The Case for TPP: Rebutting the Naysayers

October 5, 2015 12:15 PM

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The long-anticipated agreement on a Trans-Pacific Partnership (TPP) trade accord—reached after many days of negotiations on October 5—will usher in a new phase of debate and misinformation about the benefits of liberalizing trade. The TPP will lower trade barriers and set new rules for investment, labor rights, and the environment for the United States, Japan, and 10 other countries. Critics of the accord have focused on three substantive arguments that need to be rebutted as the debate gets under way. Their claims are focused on these areas:

  • TPP won’t have much payoff for advanced nations like the United States (or Japan) because their tariffs on imports of goods are already low.
  • The investor-state dispute settlement provisions (ISDS) are a giveaway to multinational corporations (MNCs).
  • The intellectual property rights (IPR) provisions in TPP will enrich pharmaceutical firms while denying life-saving drugs to poor people.

Each of these criticisms deserves a short response.

Payoff to the United States (and Japan)

Neither the United States nor Japan is a free trader. Tariff barriers to US imports of selected agricultural products are high and nontariff barriers to imports of services are severe. Japan’s agricultural trade is even more restrictive. Significant barriers remain on US and Japanese exports to the ten TPP markets abroad. Of course TPP will not eliminate all these barriers in one fell swoop but it will make a good start. Over the next decade, TPP could additionally serve as a gateway to productive deals with other Asian nations, and eventually serve as the foundation for a free trade agreement encompassing the entire Asia-Pacific region.

The casual dismissal of the notion that stronger IPR could enhance gains from trade for countries like the United States or Japan ignores the enormous international trade in ideas captured, imperfectly, in the official trade statistics. America’s revenues from its licensing of intellectual property to foreign customers exceeded its payments for foreign intellectual property by more than $90 billion in 2013, and constituted a larger trade surplus than America enjoyed in aircraft, agricultural goods, or any other category of merchandise. Stronger IP protection abroad could significantly enhance this surplus, bringing greater balance to America’s economic interaction with the rest of the world. Like the United States, Japan also runs a surplus in its trade of ideas with the rest of the world, and it is also poised to benefit from stronger IP standards.

The late 20th century history of trade and investment liberalization was a story of enormous gains to US households in the form of lower prices and better-paying jobs, to the tune of several thousand dollars per household per year. There’s no reason to abandon successful trade and investment liberalization policies in the 21st century. To be sure, those who lose must be compensated, through Trade Adjustment Assistance and other means, but since national gains in the United States outweigh individual losses by at least twenty to one, transitional adjustment costs are no reason to reject TPP.

Investor-State Dispute Settlement

TPP critics have attacked ISDS as a corporate giveaway. But ISDS provisions—designed to thwart unjust expropriation and unfair treatment, and bypass corrupt, incompetent or biased national courts—have become standard fare in thousands of investment treaties and free trade agreements over the past half century, and none has become a path to corporate riches. In fact, of the hundreds of cases that have gone to arbitration, corporations lose more than half the time, and when they win the payments just cover damages incurred (no punitive awards or triple damages).

Given this record, TPP critics are at a loss to cite an outrageous ISDS award against the United States—because there are none. In fact, the United States has prevailed in all 13 ISDS cases brought against it by foreign firms. Instead, critics speculate that future cases might seek compensation for foreign corporate losses arguably incurred on account of environmental, safety, or financial regulation. This speculation is flatly contradicted by explicit language in past US agreements that explicitly recognizes the proper role of fair regulation. Similar language is sure to appear in the TPP.

ISDS provisions could stand improvement, to be sure. They should require transparency by arbitration panels at all stages, and they should provide an appeals mechanism to correct improper decisions. But potential improvements are not a reason to reject ISDS, much less to jettison the TPP.

Intellectual Property Rights

TPP critics have cited the well-publicized opposition of Doctors Without Borders to the pharmaceutical patent provisions in TPP and suggest that “the deal would make medicines unaffordable in developing countries.” But in fact the impact of TPP on drug prices and availability will be far more modest than this sweeping criticism suggests, and the agreement retains important safeguards to ensure access to life-saving medicines.

Most drugs available for the treatment of disease around the world are already off patent. Even in the United States, generics account for more than 84 percent of all prescriptions. TPP will have no impact whatsoever on access to the vast majority of existing drugs for which patents have already expired. For drugs that are still protected by patents, TPP members will retain a far-reaching ability to influence the prices at which these drugs are sold within their jurisdictions. In Japan, Canada, and Australia, which are all participating in TPP negotiations, public agencies negotiate with international drug companies to lower the prices of patent-protected drugs sold locally. Nothing in TPP will prevent these agencies from continuing to do so, and nothing in TPP would prevent any other member state at any level of development from adopting similar policies.

The provisions in TPP, in some cases, modestly extend the term of patent protection enjoyed by innovative new medicines, thereby delaying generic entry. But current international law allows patent rights to be overridden in the event of a public health emergency, and TPP does nothing to limit that possibility. If an epidemic breaks out in any TPP member state, and no effective generic treatment exists, any TPP member state would have broad leeway under international law to ensure access to this life-saving medication by invoking its right to force any patent-holder, foreign or domestic, to license the technology to low-cost producers, ensuring broad access at reasonable prices.

Most of the provisions criticized by TPP opponents have been incorporated into earlier US free trade agreements, going back all the way to the US-Jordan FTA, in force since 2001. These provisions have not led to a devastating collapse of drug access or a precipitous decline in public health in America’s FTA partner countries before, and it won’t happen now.

Trust in Facts, not Fearmongering

Paul Krugman titled one of his anti-TPP op-ed articles for the New York Times “Trade and Trust.” He suggested in that article that TPP represents a new departure for US trade policy, whose outcome will be far less beneficial than previous steps taken toward free trade, and insinuates that prior trust in the benefits of trade should not extend to this new undertaking.

To argue this way is simply misleading. Neither the ISDS provisions nor the drug patent provisions in TPP are new, and nothing in America’s recent policy record suggests that either is dangerous. Krugman’s anti-TPP stance is flatly contradicted by the strong support the initiative has received from 14 former chairs of the Council of Economic Advisers, who hail from every administration both Republican and Democratic, since Gerald Ford’s, and constitute an eminent group of Krugman’s academic peers.

President Barack Obama has shown enormous courage in championing TPP, and Republicans in Congress deserve credit for working with him to make it a reality. Prime Minister Shinzo Abe has also shown considerable courage in pursuing his third arrow of structural reform through the negotiation of a meaningful regional trade agreement that will benefit Japan. The facts clearly support their efforts. Let’s hope they succeed in ratifying a significant and beneficial agreement.

Comments

Rik

But potential improvements are not a reason to reject ISDS, much less to jettison the TPP. So we should just accept this flawed and undemocratic system and never mind that it is laughably corruptible and can never be repealed or modified? Australia has spent 50 million fighting a single ISDS case after the company involved was firmly rebuffed by every level of our judicial system. A system which is rarely characterized as "corrupt, incompetent or biased". We are not allowed to know what services those taxpayer dollars have bought, or what legal arguments have been made in our name. The legislation at issue, plain packaging of cigarettes, has been a great boon to our nation's health and budget. The effectiveness and benefits of these measures were researched and well known prior to the legislation being enacted and the results since then have confirmed those expectations. Smoking rates have fallen, lives have been saved and our citizens enjoy higher quality of life and productivity as a result. If this is not the proper role of fair regulation then I have no idea what that phrase is supposed to mean, unless the proper role referred to is to simply not exist. Phillip Morris should be thankful they are allowed to sell their product at all given the known health issues. At this point it's irrelevant whether we win or lose. Just the astronomical cost of defending our laws from ISDS claims will have a chilling effect on regulation, and smaller nations would have been forced to simply give up. And what of climate change? Will governments be forced to fight the richest and most powerful corporations on earth in these secret courts? I think most would not even bother to try. Australia's fossil fuel reserves alone are enough to break the 2C limit, and our ruling conservative party is determined to see those reserves mined and exported. The fight to keep those in the ground is hard enough without this extra complication and barrier to effective action. The TPP and its two sister treaties could guarantee that the world does much less to reduce the effects of climate change then it would otherwise. In the worst case scenario that could mean the death of human civilization, and without the easy sources of energy we enjoyed in the past it is unlikely we could ever recover. Should we take that risk?

Gary Clyde Hufbauer

At Australia's insistence, the TPP text precludes tobacco companies from bringing future ISDS cases. Nearly all defendants -- whether individuals, corporations, or governments -- would similarly prefer an absolute bar against being dragged into court or arbitration proceedings. But because absolute bars eliminate the legal system as a means of settling disputes, they are used sparingly. Some observers would like to bar all ISDS claims, but we disagree. Decided cases show that the great majority of awards have considerable justification. We note that, under many ISDS regimes, the arbitrators have the option of awarding legal fees against the losing party -- a partial answer to the complaint of excessive arbitration costs. The suggestion that ISDS claims will be brought against carbon taxes and similar measures to reduce climate change seems implausible in light of specific TPP recognition of the "right to regulate in the public interest." -Gary Hufbauer

Hugh Campbell

“Not taking risks one doesn't understand is often the best form of risk management.”
― Raghuram G. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy

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