Trans Pacific Trade deal: Outrageous?

The Trans Pacific Partnership (TPP), a free trade agreement between the US and countries including Vietnam, Malaysia, Japan, Peru and Chile, will be devastating to American middle class jobs and I’m baffled how few people or news agencies are even talking about it on the eve of it being fully approved. It should be noted that Hilary Clinton spent much of her 6 years as Secretary of State convincing other countries to sign on to TPP, yet the core of her campaign rhetoric is about helping the middle class.

The TPP’s core premise is to give away access to the US market in return for commitments from participating countries to abide by US policies (such as patent protection for pharmaceutical company’s drugs and respecting human rights). This could make sense if A) we don’t give away the farm (which we are doing in the TPP’s case) and B) the countries we sign the deals with actually abide by those new rules and create opportunities for US businesses in those countries. In reality, developing countries need to trap more dollars in their country than they let out (via importing goods) in order to grow and they do so in spite of any agreements they’ve signed. They can accomplish this by discouraging domestic companies importing foreign (US) goods through loopholes in these trade agreements.  We have seen the Chinese government do this effectively for the last 14 years since being admitted into the WTO via tricks; one common trick is holding imported goods like food in customs for 3-6 months for “inspection,” resulting in the spoiling of the product and a huge loss of money to the importer. The importer’s discouragement leads them to sourcing locally next time. Another method is through attaching unrelated licenses to tenders that only local companies can make use of. For every 1 MW of solar project license you secured in China, the government used to also offer up to 3 MW of coal power project licenses. The only companies that could make use of the coal license were of course Chinese energy conglomerates, so they bid to build solar below actual cost of the project just to secure the coal licenses, effectively preventing foreign companies from winning.  The result, China’s solar industry is 98% (guess-timate) dominated by domestic companies.  The US solar industry however allows full access to Chinese companies.  Not only do we buy billions of dollars of solar modules from China each year, but we allow Chinese companies that are financially supported by the Communist Party to bid and win energy supply contracts with local utilities.  I would call China clever, but it actually has more to do with US stupidity.   The TPP continues in this vein.

Hence the US balance of Trade with China exceeds a $450 billion deficit per year. In other words, over 10 years, US consumers and companies will send $4.5 Trillion dollars more to China than vice versa.  That’s a lot of money to send to a country that is arguably America’s biggest enemy.  As a reference, the Iraq war was also 10 years and only cost ~$1 Trillion.  How much have we debated the cost of the Iraq war and how little have we debated the trade deficit with China?!!

Back to the point of why the TPP sucks; the US, having written the rules of its own trade agreements, must continue to abide by them, even when the counterparties in them exploit loopholes when things are going their way. We essentially handcuff ourselves to our own rules even if no one else obeys them. The result: American companies move their manufacturing equipment and jobs to Asia, Americans who didn’t lose their jobs are happy because for 2 – 3 years we see cheaper prices on flip flops and t-shirts and christmas ornaments, but then in years 4 – 20, the effects of millions of jobs being lost starts to come back and drag down the economy, the health care system, and of course those individuals and families affected most.  Even more, very few American goods ever make it to those other countries.   If the politicians approving the TPP had ever been to Vietnam and visited average Vietnamese companies, they would not likely have believed the argument that US exports to Vietnam will increase.   Most equipment you’ll find there is cheap, no-name Chinese branded.  GE, Cisco, and Microsoft will win a few contracts, but they would win them anyway.  Pharmaceutical companies will gain stronger patent protection, but does it really need to be at such a high cost to jobs. High tech is a pillar of America’s future, but it shouldn’t be at the expense of everything else.

The reason I started writing this was actually due to one specific clause in the TPP, the Buy American clause. In the TPP agreement, the US government agrees to eliminate the “Buy American” mandate that requires US Federal agencies to buy material and equipment made in America for most projects they fund. Over $500 Billion per year is spent by US Federal Agencies (and via funding to states) on projects covered by this clause. Now, if TPP passes if the next month or so, Vietnamese, Japanese, Malaysian, Peruvian companies will all be able to bid on and win projects. That $500 Billion / year (~3% of GDP) will start being wired to Ho Chi Minh, and with it, a frick-load of American jobs.

For example, according to http://www.citizen.org/documents/buy-american.pdf , “The Federal Highway Administration (FHWA) requires all projects it funds to use 100 percent U.S.-manufactured iron and steel products and coatings. The FTA requires all projects it funds to use 100 percent U.S.-manufactured steel and to use manufactured products with 100 percent U.S. content. Rolling stock (trains, buses, ferries, trolley cars, etc.) components must have 60 percent U.S. content, with final assembly occurring in the United States.”

Bye bye all of that! Hello Vietnamese, Japanese and even Chinese government backed companies with offices in Vietnam. That’s right, even Chinese government owned companies will take advantage of this. They can send their steel to Vietnam, slap a “Made in Vietnam” sticker on it, and be able to sell to the US government now. This is the reality of how trade works.

Thanks Hilary and Obama for learning nothing from Bill Clinton’s admitted greatest mistake of his presidency (NAFTA).  Thanks for, with one deal, sending some portion of $500 Billion/year overseas for the next 20-50 years with only the hope that a small fraction of American companies will benefit in return.  See below how much of your personal income could now be heading to Asia rather than to your neighbor due to the loss of the Buy American clause.

Table:  Tax Dollars Going Toward Federal Procurement Annually

Tax dollars toward fed procurment 1

Tax Dollars Spent on Fed Procurement, broken down by State

See also:   http://www.citizen.org/Page.aspx?pid=5414
Full Table above:  http://www.citizen.org/documents/table-buy-american-taxes-data.pdf

So, is there anything positive coming out of the TPP?  Yes, the attempt to shift manufacturing of imported goods away from China to Southeast Asian countries that we have better relations with.  This is a worthwhile cause.  However, that should be achieved by directly changing the tax code for goods coming from China based on China’s refusal to abide by WTO rules, not locking us into another bad trade deal with no out-clause for when things don’t go as planned once again.

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