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The TPP Dispute

By       Message Seymour Patterson       (Page 1 of 1 pages)     Permalink

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The kerfuffle between President Obama and Senator Elizabeth Warren surrounding fast-tracking the Trans-Pacific Partnership (TPP) agreement has drawn media attention to a potential split between the President and democrats, some of whom are the President's ardent supporters. President Obama maintains that Senator Warren is wrong: the trade agreement will help the middle class. Sen. Warren says if it's a good deal, let the American people see the details. However, the President wants Americans to trust him to act in their best interest as talks on TPP continue.

What is TPP all about? With the TPP agreement, the U.S. wishes to establish "a comprehensive and high standard regional FTA [free trade agreement] that eliminates and reduces trade barriers and increases opportunities for U.S. trade and investment." The U.S. also wants a role in shaping the rules that will govern TPP: "to establish new rules on emerging trade issues, such as regulatory coherence, supply chain management, state-owned enterprises, and increasing trade opportunities for small and medium-sized businesses." (See: Congressional Research Service)

TPP is a subset of the Asia-Pacific Economic Cooperation (APEC). APEC consists of 21 countries and includes the entire twelve TPP participants. The list of the twelve TPP countries consists of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States. It is redundant to note that rich countries in the TPP (Australia, Brunei, Canada, Japan, New Zealand, Singapore, and the United States) have both high GDPs (with the exception of Brunei) and high monthly wages; the average monthly wage of this cohort is $2,606. These two variables, namely GDP and wages, are for obvious reasons correlated. On the other, the low-income TPP countries have low wages, the average of which is $575. Thus, monthly wages in TPP countries are 5.5 times higher in rich countries than in poor ones. The problem with the TPP free trade agreement is its potential to reduce wages and increase business profitability, which might result a widening of income inequality in the United States as well as other rich countries.


Table 1: TPP Data
(Image by Congressional Research Service)
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Source: Columns 2, 3, 5, and 6 are from Congressional Research Service, data for Brunei in column 4 are from Salary Explorer, data for Peru are from Trading Economics, and data for Vietman are from Thanhnien News.

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The TPP trade agreement will lower barriers and expand U.S. trade and investment in a region that represents 40 percent of the world's population and 60 percent of world GDP. In addition, the Pacific region also represents 60 percent of our overall trade and 25 percent of the stock foreign direct investment in and out of the U.S. Some countries in the region reputedly have faster economic growth than the U.S. and are promising markets for U.S. business. Ironically, though, when businesses outsource there are serious consequential effects of labor in the outsourcing country. TPP is viewed as NAFTA redux. According to a piece by Dustin Ensinger, "Whirlpool's decision to uproot and relocate to Mexico is just the latest in a string of American companies that have found supposedly greener pastures since the implementation of NAFTA. Iconic American companies such as Coca Cola, Ford, RCA, General Motors, General Electric and Nokia have all opened up assembly plants in Mexico. In fact, GE employs 30,000 Mexicans in 35 factories in the country." (See: Economy in Crisis)

When a U.S. company moves to Mexico, the demand for labor in the U.S. falls: People who worked for the company lose their jobs. The demand for labor in the new home of the company rises--the company's strategy is to seek out cheaper labor costs, where environmental regulations don't exist, nor do pesky labor laws--to the detriment of U.S. labor. Since the demand for labor falls in the U.S., unemployment rises there and falls in Mexico. The resulting surplus of U.S. workers depresses U.S. wages and the relative shortage of labor in Mexico pushes up Mexican wages. Moreover, since the company is more profitable, stakeholders (particularly shareholders) will be pleased, and the share of profits going to the CEO will also increase, thus widening the income inequality gap. This same conclusion can be reached using the data in Table 1. We know that in the rich countries, the average monthly wage is $2,606, but in the poor countries, it is only $575. The average of these wages is $1,590. If given a chance--which TPP will--a company in a rich country wouldn't be willing to pay $2,606 if it can pay workers $575. Nor will workers in low-income countries be willing to accept $575 if they can get $1,590.

The U.S. also wants role in establishing "new rules on emerging trade issues." If the U.S. is not part of the TPP agreement, it would be unable to play a role in setting the rules that will govern the activities of the TPP countries. This might be a source of the kerfuffle alluded to earlier. In addition to concerns about "race to the bottom" regarding wages and environmental regulations, will some external entity enforce rules that will have jurisdiction over wages, environmental conditions, tariffs, and so forth on the United States? Senator Warren has read the TPP agreement, but she wants it available to the American people for them to have a conversation about it before the President signs off on it. Because the stakes are high, transparency seems like the right thing to do.

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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