The Other Half: Dealing with U.S.-Japan Auto Disputes

My last post covered one of the most difficult topics in trade negotiations—the problems with agriculture.  This issue is partially confounding a solution to the ongoing U.S.-Japan bilateral negotiations related to the Trans-Pacific Partnership (TPP) agreement.

But agriculture (specifically the fight over Japan’s five “sacred” items) is only half the battle.  In exchange for receiving more access to Japan’s important and protected agricultural markets, the United States is supposed to allow improved access to its auto market.   However, since the auto market barriers into the United States are not seen as sufficiently problematic to match the barriers in agriculture, the Americans are also asking for a number of changes to let more cars and auto parts flow into Japan.

This fight over autos between the United States and Japan has been underway for decades.  Literally.  Equally astonishing, there appear to have been very few changes along the way in the tone or tenor of the argument despite a radically different market environment over the same period.

My Ph.D. dissertation was partially about auto fights of the late 1980s and mid-1990s.  Sometimes, listening to the arguments made now around the topic, I could swear that nothing has changed in the past 25 years.  Many of the very same people who were present all those years ago are the same folks driving these negotiations.

The United States has two clear barriers to trade in autos.  For passenger cars, the tariff is currently 2.5%.  For trucks, the tariff rises to 25%.  Japan would like to see both removed.

What makes this whole argument rather surreal is that Japan exports almost no finished autos from Japan into the United States.  Instead, in the wake of NAFTA provisions on car manufacturing, Japanese auto manufacturers largely moved their production networks into NAFTA countries. 

About 85% of all Nissan autos sold in the United States are domestically produced.  For Toyota, the number is about 70%, with mainly just Lexus models built outside NAFTA.  Honda’s figures are higher at 95% production inside the United States, Canada and Mexico. 

Even if the auto tariff of 2.5% were eliminated tomorrow, it is unlikely to drive dramatically different trade patterns.  In spite of this, the Americans are apparently insisting on extraordinarily long phase out periods of up to 25 years. 

Think about that for a moment—a quarter century to phase out a 2.5% tariff on products that are largely domestically produced.

I would hate to think about the sheer number of hours spent arguing over this point across the decades.  Even in the past year, officials have invested hundreds of hours in conference rooms around the world hashing out how to make this tiny tariff go away.

Of course, the other piece of the equation is figuring out how to get more finished American cars into Japan.  This is an equally nonsensical fight.  

Take the specific case of General Motors.  After complaining about limited opportunities to sell cars in Japan for more than 3 decades, how many models does GM make with right-hand drive that could be sold in Japan?  Answer:  two. 

So the Americans are fighting vigorously to get more cars into the Japanese market that are just as unsuitable as they were decades ago. 

The company, I am sure, would argue that the math does not justify the tremendous investment in creating suitable products.  GM has 34 outlets in Japan.  (For comparison, Toyota has more than 4,700 dealerships in the United States.)  If GM sold 1400 cars in Japan, it would mean only 41 sales per outlet in an entire year. 

GM and Ford didn’t even bother to show up at the Toyota Motor Show for four consecutive years.  

Because the volume is so small, it is hard to justify the investment of a full garage to service the cars.  Without a garage, consumers that might take the plunge and buy a car with the steering wheel on the wrong side of the vehicle, also have to factor in very high prices for parts and servicing. 

In the last heated battles over autos, the American insisted that they could not sell more cars into Japan because of various barriers to entry, including an inspection system that favored local producers.  While many of these issues remain, it is worth noting that European car manufacturers have continued to experience market growth.

European brands made the decision decades ago to invest in their own dealerships and not rely on Japanese-brand outlets to hawk their goods like the Americans.  European brands brought in garages and auto parts.  And, critically, they built cars that were suitable for, and adapted to, the local market.

Now, European sales still fall short of what might be expected in a different type of market setting.  Total foreign auto sales still account for less than 5% of all autos sold in Japan.  But European sales leave American brands in the dust. 

BMW regularly alters models to meet customer needs, including introducing a range of diesel and hybrid autos that are in demand from consumers.  Volkswagen sells the largest number of foreign-branded cars in Japan, with a strong focus on economy to mid-range models.

Certainly, there are still obstacles to selling vehicles in Japan.  For example, Japan has a preferential tax system that rewards domestic vehicles with tiny motors.  Nearly a third of the market consists of autos with engines of less than 660 cc.  Neither the Americans nor the Europeans have models that fit this profile.

Japan also has its own safety standards that do not match either the EU or the United States.  (Although frankly, this could also be turned around--the EU and the U.S. do not have standards matching Japanese auto regulations making it difficult for Japanese brands to thrive in both markets without potentially extensive modifications.) Getting a new model certified in Japan can be extremely expensive.

They say that generals usually prepare to fight the last war.  This adage appears to be equally true in the auto debates.  Instead of focusing on competitive challenges, the Big 3 blame Japan’s supposed manipulation of currency as a key impediment to selling more cars.  Again—this is an incredible flashback to the fights of the 1980s and 1990s when the exact same arguments were used by the Big 3.

If currency values could somehow be adjusted only for autos and not for the economy as a whole, perhaps currency misalignments might be a genuine complaint.  However, it is certainly difficult to argue that currency stops American sales and not European sales.  Or that it somehow affects cars more than other goods.

In short, the United States auto industry has been making the same arguments about the closed car and parts markets in Japan, about currency manipulation, and about the necessity for tariffs to protect the domestic market for decades.  It is time to close the debate, sign the bilateral deal on the table for autos and move on to new, 21st century issues in the TPP.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Why is Agriculture So Difficult for Trade Deals?

Seoul—As we wait for Japan’s Prime Minister Abe to discuss the U.S.-Japan bilateral talks during his address to the United States Congress, it is a good time to discuss why agricultural trade regularly confounds trade negotiations.  After all, the bilateral discussions between Japan and the United States, part of the parallel path in the Trans-Pacific Partnership (TPP) negotiations, is largely focused on agricultural products in Japan’s 5 “sacred” sectors (rice, beef/pork, dairy, wheat, and sugar). 

In short, the major obstacle is that agriculture is sensitive in every single country.  As a result, more than 60 years of negotiations in the General Agreement on Tariffs and Trade (GATT) and its successor organization, the World Trade Organization (WTO), made only modest progress towards opening agricultural markets. 

This has left significant barriers to trade in food and beverages in different countries. WTO members now have widely varying commitments to tariff levels across different types of products.  Newer members and developed countries generally have lower tariff levels, but even relatively low tariffs conceal some significant tariff peaks.  Tariff levels and tariff peaks are significantly greater in agricultural sectors than in non-agricultural goods.

Tariff peaks are where general levels are low, but suddenly, for example, the Japanese tariff for a type of potato (konnyaku) faces levels of more than 1400 percent.  Peaks are frequently found in other agricultural items like rice, dairy, wheat, soybeans, edible oils, certain spices, as well as some specific items that are often unique to individual countries. 

If the tariff peak is high enough, no foreign products can be found in the marketplace at all.  Removing these peaks is particularly difficult, since they mark the most highly sensitive products that have been sheltered behind tariff walls for a significant time.

While most trade agreements do not even try to address the highest tariff peaks, the TPP is supposed to open all trade.  This means contentious discussions around highly sensitive agricultural items and sectors.  As we get close to the end, officials have had to finally grapple with these concerns. 

Another problem that is supposed to be addressed by the TPP for agricultural producers is tariff escalation.  This is where the tariff on a raw agricultural product like unprocessed coffee beans could face a tariff of 5 percent.  But roasted beans are charged 10 percent.  Ground beans could be 20 percent and bottled Starbucks Frappuccino drinks could be slapped with 45 percent tariffs.  The example is hypothetical, but the problem of tariff escalation is quite common. 

Escalation is a major problem, particularly for developing countries, because rising tariffs on higher processing can prevent firms from moving up the value chain into higher value items.  High tariffs on processed goods can mean that products are often not competitive and cannot capture the highest value.  Firms are stuck shipping raw coffee beans and not bottled coffee drinks where the highest money can be found.

As my last blog post noted, agricultural trade is particularly held hostage to problems of collective action.  Consumers benefit from lower tariff barriers to agricultural products.  They get a wider selection of items at potentially lower prices.  In areas with significant tariff peaks, consumer benefits could be substantial.  But no consumer ever lobbied government for cheaper butter or more soybean options. 

By contrast, farmers are frequently well organized and fiercely protective of their market space.  Any attempt to change the status quo is strongly resisted. 

This is true in the TPP members.  It is also true in non-members, who have to decide whether they want to join in the future.  I am sitting in a workshop in Seoul, sponsored by Korea’s Rural Economic Institute, to discuss agricultural changes around potential TPP membership.  The level of concern is palpable.

Korea will argue that their farmers tend to be working small scale, family plots.  Agricultural production, especially for an item like rice, has strong historical significance.  If rice were not produced domestically, wouldn’t it wreck Korea’s countryside and toss farmers ignominiously out of work?  Won’t the rural areas suffer irreparable harm and destruction?

No matter what happens in the TPP, it is unlikely that South Korea will witness the total destruction of the countryside and the complete loss of rice production.  Rice will still be grown in Korea.   It will continue to be consumed domestically and much of this production will be grown locally.  But Korean rice might someday be be exported more widely across TPP members as well.

Deeply held concerns about rice and other products, I should note, are not unique to Korea.  Japanese farmers make similar points.  So do growers in potential members like Taiwan.  In fact, I suspect that nearly every member and potential member faces similar kinds of issues.  Even in agricultural export powerhouses like the United States or New Zealand, it is possible to find small-scale, family farms that worry about increasing agricultural competition in their particular sectors.

It is important to note that agreements like the TPP do not mean that agricultural trade across the board will become completely open overnight.  Highly sensitive sectors will clearly be opened last.  For most members, the final items to be phased into the deal are likely to be agricultural products.

In addition, agriculture can use specific procedures to avoid complete opening overnight.  In the U.S.-Japan bilateral, Japan has not agreed to open the last five “sacred” sectors immediately.  Instead, we expect that Japan will, for instance, agree to drop tariffs on a very small quantity of rice for a bit of time.  The quantity will be specified by a quota that is likely to be opened for only 100,000 tons of rice from the United States at the outset. 

Over time, the goal is to gradually open the quota for more rice (or other sensitive agricultural products) at lower tariffs.  In time, the quota could even disappear all together, leaving the market completely open at some (likely) quite distant time. 

For beef products, frozen beef imported into Japan may fall from the current 38.5 percent tariff level to 9% for the United States (and hopefully this will also be extended to all TPP members).  Pork for Japan used to be split into three categories.  Now tariffs will drop from between 482-547 yen/kg down to 50 yen/kg with tariffs on the highest price pork falling to 0 tariffs. 

These commitments fall short of complete free trade.  The tariffs have not fallen to 0, at least for the near term.  However, it would have been impossible to lower tariffs of more than 777 percent on polished rice to 0 right away.  The other TPP members recognize the difficulties of forcing such a drastic change on a highly sensitive sector.  The goal is to get to free trade, but reality often intrudes--making the transition relatively long and slow.

In addition, given the sensitive nature of agriculture in every member state, governments have strong reasons to view deviations from fully open markets with a more relaxed eye.  After all, each government likely has its own sensitive products that it would like to support and grant farmers additional time for adjustment.

The real trick in a multi-party trade agreement is to grant sufficient flexibility in timeframes and commitments to allow everyone to remain inside the agreement while not diluting the outcome so much that the benefits are lost.  In an agreement like the TPP that promised coverage for all products, it has been difficult to manage. 

We may learn tomorrow how well the Americans and Japanese accomplished this delicate balance in agricultural trade.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Defending the Indefensible in TPP

As the Trans-Pacific Partnership (TPP) trade negotiations head towards conclusion, I am increasingly fielding questions from people about the challenging final issues that remain.  This post covers a range of topics that stem largely from officials trying to defend policies that appear indefensible to outsiders.  Most are rooted in specific local politics or interpretations of domestic conditions that may be under threat in the TPP.

Why is Japan fighting so hard for rice protections?  My interviewer on CNBC this week asked again why Japan’s government is ready to fight to the finish over issues of rice.  After all, the agricultural sector in Japan contributes a tiny sliver to overall economic output.  The average age of Japan’s farmers is heading towards 70 and very few farm full-time.  In exchange for historical protections that include a rice tariff of 777 percent to keep out foreign polished rice, Japanese consumers pay extraordinarily high prices for rice and agricultural products of all sorts.

This situation is not unique to Japan.  Like many countries, the political system has been stacked in favor of rural voters, who are overweighted in the parliament relative to their population size. 

Mansur Olsen, the Nobel-prize winning economist, highlighted problems of collective action several decades ago.  While it is true that consumers as a whole would benefit from lower rice and agricultural prices, the problems of collective action mean that these diffuse interests rarely result in activity by large groups that would receive modest benefits.  By contrast, Japanese rice farmers clearly grasp the competitive challenges that they will face from the removal of barriers to trade.  They have every incentive to make their unhappiness known in loud and clear terms to political leaders.

In Japan, these concentrated agricultural producer interests can be further funneled to politicians and bureaucrats through a strong and entrenched bureaucracy of their own.  Japanese farmers are also brought together by JA Zenchu, an agricultural cooperative that (for the moment) comes with large numbers of staff and considerable economic strength.  They can mobilize significant numbers of voters and ensure that their supporters make it to the polls on election day.

Why are the Americans fighting so hard on auto tariff reductions?  The United States currently levies a 2.5% tariff on imported passenger cars.  In the TPP, Japan is pushing hard to get this tariff eliminated as soon as possible.  Like all TPP rules, it would apply to TPP member firms only and would not be extended (through the TPP) to other country companies.

What makes American opposition to tariff reductions so puzzling is that much of Japan’s auto production now takes place inside the United States and the rest of North America.  As a result of the rules set down more than 20 years ago in the North American Free Trade Agreement (NAFTA), auto producers that want to take advantage of the agreement must produce a substantial percentage of the final vehicles in NAFTA countries.  Hence, few Japanese autos are likely to benefit from a lowering of tariffs on autos in the TPP since most are already created inside the American domestic marketplace where they have never paid tariffs on the final products.

For more than 30 years, the U.S. auto industry has been uncomfortable with Japan’s access to the American market.  Maintaining a minor tariff for a substantial length of time is one way to help encourage wavering members of Congress to avoid blocking the TPP agreement on behalf of the domestic auto industry. 

Why can’t Canada change the supply management system for dairy and poultry?  The TPP is supposed to be a high quality, 21st century trade agreement that includes all products with no exceptions and a goal of lowering tariffs to zero.  In this context, the myriad system of supports that Canada uses to protect domestic dairy and poultry farmers from competition (primarily from the Americans) ought to be phased out over time.

But Canada faces the same sort of collective action problems on agricultural reform that Japan confronts.  Although Canada’s consumers would clearly benefit from lower prices on a wider range of dairy and egg products, the industry is much better organized and can mobilize significant resources to fight change.  So far, the industry has been impressively successful in keeping supply management off the negotiating table, including (so far) in the TPP talks.

Why won’t the Americans open up the domestic sugar market to Australian sugar?  This question stems from an odd quirk in the current negotiating environment in the TPP.  Although officials are aiming for a high quality result, negotiators have to operate in a world of existing, overlapping trade agreements from the past.  These previous deals will not go away once the TPP is signed.

In an existing bilateral trade agreement between the United States and Australia, sugar was carved out or excluded from the deal.  At the time, it was part of a “grand bargain” of sorts that let Australia carve out investor-state dispute settlement while the Americans protected their sugar industry.  If Australia gets better access to the American sugar market in the TPP, it will undermine the provisions of the past deal.

The sugar industry in the United States has been amazingly well protected since WWII.  Production of sugar cane is highly concentrated in a handful of farmers.  But production of sugar beets is spread much more widely.  Large numbers of members of the U.S. Congress represent states or districts that grow sugar across diverse and politically important parts of the country.   These representatives have always responded to the money and influence of the domestic sugar lobby and the TPP is no exception.  Sugar changes in the TPP that would allow greater imports of Australian sugar have been vigorously fought off.

Why don’t American union groups support the TPP?  This question came to me with great puzzlement at a meeting of ASEAN trade union leaders this week in Kuala Lumpur.  From their perspective, any agreement that raises economic growth is likely to result in additional jobs.  With new markets opening up that were previously closed or difficult and expensive to penetrate, firms have new opportunities for expansion and job creation.

Yet American labor leaders have come out loudly and vocally against the TPP.  Union membership in the United States has been falling for some time.   Labor leaders fear that TPP changes will exacerbate the loss of union jobs in the United States, since many union members are blue-collar workers. 

What is especially strange about the objection to the TPP by labor leaders is that most union members are actually government employees of all stripes, including teachers or public health care employees, who are unlikely to be affected by this trade agreement.  The fastest growing segment of unionization is taking place among services employees.  If the TPP leads to economic growth, the service sector is also likely to expand.  Many of these jobs, like hotel and restaurant workers, are not going to be outsourced.  In fact, it could certainly be argued that easier movement of people across the TPP for business travel and tourism should bring additional jobs to American services union workers. 

We can argue about the quality of such jobs and the appropriate pay scales for workers, but the TPP should not affect either of these elements of service sector union jobs.

Why are some TPP members fighting over specific rules changes for one class of medicines?  One of the most hotly contested arguments in the entire TPP agreement has been about appropriate patent length protections for a class of pharmaceutical medicines.  Should biologic drugs receive 5, 8 or 12 years of coverage before going off patent and becoming available to generic drug manufacturers? 

What is strange about this fight is that biologic drugs like the flu vaccines are extremely hard to manufacture.  They cannot be easily reverse engineered.  Each dose can be unique, as biologic drugs are not simple copies of one another. 

Most TPP members do not have (and may never have) the capabilities to manufacturing pharmaceutical products.  Even fewer will be able to create biologic medicines.  Thus, the fight over patent length protection does not make sense for most members.  However, many countries appear to have seized on this issue as a tool for achieving their negotiating objectives elsewhere in the agreement.  It is more of a bargaining chip than a serious point of disagreement.

Closing a deal is hard.  Given the nature of trade negotiations, the most difficult, politically sensitive issues are left to the very end of discussions.  It is only after the broadest balance of interests is largely hammered out that leaders can make a clear-eyed assessment of their total gains and losses throughout a complex negotiation.  Given the determination of benefits and challenges, countries will decide whether they will continue to defend largely economically indefensible policies or whether such programs will be adjusted in the wake of the TPP.  The time for sorting out such decisions and making appropriate calculations is now.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Using e-Commerce to Help Smaller Companies

One of the fastest, easiest and lowest cost ways for smaller companies to join the global marketplace is to use e-Commerce.  By harnessing the power of the Internet to connect with suppliers, producers, lead firms, and consumers, firms can sell their goods and services to a much wider audience than would otherwise be possible.

As the clearest example of this phenomenon, check out the attached policy report.  This document, Challenges of e-Commerce for Small and Medium Sized Enterprises in Asia, benefitted from the skills of a graphic designer in Pakistan.  The staff of the Asian Trade Centre in Singapore never met the designer.  Instead, the entire process was handled via the web. 

This designer charged one-tenth the price of a locally engaged person.   In the end, the magic of e-Commerce allowed one small firm in Singapore to support an even smaller firm in Pakistan and create a win-win situation for both companies in delivering a high quality service to a wide range of readers and government officials in Asia.

The report examined many of the challenges and opportunities for small and medium enterprises (SMEs) in the region that are engaged in e-Commerce.  It was generously financed by the British Foreign and Commonwealth Office and is intended to provide a small sample of case studies to launch our larger project on the topic.

Despite the promise of greater economic growth available by using e-Commerce, the cases highlight a set of challenges that smaller firms often face. 

Small firms, by definition, have limited resources including, especially, fewer staff members.  This makes getting things done more challenging and increases the premium on hiring and retaining quality workers.  Manpower issues of all sorts are a challenge for many of the SMEs profiled in our study. 

The Singapore-based firms have particularly struggled with tight access to foreign talent at various levels. But most of the firms in the region have also faced escalating wage requests and difficulties keeping employees adequately trained for their tasks.

Rising costs elsewhere, including ever-increasing rental charges, have also proven difficult to manage.  Purchasing facilities like office, warehouse or factory space may not be possible, depending on the type of firm and ownership structure.  Land acquisition is often difficult or time consuming. 

These problems may plague all types of smaller firms, not just those trying to work in the e-Commerce space.  For companies that want to buy and sell online, they have additional issues to consider.  Creating and maintaining an excellent web presence is very difficult for smaller companies.  A lack of knowledge about existing online platforms has lead many companies to create their own customized solutions. 

However, creating a functioning website can be quite expensive and often requires hiring staff with specific skills.  Getting employees with website skills can be particularly problematic for smaller companies that may not need someone full time and have to pay a premium wage to get skilled workers to join smaller firms.

Companies do not have the time or resources to invest in expensive hardware and storage systems.  Hence, most smaller firms need to be able to find other vendors with dramatically better abilities to manage e-Commerce platforms at lower cost, greater reliability, and improved security. 

Finally, our firm-level interviews turned up many examples of companies struggling with payments issues.  These challenges ranged from getting online payment mechanisms set up on the websites in the first place to crazy high fees imposed on companies wanting to set up online shopping carts.  The charges for online card processing can be very steep for smaller firms with limited cash flow.

Government officials trying to address the specific challenges faced by such an assortment of companies struggle to respond appropriately.  Because SMEs are small and numerous, getting feedback from such firms is always harder than finding out about the concerns of larger companies with greater resources.

Most small companies do not recognize that many of their specific challenges could be addressed by government policies.  They often regard their situation as simply part of a background environment that is immutable.  For example, firms may have a hard time managing multiple bank terminal machines as required by different bank and financial institutions.  Government could fairly easily sort out this obstacle to firms by requiring that terminal machines function for multiple financial institutions. 

When asked by government, however, most companies might not complain about the banking terminal issues to agencies or ministries.  This is not because the issue is insignificant, but because firms think that a problem like this could only be addressed by banks.  Such a complaint is not seen as a policy or regulatory issue.  Hence, officials that ask for “policy feedback” may not receive as much useful input as they might have expected. 

Governments in the region, and particularly Singapore, offer many different types of support programs for small firms.  These range from seed capital to training courses to salary supplements for different types of staff.  However, for a small company, managing these programs may require significant investments from staff members. 

Such programs also frequently take time—up to six months—to completely process through complex bureaucracies.  For companies, speed to market can be critical and delays along the way can be disastrous.  Hence, many firms do not bother to take up government assistance at all because they would prefer to just self-finance or otherwise sort out their own issues than face time and paperwork delays and hassles. 

Another challenge many types of companies face in trying to manage e-Commerce operations is a lack of understanding by government officials of how e-Commerce can work.  Many officials have a very limited view of e-Commerce possibilities with a narrow focus on delivering goods to final customers.  Instead, e-Commerce programs ought to focus on a broader definition of possibilities, including delivery of both goods and services, as well as business-to-business (B2B) applications and final consumer demands. 

A broader perspective on e-Commerce possibilities and obstacles should help governments in Asia focus attention on a wider range of issues that must be considered and addressed in creating supportive policies.  For example, smaller firms that do export or import goods need a set of policies for smaller size or smaller value shipments.  Delays at the border of any kind can be catastrophic for firms since it ties up inventory and prevents payment.  A small firm can easily go out of business waiting 45 days or longer for money to reach their bank account.

Government needs to recognize the possibilities for small firms to provide a wide range of services.  For many developing countries, especially, firms can plug into wider regional or global value chains through the provision of services much more easily than they can engage in trade in goods.  Again, barriers to entry for services providers can be substantial, even if firms do not recognize that their own specific challenges in this regard are related to policy decisions by government to, for instance, limit foreign firm access to certain markets.

The Asian Trade Centre is using the information provided by this range of companies in different parts of the e-Commerce world to create a set of policy proposals for governments in the region.  We have already presented the proposal highlighted at the back of the report to the 16 party trade negotiators meeting as part of the e-Commerce deliberations in the Regional Comprehensive Economic Partnership (RCEP).  We are also working to put these ideas into practice as part of ASEAN’s Vision 2025. 

Finally, we are working within the APEC framework to encourage governments across the Asia-Pacific to consider e-Commerce in a broader, more holistic manner.  APEC has created an ad-hoc committee on the internet economy that should help guide policy across a wider range of issue areas than just a focus on telecommunications policy. 

Getting the right policies into place to unleash the creative and entrepreneurial spirits of smaller firms like those featured in our report should lead to greater opportunities for economic growth and development across the region.  Thinking carefully about e-Commerce provides an ideal space for government officials to consider and address next generation barriers to trade.   We are looking forward to hearing from more firms and governments trying to operate in this space.

***Talking Trade is a blog post written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Getting TPA for TPP

Note:  This Taking Trade post is a reprint of my article now appearing in a special issue on the Trans-Pacific Partnership, part of the Social Science Japan newsletter produced by the Institute of Social Science at the University of Tokyo.  

As the Trans-Pacific Partnership (TPP) negotiations with the 12 international trading partners nears conclusion after five long years of hard bargaining, the battle for the future of the agreement inside the United States is heating up.  There are two key elements of the fight: Congressional approval of Trade Promotion Authority (TPA) and passage of the implementing legislation necessary to bring it into force in the United States.  In both areas, interest group pressures are likely to be substantial, making ratification of the TPP uncertain.

In the U.S., Congress has the authority to regulate commerce, which includes setting tariffs.  But getting 535 members of Congress to negotiate trade agreements is not practical, so historically the executive branch has handled these tasks.  In the 1970s, this arrangement was formalized.  Congress explicitly gave the role of negotiating trade agreements to the White House subject to a number of specific provisions.

Under what used to be called “fast track” and is now labeled “Trade Promotion Authority” (TPA), Congress is to be notified of the intention to launch negotiations.[1]  Congress is given 90 days to respond.  The United States Trade Representative (USTR) office is also tasked with gathering information about the future direction and important elements for the talks during this time period from a range of key stakeholders including business groups.  After the initial comment period is concluded, USTR is required to keep Congress informed as negotiations continue.  Finally, Congress has promised to vote the entire trade agreement up or down without amendment at the end by a simple majority vote in both chambers.[2]  The timeline is shown in Table 1.

Ideally prior to the start of new negotiations, USTR would receive TPA from Congress, with the broad parameters and objectives set for any trade agreements to be negotiated during the time covered by the approval.  However, this was not done for the TPP as the latest version of TPA expired in 2007.

The outgoing George W. Bush administration announced its intention to join what became the TPP in September 2008.  The Obama White House decided not to press Congress for renewal of TPA in 2009, but rather started negotiations in March 2010 by following the provisions of TPA “as if” it were active. 

Over all the years of TPP negotiations, the White House never seriously pursued the votes in Congress to support renewal of TPA.[3]  But now, as talks enter the closing phase, TPA is necessary to finish the agreement.  Without TPA, Congress can amend the agreement from the opening sentence to the closing word.  It could also allow the agreement to die in committee or tangle ratification in an endless filibuster.  In short, without the provisions of TPA in place prior to the closure of the agreement, the TPP will likely fail to be ratified by Congress.[4]

The first problem for 2015, then, is to secure passage of TPA.  The last time the bill was authorized, in 2002, the votes were very close: approval by 215 to 212 in the House of Representatives and by a margin of 64 to 34 in the Senate.[5]  All indications are that a TPA vote may be equally close this time.

Even the passage of TPA, however, does not mean smooth sailing for a TPP deal.  In authorizing TPA, many members of Congress want to place strict conditions on elements of a final deal that must be present before they will grant approval.  Most controversial is an ongoing discussion of including legally binding rules to prevent trade agreement members from manipulating their currencies.[6] 

Until now, currency issues like manipulation or currency controls have been kept out of the TPP.  There is no appetite within the other TPP member countries to include such rules and certainly there is no interest in adding in an extremely controversial set of provisions at this late date in negotiations.  Hence, a decision by Congress to insist on such currency rules in TPA approval in 2015 will be deeply problematic for the TPP.

Ideally, TPA will be granted—as it has always been—for a range of trade agreements and not simply given for the TPP.  The United States is simultaneously engaged in multiple negotiations over trade: with the European Union in the Trans-Atlantic Trade and Investment Partnership (TTIP); with nearly two dozen countries on the sidelines of the World Trade Organization (WTO) in the Trade in Services Agreement (TiSA); with 80 countries at the WTO in updating the Information Technology Agreement (ITA); and with more than 160 countries in the WTO in the Doha Development Agenda (DDA).   All will need a version of TPA, at least before any agreement can be implemented and enter into force for the United States.

Once TPA has been granted, the fight over trade inside the U.S. will not be over.  Instead, different groups are likely to engage in potentially bitter arguments over the provisions of the TPP as Congress grapples with whether or not to approve this specific trade deal. 

Even for less controversial agreements, passage of the final legislation for free trade agreements (FTAs) has been far from assured.  Congress approved the three most recent FTAs, with Colombia, Panama and South Korea, on October 12, 2011.[7]  The votes were largely along partisan lines with many Democrats in Congress voting against President Obama.[8] 

The TPP is a much more complicated and challenging agreement.  Many provisions will require changes in domestic rules and regulations.  Sectors that have not been affected by previous trade agreements may face new issues in the TPP.  For example, the agreement drops tariffs to 0 on 90% of goods trade on entry into force, which may impose new competitive challenges on some industries from the very beginning.

Sectors, firms and industries that believe they will be negatively affected, especially by the removal of previous protections of one sort or another, can be expected to lobby furiously to block the implementation of the TPP in the United States.  They will likely find a receptive audience, especially from some members of Congress.

Trade agreements have always been problematic for Democrats given their historical ties to the labor and union movements.  Additional challenges come from the environmental wing of the party, as opening trade is assumed to undermine environmental protections.  Although changing, the party has not been as closely tied to the business community. 

An additional complication in securing support from Democrats for the TPP will be the legacy of the North American Free Trade Agreement (NAFTA).  The battle over NAFTA was long and bitter.  In the end, President Bill Clinton defied his party to push for the conclusion of the deal to tie the United States more closely with Canada and Mexico.[9] 

The debate around NAFTA was highly charged with supporters overselling the benefits and opponents making wild claims (Ross Perot, a US Presidential candidate, famously called NAFTA a “giant sucking sound” of American jobs heading to Mexico in one of the debates.[10]) 

In the 20 years since NAFTA was approved, the evidence on the benefits to the American economy has been largely mixed.  In this relatively uncertain environment, opponents have been quick to seize on examples of companies that moved operations into Mexico.  Some will likely argue that a similar loss of jobs will take place under TPP.[11]

Against a backdrop of—at best—lukewarm Democratic support, the TPP will require Republicans to line up in support of the agreement.  In the past, Republicans largely voted in favor of trade agreements.  Now, however, the Republican party is also split.  Many members of the party are firmly opposed to any type of foreign entanglements, especially those in the Tea Party wing.  Others are simply loath to give President Obama a victory in anything at all.  Hence, unified support by Republicans for the TPP cannot be taken as a given. 

In this environment, the votes needed to bring the TPP into force in the United States may very well be closer than ever.  The President and his team will need to mount an aggressive campaign to ensure that the 12 nation deal does not collapse at the finish line in Washington DC. 

[1] For the best review of the history and evolution of fast track, see I.M. Destler, 2005, American Trade Politics, 4th edition, (Washington DC:  International Institute for Economics).  For a recent discussion of issues, see William Cooper, January 13, 2014, “Trade Promotion Authority and the Role of Congress in Trade Policy,” Congressional Research Service 7-5700.  Access at: http://fas.org/sgp/crs/misc/RL33743.pdf.

[2] Technically, TPA is a Congressional-Executive Agreement, which is why it needs approval of both houses of Congress (unlike Executive Actions, which do not need Congressional approval at all or treaties that require 2/3 of the Senate). 

[3] President Obama did ask for TPA on January 30, 2013, but did not push very hard to receive it. 

[4] Technically, Congress does not ratify trade agreements.  But to bring them into force, Congress must pass implementing legislation to bring existing laws into compliance with the newly negotiated international obligations.  TPA provisions also streamline the procedures for doing so and prevent the deal from getting stuck while under review.

[5] A 1998 vote went down to failure with a vote of 180-243 in the House.

[6] For example, see “Brown, Levin Working on Currency Legislation Reminiscent of Earlier Bills,” Inside US Trade, January 16, 2015, Vol. 33 No. 2. 

[7] House votes for the three were: 262 to 167 for Colombia; 300 to 129; and 278 to 151 respectively while the Senate voted 66 to 33; 77 to 22; and 83 to 15 for the Korean agreement.

[8] For a nice interactive summary of the votes, see Binyamin Applebaum and Jennifer Steinhauer, “Congress Ends a 5 Year Standoff on Trade Deals in Rare Accord,” New York Times, October 12, 2011, accessed at: http://www.nytimes.com/2011/10/13/business/trade-bills-near-final-chapter.html?pagewanted=all. 

[9] In the final vote, Democrats split.  The House voted 234 to 200 and the Senate was 61 to 38.  The Democrats were almost evenly divided in both chambers.  (The vote over the next deal, the Central American Free Trade Agreement or CAFTA, was even closer.  If even one House member had changed a “yes” vote to “no,” the agreement would have failed in 2005 by 216-216.)

[10] See his remarks in the 1992 Debate at: https://www.youtube.com/watch?v=Rkgx1C_S6ls

[11] See, for example, remarks by Democrat Congresswoman DeLauro, “DeLauro Breaks with Obama, Big CT Firms on Pacific Trade Deal,” Hartford Courant, January 12, 2015; comments by Elizabeth Warren, “Senator Warren’s Remarks at  AFL-CIO National Summit on Raising Wages,” January 7, 2015 (accessed at: http://www.warren.senate.gov/?p=press_release&id=696); or Julie Hirschfeld Davis, “Democrats Step Up Efforts to Block Obama’s Trade Agenda,” New York Times, January 8, 2015.