In his State of the Union speech, President Obama said he would submit a bill to Congress that would grant him the fast track authority to finalize the Trans-Pacific Partnership (TPP)—a trade pact with Pacific Rim countries such as Japan, Malaysia, Peru, and Chile. While free trade has brought benefits in the past, tariffs in the world economy are at an all time low and new deals like the TPP offer few new gains in terms of growth and jobs for the American people.
Moreover, deals like the TPP now come with very high risks. Given that tariffs on goods are so low, these sorts of agreements have rebranded bona fide economic regulations as “barriers to trade,” blurring the distinction between protectionism and measures to protect the well-being of the middle class.
According to the most optimistic economic models, the TPP would only boost U.S. GDP between one and three tenths of one percent by 2025. This essentially amounts to a rounding error of just over one hundredth of a percent per year over the next ten years. Even these tiny gains are likely overestimates, given that they assume full employment for the U.S. and all trading partners.
Alongside these small gains, the TPP comes with high costs. The negotiations are conducted in a highly secretive manner, but leaked text on foreign investment and financial services reveals that the TPP rebrands regulations to protect workers and the general public from financial crisis as unfair barriers to trade. When signing on to “market access” provisions—a cornerstone of the TPP–nations must “liberalize” regulations that are seen as lessening the profits of Wall Street.
The TPP would also enshrine the ability of Wall Street to move funds in and out of the United States at its whim. This “financial liberalization” greatly exposes the U.S. to financial instability across the world, while at the same time barring our trading partners from regulating financial flows that are causing financial instability in their countries. It is problematic, given that the International Monetary Fund (IMF) has now taken to recommending and requiring that nations regulate cross-border capital flows. And it is dangerous since the growing interconnectedness of the global financial sector is the channel from which crises become contagious.
Moreover, the TPP elevates the right of powerful corporations to directly sue the U.S. federal, state, or local governments and the governments of our trading partners for not deregulating. Such a dispute mechanism—referred to as investor-state-dispute resolution—stands in stark contrast with the World Trade Organization (WTO), where disputes are settled among nation-states and regulators.
These are not theoretical possibilities, it has already happened: the Czech Republic recently had to dole out $260 million because the Czech government did not bail out a non-Czech bank after their financial crisis. Imagine the United States getting sued by Credit Suisse, Deutsche Bank, Société Générale, HSBC, and the rest for not bailing them out, too.
One of our TPP partners, Malaysia, had a case filed against it for emergency measures it took to react to the impacts of the Asian Financial Crisis in that country.
Main Street and the middle class will be the hardest hit from another crisis in the United States. During the 2008 crisis, banks took large losses and credit froze for Main Street, throwing millions out of work and reducing the earnings of those workers that were able to keep their jobs. The evaporation of pension funds due to the crash was the nail in the coffin for many workers and families who had worked hard all their lives. The decrease in public services from fiscal consolidation and the bailout of the financial sector gave households fewer safeguards to turn to at a time of the deepest need.
Borrowing from an analogy from my colleague Anton Korinek, in a new paper in the Journal of Monetary Economics, financial deregulation is similar to relaxing safety rules on nuclear power plants: such a relaxation may reduce costs and increase profit for the nuclear industry, and may even reduce electricity rates. However, it comes at a heightened risk of a nuclear meltdown. Financial deregulation acts in the same way, it increases the profits of the financial sector at great risk and expense to the rest of society.
The U.S. should be making sure that our trade deals grant all parties all the tools necessary to prevent and mitigate a crisis, not the so called “minimum standard of treatment” that the U.S. is seeking to forge in the TPP.
U.S. trade policy has taken a wrong turn. As much as I support President Obama, it seems dangerous that a swath of regulations to protect the middle class gets relegated to a yes or no vote. The benefits are too low, the potential cost are too high.
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