Kellogg School of Management at Northwestern University

The Trans-Pacific Partnership—an ambitious trade agreement reached in October 2015 among the United States and eleven Pacific Rim nations including Mexico and Canada—has been a source of controversy across the U.S. political landscape. Detractors argue it threatens American jobs and the environment; proponents say it would spur growth and secure U.S. leadership by addressing issues specific to a 21st century global economy. So what exactly is at stake?

In part, the pact is about reducing tariffs and other common trade barriers. Beginning after World War II, and especially since the creation of the World Trade Organization in 1995, most of the world’s economies have made steady progress on that front, and a new deal would continue the trend.

When you strip away the politics, says Ben Jones, a professor of strategy at Kellogg, the economic argument for free trade is clear. “The best evidence suggests that the gains from trade are enormous,” he says—not just for the United States, but for all participating nations. He points to the development of South Korea as an example of how trade can drive rapid economic growth, which countries like Vietnam and Malaysia hope to emulate. “It’s clearly a boon for emerging markets.”

Overcoming Trade Pact Anxiety

Still, free trade can cause anxiety among some groups. “On average, there is a net benefit, but there are winners and losers within a country,” Jones says.  “And agreements bog down when they don't pay attention to the real concerns of those who lose. Trade Adjustment Assistance, while difficult to implement, can help solve these challenges.”  This assistance, which includes job training and other employment-related benefits, was included in the Trade Preferences Extension Act passed by Congress last month—though it may not necessarily be part of the final T.P.P. agreement.

Nonetheless, while much domestic concern is about the loss of U.S. manufacturing jobs, Jones cautions against seeing trade agreements per se as the cause of any broader negative trend. “People tend to conflate trends,” he says. “Along with an increase in global trade, we see stagnating middle-class wages, the decline of manufacturing and rise of services, and environmental concerns. In some ways these are connected, but it’s hard to say that trade agreements are a principal contributing factor compared to the broader forces of technological advances in the U.S. and elsewhere.”

But more than reducing barriers to trade, “the T.P.P. is really about establishing rules and regulations,” Jones says. “There is a great need today for broader regulatory harmonization—and that’s a big part of what the deal is meant to achieve.”

Regulating Global Supply Chains

Philip Levy, an adjunct professor of strategy at the Kellogg School, points out the need for a standard set of regulations to build global supply chains. “Today, for the sake of efficiency, we have production and distribution all over the globe,” Levy says. “There really is no country in the world that could produce the iPhone—from start to finish—in an economically viable way. That means there is competition at every stage in the value chain, which makes it more important for multinational companies to work under a single set of rules.”

The pact will also provide an opportunity for countries to carry out much-needed economic reform. “I think there is a strong analogy between Nafta and the Trans-Pacific Partnership,” Levy says, “but it’s not the one people usually think of. Both agreements allow countries to make credible reforms in order to attract investment. Nafta did that for Mexico, and the T.P.P. could do that for nations like Vietnam. Even Japan is using this as a way to push reforms.”

While free-trade agreements facilitate imports and exports, it is less clear whether the proposed regulations will lead to positive changes in other areas—like intellectual property. “The last twenty years have shown that intellectual-property protection is a serious concern across borders,” Jones says, as access to software, films, and most importantly pharmaceuticals has generated conflict between multinational corporations and consumers in developing countries, many of whom cannot afford potentially life-saving medications. “In some ways it’s highly questionable why intellectual property was pushed under this trade umbrella and whether it is in fact helpful for the world at large.”

It is also unclear how strict the trade deal’s environmental regulations will be. But Levy is bullish. He says there is evidence that as countries grow wealthier, they begin to care more about the environment. “Our best hope for getting everyone on board with environmental progress is ensuring that these other countries become more prosperous.”

Photo credit belongs to Randy Tan. Published under a Creative Commons license.

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