Monday morning dawned to news that a final all-night session brought a successful conclusion to a five-year negotiation among 12 nations to lower trade barriers and unleash competition. Given the paucity of economic and foreign policy successes, it is important to congratulate the president on a huge accomplishment in wrapping up the Trans-Pacific Partnership trade pact. Once the agreement is ratified by the governments of the signatories, the TPP will take its place as one of the most significant trade agreements in history. Well done.
Chris Hopkins of Barnett & Co.The TPP is a comprehensive agreement among 12 disparate American and Asian nations including Japan, Canada, Mexico, the United States, Malaysia and Vietnam. Its provisions (expected to run up to 30 minutely detailed chapters) lower tariffs and restrictions on trade among the participating nations and uniquely stipulate unprecedented labor protections for workers in some countries with notoriously abusive practices.
Creating an environment conducive to freer trade is especially important for U.S. workers. America is a significant exporter, with total sales of goods and services to other countries of $2.3 trillion in 2014. Still, much room for improvement beckons, since the U.S. exports just 16 percent of GDP compared to 26 percent for China and 46 percent for Germany. And given that jobs related to exports pay an average of 18 percent higher wages than those that don't, workers stand to reap significant benefits.
Few corners of the "dismal science" of economics are as settled as the impact of free trade. By capitalizing on the power of comparative advantage, trading partners focus on producing the things they do well and purchasing those things they less effectively create. Countries that artificially protect domestic industries unwittingly reduce living standards and incomes over time by facilitating inefficiencies. Free trade promotes competition and rewards productivity, raising incomes across the board over time.
The nonpartisan Peterson Institute has estimated that the TPP trade agreement 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. Administration estimates suggest that 18,000 different taxes on American exports will be eliminated over the course of implementation.
Like any negotiated agreement among vigorous competitors, the deal includes a number of concessions that render it less than optimal. For example, import duties on American automobiles and trucks into Japan phase out gradually over 30 years, as do the barriers to American rice imports to Japan. Nevertheless, the direction is positive and clearly supportive of increased competition among the participants that will promote greater economic intercourse and higher wages across all of the signatory nations.
Importantly, the deal is also 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 integrally engaged in Asian markets as a counterbalance to China and the exemplar of free trade in the region. The successful conclusion of the TPP presents a template for future agreements that may include China in trade pacts that follow the model promoted by America rather than the direction advocated by the Chinese.
The next steps include ratification by the U.S. Congress, some of whose members are expressing parochial objections specific to their constituencies. But the overall benefits of the agreement are manifest, and the president deserves credit for his steadfast commitment to freer trade that will raise incomes of all Americans over time.
Christopher A. Hopkins is a vice president and portfolio manager for Barnett & Co. in Chattanooga.