Article / 08 October 2015 at 10:31 GMT

TPP trade deal: The US is back in the game

Head of Macro Analysis / Saxo Bank
France
  • China's Silk Road policy spurs US to act
  • TPP will be a bulwark against China’s power
  • A powerful signal that the US is back in the game
  • Deal may boost international trade and jobs
  • Japan may be the biggest beneficiary

obama tpp

 President Obama selling the benefits of TPP. Source: ustr.gov


By Christopher Dembik

The past few years will be remembered as a moment in history when the United States temporarily lost its role as the underwriter of the global economic system. The country was unable to reform the international system after the 2007 crisis and has lost political and economic influence in most regions of the world. It's facing new competition from China, Russia, Iran and even Brazil.

A strategic move to contain China

China’s Silk Road policy acted as a wake-up call for the United States. This ambitious strategy will change the geoeconomic map of Asia to the benefit of China and confirms its will to take a leading role in global affairs. To avoid being marginalised, the United States had no choice but to react and to accelerate the signing of the Trans-Pacific Partnership. It is the capstone of Obama’s Asia rebalancing and it will act as a bulwark against China’s power.  

This trade alliance will give the United States the perfect excuse to intervene in trade and territorial disputes in the oil-rich South China sea, and its reaffirms the US commitment to support its regional allies, such as Taiwan, that are worried about Chinese ambitions. The TPP goes beyond trade, it is the symbol that the US is back in the game!

It will also have important economic consequences as it has been signed by the countries which represent 40% of the world’s economy. Since the global financial crisis, worldwide trade growth has been slower than in previous periods of economic recovery which reinforces concerns about a further economic slowdown or even a global recession. The TPP may help to reverse the downward trend in trade by boosting exports, economic growth and creating more jobs in Latin America and in Asia.

Winners and losers

Promoters of the TPP consider this trade alliance all good. The United States forecast that the agreement will add $223 billion a year to incomes of workers in all the countries, with $77 billion of that going to US workers. Such rosy thinking is certainly misplaced considering the macroeconomic impact of previous trade agreements. 

The North American Free Trade Agreement, signed in 1994 between the United States, Canada and Mexico, resulted in higher labour productivity (+170% for the USA and + 76% for Mexico between 1994 and 2011), stronger growth in the manufacturing sector and more jobs in Mexico but a lower impact on economic growth in the US and a slow rise in wages. Real hourly compensation for American workers rose by only 16% from 1994 to 2011.

The United States won’t benefit from much of the TPP. US consumers will have access to cheaper goods, which will buy social peace, but they should not expect much higher wages. There will be job losses for low-skilled workers in industry who will have to switch to precarious jobs in the service sector. There will be huge revenues for US companies and for Wall Street. The lesson we can draw from the past is that free trade agreements usually help emerging countries to develop their economies and reduce inequalities.

However, the main winner of the deal may be Japan. That may sound surprising but the TPP will force Japan to open up to competition and foreign investors. The country will be able to attract more foreign direct investment, which stands at 6% of GDP today versus 17% of GDP in the US and 22% of GDP in China; and to increase productivity in the service sector. This is a key opportunity for Japan to strengthen economic growth as Abenomics falters.

Europeans have every interest in looking closely at the economic output of the TPP as the negotiations about the Transatlantic Trade and Investment Partnership are slowing down. Europe is wedged between the Chinese Silk Road and the TPP. Its last chance to avoid economic stagnation is to implement a strategy of international development of its own.

Abe
Shinzo's Abenomics is faltering. TPP might save it. Photo: Wikimedia Commons 

– Edited by Clare MacCarthy

Christopher Dembik is an economist with Saxo Bank in Paris

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