The signing of the Trans-Pacific Partnership Agreement (TPPA) by the trade ministers of 12 Asia-Pacific countries in February 2016 has caused some unwarranted concerns. Business leaders, think-tanksand economic commentators have all expressed concern, and there seems to be a consensus that Bangladesh will lose, given its heavy dependence on the ready-made-garments (RMG) sector in its export. Vietnam is anticipated to win at the cost of Bangladesh as it is expected to gain duty-free privileged access to the US and other TPP country markets.
Many observers at the Bangladesh Development Conference at Harvard University in June 2015 voiced their concerns that Vietnam, enjoying tariff preferences and technology transfers following the TPPA, is likely to overtake Bangladesh as the second largest RMG exporter in global trade by 2024.
A senior, well respected economist was quoted as saying, “Investment decisions by entrepreneurs will also be affected by the trade agreement, making Vietnam a stronger candidate as a preferred destination, due to zero-duty access to other TPP nations, which control about 40 per cent of global economy… We should also prepare to join such a mega deal, as some other countries are also planning for the agreement.”
But a closer look reveals that projected gains often claimed by such proponents are grossly exaggerated. It is ‘much ado about [next to] nothing’. There is no need for Bangladesh to become overly concerned if we look closely at the agreement.
Hazards of estimation
Estimating benefits from a trade pact, especially when it involves a group of heterogeneous economies, is not an easy task. The large-scale models used for such exercises are great simplifications of reality – they cannot even capture the complexities of a single economy, let alone a group of assorted economies. They rely heavily on assumptions poorly grounded in the real world. Hence, one can almost get whatever results one wishes to obtain, as pointed out by Nobel Laureate economist Robert Solow in the American Economic Review in 1985.
Solow observed, “the best and brightest in the profession proceed as if economics is the physics of society…a modern economist along with his or her personal computer… could set up in business without even bothering to ask what time and which place… run the obligatory familiar regression. The familiar coefficients will be poorly determined, but about one-twentieth of them will be significant at the 5 percent level, and the other nineteen do not have to be published… the proper choice of a model depends on the institutionalcontext. One will have to recognize that the validityof an economic model may depend on thesocial context. What is here today may begone tomorrow, or, if not tomorrow, then inten or twenty years’ time.”
Furthermore, nothing is without cost, but the TPPA downplays or ignores costs, although standard economic theory recognizes that any customs union or free-trade area will involve trade-creation and trade-diversion with winners and losers – both within and among trading partner countries – depending on the various effects of trade-creation and trade-diversion.
Besides direct and indirecteconomic costs, there are political and social implications. Countries are obliged to follow the rules of the agreement even when in conflict with the national or public interest. Common sense also tells us that rules will be dictated by the powerful,often with consequences developing country trade negotiators are poorly prepared to deal with, especially as most so-called free trade agreements involve many non-trade provisions.
Thus, assessing the benefits and costs of a trade pact is not just a matter of applying some generalized econometric or simulation models. One needs to have a good understanding of international political economy, and more.
Furthermore, rules set today may be at odds with what will be needed tomorrow or in ten or twenty years’ time. For example, developing countries agreed to the World Trade Organisation (WTO) Agreement on Agriculture after food prices had been declining for almost half a century, thanks to the Green Revolution, etc. However, when food prices started rising again, its provisions undermined food security, especially for the poor, as India and others have learnt in recent years, resulting in protracted negotiations at the WTO, especially with its recent Food Security Act.
The claimed effects of the TPPA have been grossly misrepresented, and it is therefore crucial to better understand what the evidence actually shows, rather than to cry wolf. Retaining policy space, or a government’s ability to pursue policies to achieve developmentalobjectives and to protect the national and public interest, is vitally important, and should not be sacrificed in pursuit of some non-existent benefits.
Modest trade gains
TPP proponents generally refer to studies sponsored by the Peterson Institute of International Economics, the well-known Washington DC-based cheerleader of economic globalization. They have claimed significant economic benefits in two studies, the second one used by the World Bank’s early 2016 Global Monitoring Report. The latest study claims growth gains ranging from half of one per cent in the US to 13 per cent in Vietnam after fifteen years, i.e. not annualized. It should be noted that the only official US government CGE study found total growth of meagre 0.1 per cent after ten years of the TPP.
The Peterson Institute studies use methodologically-controversial computable general equilibrium (CGE) models. Theserely on many unjustified assumptions, including full employment in every country and no changes in each country’s trade or fiscal balances. Also, many assumptions made for the CGE modelling exercises are not in the final TPPA deal.
Most importantly, more than 90 per cent of overall growth gains are due to ‘non-trade measures’ (NTMs), and not trade-related growth. To make the case for the TPPA, they claimlarge economic benefits from NTMs and huge related foreign investment boosts. They then arbitrarily assume that every dollar of FDI within the TPP bloc would generate additional annual income of 33 cents, divided equally between source and host countries without any economic theory, modelling procedure or empirical evidence for this supposition.
In the process, they ignore risks and costs, or even present them as benefits! If the modelling used conventional methods for estimating gains from trade, the gains would have been negligible, and not considered statistically significant, as with the only US government study of TPP impacts.
The only quantified benefits, consistent with mainstream economic theory and evidence, are tariff-related benefits that make up a very small share of the projected gains. Yet, these gains are much smaller than claimed by TPP governments who cite national versions of the Peterson Institute/World Bank studies.
Less than a quarter of the TPPA’s purported gains can be considered seriously. Even these need to be compared against costs conveniently ignored by these studies as well as the actual details of the final deal. Needless to say, ostensible country gains similarly need to be discounted for the same reasons.
Diverse expected TPPA provisions were fed into the CGE model as simple cost reductions, with scant consideration given to downside risks and costs, e.g. due to reductions in national regulatory autonomy due to the TPPA. For example, provisions to greatly extend intellectual property rights (IPRs) are modelled as cost reductions increasing trade in services.
Provisions allowing foreign investors to sue governments in private tribunals or to undermine national bank regulations are considered trade-promoting cost reductions. Thus, by excluding crucial costs and risks, TPPA advocates exaggerate benefits by claiming dubious gains from NTMs.
Even unadjusted, the gains are small relative to the GDPs of TPPA partner economies. Also, while projected trade benefits will take a decade to realize, the major risks and costs will be more immediate. The projected trade benefits represent one-time gains, and have no recurring annual benefit, i.e. the gains are static, not dynamic, meaning that they do not raise the economies’ growth rates.
Moreover, the distribution of benefits has not been analysed in most of these exercises. If they mainly go to a few big or foreign businesses, with losses borne by others, the TPPA would exacerbate inequality. It is likely to be the case as there will inevitably be job losses as adjustments take place and the government’s ability to respond will be constrained due to TPPA rules.
But the prospect of losing jobs is assumed away with the CGE models’ full employment assumption. Using more realistic methodological assumptions, TPPA sceptics have good reason to be concerned.
For example, using the United Nations Global Policy Model, a Tufts University studyaccepted the Peterson Institute’s 2014 estimates of trade-related gains, but used more realistic assumptions to estimate TPP effects on employment and inequality. It found that the TPPA would lead to net employment losses in many countries and higher inequality in all country groupings. Declining worker purchasing power would weaken aggregate demand, slowing economic growth, with the US and Japan projected to suffer small net income losses, not gains.
The TPPA will increase pressures on labour incomes, weakening domestic demand in all participating countries, in turn leading to lower employment and higher inequality. Even though countries with lower labour costs may gain greater market shares and small GDP increases, employment is still likely to fall and inequality to increase.
Net gain or loss?
The TPPA goes much further into how governments operate than is needed to facilitate trade. Such ‘disciplines’ significantly constrain the policy space needed for countries to accelerate economic development, ensure food security and protect the public interest.Moreover, the TPPA will necessarily entail both short- and long-term macroeconomic and social adjustment costs, such as unemployment, public revenue losses and changes to the current account. By completely ignoring such costs, the gains from reducing NTMs are easily overestimated.
In fact, most merchandise trade among TPPA countries has already been liberalized by earlier trade agreements as well as unilateral initiatives. Rather than eliminating tariffs, most will only be reduced slightly, and even then, only a decade or more after it comes into force, after being ratified by all countries, which may take several years, or may never happen, if the US presidential primaries’ rhetoric is anything to go by. Therefore, TPPA will hardly accelerate trade liberalization as such.
Instead of promoting growth and employment, the TPPA is mainly about imposing new rules demanded by large transnational corporations, mainly from the US. Thus, the TPPA greatly strengthens investor and intellectual property rights (IPRs), while weakening national regulation, e.g. over financial services.
The TPPA will strengthen monopolistic IPRs, well beyond the onerous provisions of the WTO Trade-Related Intellectual Property Rights (TRIPS) agreement, especially for big pharmaceutical, media, information technology and other companies. For example, the TPPA will allow pharmaceutical companies longer monopolies on patented medicines, keeping cheaper generics off the market, and blocking the development and availability of similar new medicines. Despite all odds, Bangladesh has developed a pharmaceutical industry with growing exports, which such provisions will crush.
The TPPA will also strengthen foreign investor rights at the expense of Bangladeshi businesses and the public interest. The TPPA’s investor-state dispute settlement (ISDS) provisions will enable foreign investors to sue a government in binding private arbitration if they claim that new regulations reduce their expected future profits, even when such regulations are in the public interest, e.g. health. This can oblige governments to compensate foreign investors for losses of expected profits due to national regulations.
These pro-investor measures impose significant costs, especially on developing countries. They will exert a ‘chilling effect’ on important government responsibilities to promote national development and protect the public interest. For example, a New Zealand study shows that the TPPA’s ISDS provisions and restrictions on state-owned enterprises will deter future NZ governments from regulations and policies in the public interest, for fear of litigation by foreign corporate interests.
Potential ISDS compensation payments or settlements could far outweigh the limited economic benefits of TPPA. Even when cases are successfully defended, the legal costs will be very high. Thus, the ISDS threat, if not its actual repercussions, will be good enough to ‘discipline’ governments through ‘regulatory chill’.
In Malaysia, the government will be less likely to ban or restrict the use of toxic herbicides on plantations. Although declared carcinogenic by the WHO, the government will not only have to pay for the costs of treating its victims, but will also have to compensate the herbicide supplying foreign corporations for lost profits.
As private insurance is already available for investment protection, such ISDS provisions are completely unnecessary. Even advocates of free trade and trade liberalization, such as Professor JagdishBhagwati, have sharply criticized the inclusion of such non-trade provisions in ostensible free trade agreements.
It is no secret that the main US motive for the TPPA has been to undermine China. President Obama’s last State of the Union address made this abundantlyclear: “With TPP, China does not set the rules in that region, we do”.
Despite being portrayed as a trade deal, the TPPA is not mainly about ‘free trade’. The USA and many of its TPPA partners are already among the most open economies in the world. The main trade constraints involve non-tariff barriers, such as ballooning US agricultural subsidies, which the TPPA does not address.
After several years of deteriorating bilateral relations with China, Vietnam is the only member country where public opinion favours joining the TPPA. Several other developing country members, such as Mexico, Chile and Singapore, already have agreements with the US to which the TPPA will add little. There is widespread suspicion that the Malaysian motivation for joining the TPPA is mainly political while other US allies in Southeast Asia with even closer trade and bilateral relations with the US, such as Thailand and the Philippines, have chosen to steer clear of it.
Implications for Bangladesh
The anxiety of observers of Bangladesh’s development arises from their concern about the prospects of losing competitive advantage in RMG to Vietnam. But the TPPAand related developments provide more of an opportunity than a threat.
It is quite understandable that very few people have actually read the 6350 page TPPA document, but the devil is really in the details. For instance, it contains a ‘yarn forward’ rule. Under this rule, the only garments and apparel which will qualify for lower tariff duties will be those using yarn manufactured by another TPP member country, such as the US or Japan, rather than the much cheaper yarn imported into Vietnam and Bangladesh from China and other Asian countries.
Moreover, very few garments will qualify for total tariff exemption; even if they qualify under the yarn forward rule, they will get some tariff reduction rather than total exemption, and that too after many years.
The TPPA cost-benefit analysis commissioned by the Malaysian government done by Pricewaterhouse Cooper expects the main trade gains for Malaysia to come from textiles exports. This expectationseems to ignore the fact that the number of people employed in the sector has fallen by well over 80 per cent in the last three decades precisely because labour costs were still too high, even after employing Bangladeshi and other foreignworkers at lower cost.
As China moves increasingly to more sophisticated higher-end products, Chinese firms as well as foreign firms in China will want to move abroad. Given the US-led TPPA’s overtly anti-China purpose, Bangladesh will likely become a more attractivelocationfor Chinese firms followingVietnam’s ‘pivot to the US’.
But in the longer term, Bangladesh must not remain stuck at the low end of labour-intensive, low value-added activities of the RMG sector. It should progressively move towards more diversified and higher value-added activities,byaccelerating this process with active industry or trade and investment policies. As many East Asian experiences show, with such pro-active policies, countries can quickly gain competitiveness in more diversified, higher-end products.
In fact, the Government of Bangladesh seems aware of the need for diversification and industrial restructuring towards higher value added activities. The promotion of structural transformation of the economy is one of the important strategic goals of the Perspective Plan of Bangladesh, 2010-2021. The Plan mentions the Government’s strategic export policy giving the highest priority to several emerging exports that demonstrate high potential, such as pharmaceutical products, ICT products,including software, as well asocean-going ship building, refurbishing, maintenance and repair industries.
Bangladesh has already demonstrated enormous potential in these areas. Stricter IPR rules and ISDS provisions are likely to constrain Bangladesh’s ability to accelerate development of these promising higher value-added activities and to diversify the economy.
Thus, it would be better for Bangladesh to stay away from the TPPA to take a more prudent and pragmatic approach with long-term national development objectives in mind. A knee-jerk reaction to try to jump on to the TPP band-wagon would be a serious mistake.
Anis Chowdhury was Director of the Macroeconomic Policy & Development Division of the Economic and Social Commission for Asia and the Pacific (UN-ESCAP) during 2012-2014, among other senior UN responsibilities since 2008, and was Professor of Economics (2001-2012) at the University of Western Sydney, Australia.
Jomo Kwame Sundaram was an Assistant-Secretary-General for Economic Development in the United Nations system during 2005-2015, and was awarded the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He is a co-author for this piece.