Behind all this is a debate that is taking place, not just in the US, but in Europe, about Trade Agreements. Do they work? And do they work just for ‘big corporates’?

Let me warn listeners that this analysis contains adult material. It is based on evidence from experts. When I get sick, I go to doctors, not quacks or faith healers. When I want to build an extension to my house, I go to architects and structural engineers. Listening to experts is, I appreciate, very old fashioned, and in some political quarters is even remarkably a term of abuse. I just had the impression from the Western-based education I received  as a young person that evidence-based decisions constitute the main reason we have evolved over the  last 300 years from what Thomas Hobbes called ‘nasty, brutish and short lives’ to where we are today.

In 2012 the OECD published what I believe is the most comprehensive assessment of empirical studies on the relationship between trade, growth, jobs and incomes that is available. It was a collaborative exercise involving many scholars. It is 454 pages long, so let me just quote the headline conclusion:

“Despite all the debate about whether opennes on trade contributes to growth, if the issue were truly one warranting nothing but agnosticism, we should expect at least some of the estimates to be negative. The uniformly positive estimates suggest that the relevant terms of the political debate today should be about the size of the positive benefits of openness.”

People expect too little and too much from trade agreements. Too little, because the evidence, such as the above comprehensive set of studies, overwhelmingly supports a positive view of trade agreements; too much, because trade agreements are not an elixir. They can create adjustment problems. They need supportive domestic policies to deal not only with some adjustment issues, but to help businesses and the people that work there take advantage of the opportunities they create.

We all know rising tides do not lift all boats. But you sure wouldn’t want to be a modern King Canute and try and stop the tide coming in because it did not help lift all your boats.

The world, it has been said rather brutally, can be divided amongst those who, were they around at the time Thomas Edison invented the electric light would have welcomed it and those who would have opposed it because of the impact on candle makers and their families. And actually, there is a case for being concerned about the impact of change, whether from trade or from technology, on today’s candle makers, so to speak.

But that’s about domestic policy and there is obviously a strong and legitimate political debate in this great country about what supportive measures are needed. But we and a whole bunch of countries that are friends, partners and allies of the United States don’t want to see you withdraw from the game and the crucial international leadership you have provided over the last 75 years.

For one thing, TPP is a bit more than a "trade agreement." Think of it as a strategic blueprint for the Asia Pacific to which we will add countries and ideas. It’s a big deal.

It breaks new ground in numerous other areas. On trade and the environment it has legally binding and enforceable provisions on wildlife trafficking, over-fishing, illegal logging. When it came out, WWF US called the Trade and Environment Deal a ‘game changer’ – to the intense annoyance of certain extreme people who want to paint TPP as something of interest only to large corporates. (To protect the guilty, I won’t name them).

TPP has a whole range of provisions for small and medium sized businesses. And don’t forget this – US manufacturing is still overwhelmingly a country of small and medium sized business. You have around a quarter of a million manufacturing companies; about 200,000 of them have 20 employees or less. They are going to benefit from the innovations in TPP.

On labor issues, there are provisions on minimum wages, workforce discrimination, child and forced labor, backed by enforceable sanctions.

On the purely commercial side, it eliminates in time around 18,000 tariffs, including some very high barriers to US exports. Now, in the US or my country, nobody can deconstruct that sort of mega-statistic and complexity to comprehend it. But behind each of those 18,000 taxes lies an opportunity.

Let me start with a small example for the US, but pretty significant for NZ. Japan and cheese imports. Globally, the US is easily the fastest growing cheese exporter in the world – up 43% in the last five years. The US dairy industry is six times larger than NZ and has already overtaken us as the largest exporter in certain important areas of world trade. In 2014 the US exported some $250 million cheese to Japan, over tariffs as high as 40%. Those tariffs get eliminated over time if TPP happens. What an opportunity that gives us all.

But that is quite literally ‘small cheese’, even if your dairy farmers would hugely appreciate this opportunity. Look at machinery exports. The US exported in 2014 $59 billion to TPP countries, over tariffs or taxes – they mean the same thing – as high as 59%. The US exported autos and auto parts to TPP countries equal to $89 billion. I don’t suppose much of that went to Vietnam; currently Vietnam, a country of 85 million people going places, has a tax against US exports of 70%.

By the way, it is not a mistake to say Vietnam maintains these taxes "against the US", because a lot of us, including Australia and NZ, already have a free trade deal with Vietnam, which we negotiated a few years ago, and Australia in particular does have competitive auto-parts industries. The US is playing catch-up football here.

And this matters. Go back to US agriculture exports, and remember this – agriculture is a very sophisticated and increasingly high tech sector and the US is the world’s largest agriculture exporter. Beef is a big deal in TPP and Japan is the prize. Japan maintains a 38.5% tax against US beef exporters. But because Australia has an FTA with beef, that tariff or tax of nearly 40% doesn’t apply against Australian beef exporters – it’s coming down year by year. And you just ask your cattlemen – they are getting killed in the Japanese beef market because of this, and it will get worse as the relative competitiveness of Australian beef exporters over US exporters improves year by year.

Do any of the critics who are saying this is a "terrible deal" know this? I am not sure they would want to know it. As for the argument that "well, if we don’t do TPP, we could do a deal just with Japan," that is plain wishful thinking. I have been listening to so-called "trade experts" for decades saying Japan and the US “should do an FTA”. It is not a new idea. It doesn’t exist because no-one could think of a political way to create it.

Moreover, the whole point of TPP is to join all these bilateral FTAs together into a single coherent set of rules, led by the US, that is consistent with the realities of modern trade – the Global Value Chain. US companies want to move away from the spaghetti bowl of dozens of FTAs, each with their own rules of origin, towards a single system of rules and towards regulatory convergence. Your biggest corporations maybe can employ experts and lawyers to navigate through this complexity. But those 200,000 US manufacturing companies with less than 20 employees can’t. This is a large part of the "value-add" of TPP.

But sure, you would say, this is a two say street – what is the US giving up? In field of making regulatory changes to US policy settings, practically nothing – unlike many TPP economies. In terms of import tariffs, the bigger picture is that this economy, the most successful large economy in the world, liberalized decades ago and is fundamentally an open economy.

The World Bank calculates the average US tax on imports is 1.5% and most of these low tariff rates are bound under international law. You could, of course, withdraw from the World Trade Organization or just plain break international law and re-create massive protection around the US economy. “Move over ‘Pokemon Go’; let’s play ‘Global Trade War!’” Senator Smoot and Representative Hawley gave us that model in 1930 with the Hawley-Smoot tax increases to protect US jobs. How well did that go? I forget.

I would love to say to some of your people – stop playing around in the weeds, and look at the bigger picture: TPP fundamentally levels the playing field for US exporters for precisely the reason that the US is already an open economy and has no realistic option but to remain that way.

Go back for a moment to another area of US export strength, where TPP will make a difference: ICT, or Information, Communications and Technology. Same story – huge US export interest (some $36 billion of exports in 2014) facing taxes up to 35% in TPP markets.

But the reason I bring this up is because this sector shows why TPP is more than just a conventional trade agreement. This agreement, if passed by your legislators, will write the rules of the road in this sector, and this has far more than just beneficial trade impacts for the United States. It strengthens the US hand with respect to a global free flow of data, the private right to cyber security, and digital freedom more broadly. If the foundation rules on internet freedom are not written here, they will be written elsewhere by other players.

And this takes me to the core strategic point. Open economic markets have always been linked with open political markets. That is why far-sighted American leaders designed the post-war system based on these two fundamentally compatible broad principles. And up to now, the United States has undoubtedly written the rule-set.

So at stake here, is who is going to write the rules of the road in the most important region of the planet in the first quarter of this century –  in the Asia Pacific? If TPP makes the cut-line during lame duck, that is not the end of the process. The last passenger, Japan, got on the TPP bus in 2013 when Prime Minister Abe made the difficult decision to commit his Government’s prestige to TPP – as an agent of structural change, one of the Prime Minister’s "Three Arrows," named after the famed samurai fable, for those of you who are Japan specialists.

But the TPP bus, if it does not get stalled in Congress, will not stop at Tokyo station. Korea, Indonesia, Thailand and, intriguingly in the light of recent extraordinary developments in Philippines/China and Philippines/US relations, the Philippines. All of these countries have said they want to be part of the expansion of TPP – how could they afford not be part of it, given the realities of the Global Value Chain that TPP will strengthen enormously. That is another 500 million people that would be following the US led system.

But before we get around to the TPP 2.01 upgrade, we have to get TPP 1.01 baseline model off the political production line and to market. Let me end with the much noted comment of my colleague in Washington, the current Ambassador for Japan, Ambassador Sasae. He said on September 14:

“I genuinely hope we do not see a debate in the United States in the years ahead on the question, ‘Who lost Asia’? But if so, its start will be counted from the demise of the TPP Agreement.”

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The Chicago Council on Global Affairs is an independent, nonpartisan organization that provides insight – and influences the public discourse – on critical global issues. We convene leading global voices and conduct independent research to bring clarity and offer solutions to challenges and opportunities across the globe. The Council is committed to engaging the public and raising global awareness of issues that transcend borders and transform how people, business, and governments engage the world.

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