Economy

Asia's newest odd couple might help Obama get trade agreement over the line. By Hamish McDonald.

Abbott and Abe to influence US decision on TPP

Twenty years ago, billionaire political maverick Ross Perot evoked a “giant sucking sound” of vanishing jobs if Bill Clinton signed a free trade deal with Mexico. Military chief Colin Powell said he’d need five army divisions on the Mexican border if Clinton didn’t.

Now another Democrat president faces a similar dilemma. Barack Obama is caught between his goal of “rebuilding America” and his main foreign policy initiative, the “Pivot” or “Rebalance” to Asia.

A free trade deal even bigger than the one Clinton eventually signed with Mexico and Canada has become widely perceived as the main substance to the Pivot, a test of whether Obama is all high-blown rhetoric or not.

This is the Trans-Pacific Partnership, joining the three North American economies to nine other economies around the Pacific, including Japan, Australia and probably South Korea. The combined gross domestic products of the 12 countries add up to 40 per cent of the global economy.

Why are the Democrats hesitating? More  US exports to dynamic Asia should create more jobs. Yet Americans have lost trust in wealth distribution. Free trade has meant a shrinking middle class, good jobs replaced with “McJobs”, and closing factories. Polls show most Americans no longer believe their children will be better off than they are.

The winners from the TPP on the US side, if it goes ahead, will be providers of insurance, e-retailing, education, healthcare, investment advice, professional advice, information technology, entertainment and other services, which would be allowed to set up and sell behind currently closed borders and local preferences, plus some agribusinesses.

This kind of service-sector activity is now the biggest part of mature economies such as the United States and Australia, but lags as a percentage of their trade behind manufacturing, agriculture and resources.

Proponents keenly describe the TPP with words such as “modern”, “cutting edge”, “high quality”, “a new type of trade agreement”, and “embodying high standards worthy of a 21st-century trade agreement”. They see it enabling countries like the US to play their strengths into the rapidly growing economies of Asia. 

Washington’s Peterson Institute for International Economics estimates the TPP could add $US295 billion to the income of member countries by 2025 (Australia gaining $US8.6 billion or 0.6 per cent of GDP). Ultimately, if all the 22 countries in the Asia-Pacific Economic
Co-operation group joined, it could add $2.4 trillion.

Immediate losers, however, would be US manufacturing workers, notably in the garment and footwear sectors, since TPP members include Vietnam, a low-wage country with communist restrictions on labour organisation. 

Obama’s backers in Hollywood and Silicon Valley love the TPP, because of its enhanced copyright enforcement. Big trade unions such as the AFL-CIO and Teamsters, necessary to ensure the Democrat turnout at the mid-term congressional elections in November, hate it. 

Rather than risk losing their senate majority, leaving Obama with an entirely hostile congress for his last two years, Democrats have refused to vote Obama the fast-track authority to sew up the TPP. But it leaves Obama looking ineffectual in Asia.

The delays, meanwhile, have brought out civil society groups, and farm, labour and environmental groups demanding more transparency, fearing a transfer of power from elected governments to corporations. Internet activists see a restriction in the flow of information, and worry about the US push for criminalisation of online piracy activity such as file-sharing, even where no commercial gain is involved. Médecins Sans Frontières sees it resulting in more expensive drugs and less scope for Third World governments to make antivirals or other treatments cheaply available. 

Nobel laureate economist Joseph Stiglitz is one critic. “There is a real risk that it will benefit the wealthiest sliver of the American and global elite at the expense of everyone else,” he wrote in The New York Times last week.

In particular, critics unite against a proposed mechanism called Investor-State Dispute Settlement (ISDS), whereby foreign investors can take a host government to an outside panel of lawyers for binding arbitration of disputes about direct or indirect expropriation. Philip Morris International’s use of an ISDS mechanism in a treaty with Hong Kong to try to overturn Australia’s tobacco plain packaging law is widely cited as an example of how foreign companies might overturn laws and regulation introduced to protect health, safety and the environment. It could be the Opium Wars all over again, says Stiglitz.

Adjudication in that case is not over. But it was the reason the Rudd-Gillard government opposed inclusion of dispute settlement in the TPP in 2010. The Abbott government recently abandoned this blanket opposition (and in December signed a free trade agreement with South Korea that includes ISDS) with Trade Minister Andrew Robb insisting safeguard clauses would be adequate to protect the public interest.

Now Tony Abbott, from a party traditionally more simpatico with the Republicans, has emerged as someone who might help steer Obama out of this dilemma. Embarking next week on his first big Asian tour, he gets to Tokyo two weeks ahead of Obama.

US Trade Representative Michael Froman has been working frantically on Prime Minister Shinzo Abe’s government to get major concessions ahead of the visit that might disarm the domestic US opposition. “In a way the TPP is a US-Japan free trade agreement,” says Fred Bergsten, a leading economist at the Peterson Institute.

Opening Japan to the extent required for the TPP would also take the Japanese most of the way through the hard structural reforms seen as the necessary “third arrow” of Abenomics, the effort to reflate the sagging Japanese economy (the first two arrows being massive money creation and fiscal spending).

It could also eventually pull in China, which will lose about $US57 billion in exports if the TPP goes ahead without it, according to the Peterson Institute. As in Japan, some of its economic planners see the TPP helping new leader Xi Jinping in his own structural reforms, switching China from its faltering export-and-infrastructure model to one based on domestic consumption. 

Enter Abbott. Canberra has been negotiating a bilateral free trade agreement with Tokyo for some years. Like the South Korean agreement, it seems about to come good as an achievement on his watch. 

Abe may be offside with near neighbours, but Abbott loves his steps to bring Japan’s military into closer interoperability with the US and its allies. Abbott has also found a strong personal rapport with Abe. 

If not too miffed about this week’s whaling decision, Abe might just give the nod to the bilateral free trade agreement, to be signed when Abe visits Australia in July. To be credible, it would have to include many of the features Washington seeks for the TPP. If Abe makes those concessions to Australia, he’s unlikely to hold them back from the US for long. 

For his part, removal from Washington’s toxic politics might encourage Obama to take a more strategic stance on the TPP. “In the end these trade deals are always sold on national security grounds, not the economic arguments,” Bergsten notes. In which case, the TPP may be closer than we think, and our government needs to do
a much better job of explaining what it’s all about. This one is not just for farmers. It will impact everyone.

This article was first published in the print edition of The Saturday Paper on Apr 5, 2014 as "Abbott and Abe". Subscribe here.

Hamish McDonald
is The Saturday Paper’s world editor.  

Continue reading your one free article for the week