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Talking Trade blog

Defending the indefensible in TPP


Published 24 April 2015

As the Trans-Pacific Partnership (TPP) trade negotiations head towards conclusion, I am increasingly fielding questions from people about the challenging final issues that remain. This post covers a range of topics that stem largely from officials trying to defend policies that appear indefensible to outsiders. Most are rooted in specific local politics or interpretations of domestic conditions that may be under threat in the TPP.

Why is Japan fighting so hard for rice protections?  My interviewer on CNBC this week asked again why Japan’s government is ready to fight to the finish over issues of rice.  After all, the agricultural sector in Japan contributes a tiny sliver to overall economic output.  The average age of Japan’s farmers is heading towards 70 and very few farm full-time.  In exchange for historical protections that include a rice tariff of 777 percent to keep out foreign polished rice, Japanese consumers pay extraordinarily high prices for rice and agricultural products of all sorts.

This situation is not unique to Japan.  Like many countries, the political system has been stacked in favor of rural voters, who are overweighted in the parliament relative to their population size. 

Mansur Olsen, the Nobel-prize winning economist, highlighted problems of collective action several decades ago.  While it is true that consumers as a whole would benefit from lower rice and agricultural prices, the problems of collective action mean that these diffuse interests rarely result in activity by large groups that would receive modest benefits.  By contrast, Japanese rice farmers clearly grasp the competitive challenges that they will face from the removal of barriers to trade.  They have every incentive to make their unhappiness known in loud and clear terms to political leaders.

In Japan, these concentrated agricultural producer interests can be further funneled to politicians and bureaucrats through a strong and entrenched bureaucracy of their own.  Japanese farmers are also brought together by JA Zenchu, an agricultural cooperative that (for the moment) comes with large numbers of staff and considerable economic strength.  They can mobilize significant numbers of voters and ensure that their supporters make it to the polls on election day.

Why are the Americans fighting so hard on auto tariff reductions?  The United States currently levies a 2.5% tariff on imported passenger cars.  In the TPP, Japan is pushing hard to get this tariff eliminated as soon as possible.  Like all TPP rules, it would apply to TPP member firms only and would not be extended (through the TPP) to other country companies.

What makes American opposition to tariff reductions so puzzling is that much of Japan’s auto production now takes place inside the United States and the rest of North America.  As a result of the rules set down more than 20 years ago in the North American Free Trade Agreement (NAFTA), auto producers that want to take advantage of the agreement must produce a substantial percentage of the final vehicles in NAFTA countries.  Hence, few Japanese autos are likely to benefit from a lowering of tariffs on autos in the TPP since most are already created inside the American domestic marketplace where they have never paid tariffs on the final products.

For more than 30 years, the U.S. auto industry has been uncomfortable with Japan’s access to the American market.  Maintaining a minor tariff for a substantial length of time is one way to help encourage wavering members of Congress to avoid blocking the TPP agreement on behalf of the domestic auto industry. 

Why can’t Canada change the supply management system for dairy and poultry?  The TPP is supposed to be a high quality, 21st century trade agreement that includes all products with no exceptions and a goal of lowering tariffs to zero.  In this context, the myriad system of supports that Canada uses to protect domestic dairy and poultry farmers from competition (primarily from the Americans) ought to be phased out over time.

But Canada faces the same sort of collective action problems on agricultural reform that Japan confronts.  Although Canada’s consumers would clearly benefit from lower prices on a wider range of dairy and egg products, the industry is much better organized and can mobilize significant resources to fight change.  So far, the industry has been impressively successful in keeping supply management off the negotiating table, including (so far) in the TPP talks.

Why won’t the Americans open up the domestic sugar market to Australian sugar?  This question stems from an odd quirk in the current negotiating environment in the TPP.  Although officials are aiming for a high quality result, negotiators have to operate in a world of existing, overlapping trade agreements from the past.  These previous deals will not go away once the TPP is signed.

In an existing bilateral trade agreement between the United States and Australia, sugar was carved out or excluded from the deal.  At the time, it was part of a “grand bargain” of sorts that let Australia carve out investor-state dispute settlement while the Americans protected their sugar industry.  If Australia gets better access to the American sugar market in the TPP, it will undermine the provisions of the past deal.

The sugar industry in the United States has been amazingly well protected since WWII.  Production of sugar cane is highly concentrated in a handful of farmers.  But production of sugar beets is spread much more widely.  Large numbers of members of the U.S. Congress represent states or districts that grow sugar across diverse and politically important parts of the country.   These representatives have always responded to the money and influence of the domestic sugar lobby and the TPP is no exception.  Sugar changes in the TPP that would allow greater imports of Australian sugar have been vigorously fought off.

Why don’t American union groups support the TPP?  This question came to me with great puzzlement at a meeting of ASEAN trade union leaders this week in Kuala Lumpur.  From their perspective, any agreement that raises economic growth is likely to result in additional jobs.  With new markets opening up that were previously closed or difficult and expensive to penetrate, firms have new opportunities for expansion and job creation.

Yet American labor leaders have come out loudly and vocally against the TPP.  Union membership in the United States has been falling for some time.   Labor leaders fear that TPP changes will exacerbate the loss of union jobs in the United States, since many union members are blue-collar workers. 

What is especially strange about the objection to the TPP by labor leaders is that most union members are actually government employees of all stripes, including teachers or public health care employees, who are unlikely to be affected by this trade agreement.  The fastest growing segment of unionization is taking place among services employees.  If the TPP leads to economic growth, the service sector is also likely to expand.  Many of these jobs, like hotel and restaurant workers, are not going to be outsourced.  In fact, it could certainly be argued that easier movement of people across the TPP for business travel and tourism should bring additional jobs to American services union workers. 

We can argue about the quality of such jobs and the appropriate pay scales for workers, but the TPP should not affect either of these elements of service sector union jobs.

Why are some TPP members fighting over specific rules changes for one class of medicines?  One of the most hotly contested arguments in the entire TPP agreement has been about appropriate patent length protections for a class of pharmaceutical medicines.  Should biologic drugs receive 5, 8 or 12 years of coverage before going off patent and becoming available to generic drug manufacturers? 

What is strange about this fight is that biologic drugs like the flu vaccines are extremely hard to manufacture.  They cannot be easily reverse engineered.  Each dose can be unique, as biologic drugs are not simple copies of one another. 

Most TPP members do not have (and may never have) the capabilities to manufacturing pharmaceutical products.  Even fewer will be able to create biologic medicines.  Thus, the fight over patent length protection does not make sense for most members.  However, many countries appear to have seized on this issue as a tool for achieving their negotiating objectives elsewhere in the agreement.  It is more of a bargaining chip than a serious point of disagreement.

Closing a deal is hard.  Given the nature of trade negotiations, the most difficult, politically sensitive issues are left to the very end of discussions.  It is only after the broadest balance of interests is largely hammered out that leaders can make a clear-eyed assessment of their total gains and losses throughout a complex negotiation.  Given the determination of benefits and challenges, countries will decide whether they will continue to defend largely economically indefensible policies or whether such programs will be adjusted in the wake of the TPP.  The time for sorting out such decisions and making appropriate calculations is now.

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Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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