The latest round of Trans-Pacific Partnership negotiations ended in Maui last week without an agreement. When all is said and done, the massive, 12-nation trade deal will link 40% of the world’s economy. The potential payoffs are expected to be huge for the countries at the table, but the geopolitics of such a complicated treaty are tricky. Still, while the deal will pass in the end, these five facts explain the last major hurdles to the most significant trade deal of the 21st century.
1. Pharmaceutical Fight
According to the pharmaceutical companies, development of a new drug typically takes 10 to 15 years. Each success costs around $1.2 billion—including the price of the many failures along the way. A period of exclusivity in the form of patents are the reward for this investment. At issue in TPP negotiations is when cheaper generic forms of new drugs can come to market, or when that exclusivity ends. In the U.S., that timeframe is about 12 years, but most countries involved in negotiations want it to be shorter—eight years or less, though Australia is insisting on five. It makes sense that the U.S. wants the longest period of exclusivity; of the ten largest pharmaceutical companies in the world, six are based in the US. The other four? In Europe, which is not a party to this deal.
2. Got Milk?
Dairy accounts for more than 25 percent of New Zealand’s exports (and 7 percent of its overall economy), so the country is driving for greater market access for its dairy products, with help from Australia. It might come as a surprise that cows are so contentious, but Canada is having none of it. Their government is facing a tight election this fall, and dairy farmers hold disproportionate clout in Ottawa. How much clout? Enough that dairy imports in Canada currently face a 248.95 percent tariff. If you figure that each of the 12 countries involved in TPP negotiations have their own domestic politics to worry about—more on this below—you can start to understand why trade negotiations hit so many road blocks.
3. Car Controversy
Considerable media attention has been paid to the auto details of the deal. That’s because they prominently feature the U.S. and Japan, the two most significant members of the TPP trade bloc. Japan’s auto sector is the most closed-off of all industrialized countries, ranking 30 out of 30 across all OECD nations. It’s import penetration rate in 2012 was 5.9%, compared to an OECD average of 58% and a U.S. import penetration rate of 47.9%. Tokyo has made it quite difficult for foreign countries to sell in Japan by throwing up “nontariff barriers,” or indirect costs. Washington also has long-standing protections on its domestic auto industry. The U.S. currently has a 2.5 percent import tariff on passenger cars and parts and a 25 percent tax on light trucks. Automotives in general enjoy a high level of protection across industrialized countries, but this will start to change with the passage of TPP.
4. The Trouble with Textiles
Textiles, the poster child of globalization, have become ensnared in the deal. Only clothing that is wholly sourced and assembled within TPP countries will qualify for duty-free sales. This poses particular problems for Vietnam, currently the second-largest exporter of apparel and footwear to the U.S., with more than $13 billion in sales last year. In order to manufacture all those items, however, Vietnam had to buy $4.7 billion worth of fabric from China, about half of its total annual imports. By itself, Vietnam is only able to produce a fifth of the fabric that it needs to sell on world markets. Companies in countries like Vietnam have spent decades building up diversified and extensive supply chains. The TPP may well force some shifts. But the payoffs will be huge—American taxes on Vietnamese textile imports would fall from as high as 32 percent down to zero. In fact, of all the TPP countries, Vietnam is projected to be the biggest winner relative to the size of its economy, with an expected 10 percent boost if TPP goes into effect.
5. The Red Herring: Currency Manipulation
If you’ve been following the “fast-track” debates in the U.S. Congress over the past few months, you might think that currency manipulation was a key sticking point in the TPP negotiations. It isn’t, but it’s a big domestic headache for President Obama. U.S. politicians who oppose the deal attempted to tie it to the more general problem of global currency manipulation, when governments buy or sell foreign currency in an effort to artificially change the value of their currency. It’s easy to see why. The Peterson Institute estimates that the U.S. trade deficit has increased by $200 billion to $500 billion per year as a result of currency interventions. At the same time, the U.S. has lost between 1 million to 5 million jobs. Those are chilling figures.
But tougher currency manipulation regulations were never going to be a part of the TPP. Control over individual currencies and monetary policies are key issues of sovereignty, and countries are understandably wary of signing away that kind of control. Introducing stringent currency manipulation requirements would blow up the entire TPP on the spot. But it will make it tougher to get the deal passed. With anti-TPP Senators in the U.S. threatening to repeal Obama’s “fast-track” authority for TPP if the administration doesn’t address currency manipulation in the final agreement, Obama still has significant domestic battles ahead of him.
Despite these thorny issues, the deal is a big economic and geopolitical win for all the countries involved. Expect the TPP to be completed by the end of 2015.