The fractious and partisan environment in Washington has been less than conducive to actions that would boost economic vitality and income growth. The potential exists for a breakthrough on at least one initiative, however: the Trans Pacific Partnership, the most significant multinational free trade agreement undertaken in more than 20 years.
The TPP is a comprehensive agreement among 12 American and Asian nations including Japan, Canada, Mexico, the United States and Vietnam. Lengthy negotiations among the signatory nations are moving toward a conclusion as soon as this year, provided that Congress agrees to grant the requisite authority to President Obama to finish the job.
The TPP is supported both by the President and most Republicans in Congress, a rara avis in an era of rancorous partisanship that should serve as a model for further cooperation on economic issues. All of which makes the strident opposition from the extreme wings of both parties perplexing.
Economists are renowned for disagreement (if not for forecasting accuracy). But one area of near unanimity involves the mutual benefits of free trade, whereby nations specialize in exploiting their own unique competencies to trade for what they cannot produce efficiently. For example, Warren Buffet notes that bananas are better grown in the Brazilian rain forest than in his back yard in Omaha. Meanwhile, America provides technology to Brazilian farmers, to the mutual benefit of both countries. This concept, known as comparative advantage, raises incomes and improves the lives of workers in both countries when fairly applied and is one of the fundamental principles of economics.
Which brings us to the Trans Pacific Partnership. The pact lowers tariffs on a wide variety of agricultural products, manufactured goods and services, and promises to stimulate significant marginal economic activity for all participants. The nonpartisan Peterson Institute has estimated that the deal will produce $305 billion in additional world exports and generate over $220 billion in income benefits for the 12 nation bloc (including $77 billion for Americans) by 2025.
In order to conclude the treaty, President Obama will need Congress to renew his authority to complete the negotiations and bring a treaty to the Members for a vote. Pending legislation would grant so-called trade promotion authority to the President to conclude the talks and present the resulting agreement to Congress for an up or down vote. Trade promotion authority (colloquially referred to as "fast track" authorization) allows the parties to negotiate a treaty to completion, and then submit to their respective legislatures for approval or rejection without amendment.
Despite the agreement among economists, political exigencies frequently intrude, and opponents monger fear of illegal immigration or mass destruction of American jobs. Of course, globalization creates displacement and disruption in certain industries (the future of Nebraskan banana production does not look bright) but in the aggregate higher wages, better jobs and improved quality of life result from good trade deals.
Perhaps more importantly, the deal is an essential response to growing Chinese muscularity in the region. China surpassed the U.S. as the world's largest trading nation by volume in 2012, and is currently establishing a global investment bank that may evolve into a formidable competitor to the IMF (and of which the U.S. is not a member). American security interests demand that we be deeply engaged in Asian markets as a counterbalance to China and the exemplar of free trade in the region. In view of recent U.S. foreign policy setbacks, the prompt adoption of the TPP would serve to assure our trading partners and allies of our continued fidelity and dependability.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. Investment Advisors.