TPP Is about a Lot More than Intellectual Property and Dispute Settlement



In a recent blog post, Paul Krugman claims that the Trans-Pacific Partnership (TPP) is not really a trade agreement and he castigates economist Greg Mankiw for pointing to trade’s benefits. As he writes, “I don’t see it [failure of the agreement] as the end of the Republic…It’s about intellectual property and dispute settlement; the big beneficiaries are likely to be pharma companies and firms that want to sue governments.”

Many other critics of the TPP have made similar arguments, but they focus only on a small, readily-fixable part of the agreement and ignore its potential benefits. It does not take much to make it clear that the investor-state dispute system is meant to deal only with clear cases of expropriation and cannot be used to challenge regulations that are nondiscriminatory and designed to promote health and safety. Similarly, some of the extreme demands for extended intellectual property protection within TPP can easily be dropped. But the emphasis on these issues leads the critics to miss what the agreement is really all about: a key building block in a much larger US strategy to construct a trading system that meets the governance needs of 21st century trade.

Ironically, the insights of Adam Smith, David Ricardo, and indeed Paul Krugman, are more relevant than ever. Larger, more integrated markets raise living standards through increased specialization and greater competition. The old view of trade in which products are made in one country and sold in others no longer applies. Instead, goods and services are now “made in the world,” as final products are assembled using intermediate inputs from a large number of countries.

To fully reap the gains from such production, transaction costs need to be minimized, but the barriers that raise the costs of trade are no longer tariffs but opaque regulations and standards and customs procedures that present unnecessary obstacles. In addition, to invest in these supply chains, firms require secure property rights for their assets and their technologies. To be sure, there are some regulatory differences among countries that reflect deeply held preferences, and these differences should be respected and preserved. But many rules are simply the result of history and these can be harmonized or recognized as equivalent with large savings in costs.

Unfortunately, however, the World Trade Organization (WTO) has not dealt with these issues, because its decision-making rules that require consensus allow some protectionist members to block them. As a result, those eager to make progress in these areas are advancing their interests in regional trade agreements that they sign bilaterally or in groups.

The TPP should therefore be viewed not simply as a one-off agreement, but as part of a strategy with much broader implications. And accordingly, its benefits will be far greater than this agreement alone. If it is concluded and complemented by a similar agreement between the United States and the European Union, more countries will either seek to accede to the agreements or to conclude plurilateral agreements that cover issues such as investment and standards, under the aegis of the WTO.

Consider, however, what rejection of this agreement by the United States would mean. Would it stop those interested in establishing rules that govern global supply chains in their tracks? Not likely. Instead, it would mean they will write these rules without US participation. Are we better off playing a leadership role when the rules are written, or should we just leave it up to others and allow them to discriminate against us? Yes, it may not mean the end of the Republic but it would mean the end of US leadership in the trading system.

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