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The Trans Pacific Partnership (TPP) Is Dead; Long Live the CPTPP!

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This activity is important because, as a manager, you must be able to understand the debate over trade,  the implications of trade theory for management practice, and especially location implications, first-mover implications, and government policy implications.

The goal of this exercise is to demonstrate your understanding of the foundations of global trade policy and international trade theory and how these have evolved over the last 70 years.

Read the case and answer the questions that follow.

On February 4, 2016, ministers from 12 governments signed off on the Trans Pacific Partnership (TPP), a free trade deal among 12 countries, including the United States, Japan, Australia, New Zealand, Chile, Canada, Mexico, and Vietnam. China was not part of the deal. Together, these countries accounted for 36 percent of the world’s GDP and 26 percent of world trade. In the United States, critics of the deal were quick to register their opposition. Donald Trump, now president of the United States, said that the “TPP is a terrible deal.” Bernie Sanders, one of the leading Democratic contenders, called it “disastrous” and “a victory for Wall Street and other big corporations.” Many other politicians, wary of the fact that 2016 was a general election year in the United States, were also quick to criticize the deal. In contrast, the administration of Barack Obama heralded the TPP as a historic deal of major importance. Editorials in influential publications such as The Wall Street Journal and The Economist urged the U.S. Congress to ratify the deal.

The TPP planned to eliminate or reduce about 18,000 tariffs, taxes, and nontariff barriers such as quotas on trade between and among the member countries. By expanding market access and lowering prices for consumers, economists claimed that the deal would boost economic growth rates among TPP countries and add about $285 billion to global GDP by 2025. Because the United States already has very low tariff barriers, most of the tariff reductions would occur in other countries.

U.S. agriculture would have been a big beneficiary. The TPP would eliminate import tariffs as high as 40 percent on U.S. poultry products and fruit and 35 percent on soybeans—all products where the United States has a comparative advantage in production. Cargill Inc., a giant U.S. grain exporter and meat producer, urged lawmakers to support the pact. A number of large, efficient U.S. manufacturers also came out in support of the deal, which would eliminate import tariffs as high as 59 percent on U.S. machinery exports to TPP countries. Boeing, the country’s largest exporter, said that the deal would help it compete overseas, where it gets 70 percent of its revenue. Several technology companies, including Intel, voiced support for the deal, pointing out that it would eliminate import taxes as high as 35 percent on the sale of information and communication technology to some other TPP countries.

Some U.S. companies urged Congress to vote against the deal. Ford opposed the deal because it would phase out a 2.5 percent tariff on imports of Japanese cars into the United States and a 25 percent tariff on imports of light trucks—even though under the agreement, those tariffs would be phased down over 30 years. Labor unions opposed the deal, arguing that it would result in further losses of U.S. manufacturing jobs and lead to lower wages. The tobacco company Philip Morris opposed the deal because it would prevent tobacco companies from suing foreign governments over antismoking measures that restrict tobacco companies from using their logos and brands to market tobacco products. Several big drug companies also opposed the deal because it only protected new biotechnology products from generic competition for 5 years, rather than the 12 years they had before.

Data supporting these various claims and counterclaims was offered by a number of independent studies, including those from the World Bank, the Institute of International Economics (IIE), and Tufts University. Both the World Bank and the IIE concluded that by creating more overseas demand for American goods and services, by 2030 the TPP would raise U.S. wages slightly above what they would have been without the deal. The IIE study estimated that the TPP would increase annual U.S. exports by $357 billion, or 9 percent, by 2030. The IIE study also calculated that overall, there would be no job losses in the United States. Although some sectors would see job losses, the IIE suggested that these would be offset by job gains elsewhere. The study from Tufts University was the most pessimistic, estimating that the deal would result in the loss of 450,000 jobs in the United States over 10 years. To put this in context, between 2010 and 2015, the U.S. economy created 13 million new jobs, so the worst-case estimate of losses amounted to no more than two months of job growth during the 2010–2015 period.

Just three days into his administration, President Donald Trump withdrew the United States from the TPP, calling it a “ridiculous trade deal.” Many predicted that without the United States, the deal would quickly collapse—but that did not happen. Instead, led by Japan, the remaining 11 nations pressed ahead with a revamped deal. Renamed the Comprehensive and Progressive Trans Pacific Partnership (CPTPP)—or TPP for short—the deal signed in Chile on March 8, 2018, will dramatically lower tariffs and other trade barriers between the 11 nations. The revised agreement, which still excludes China, covers 500 million people in nations that produce more than 13 percent of global gross domestic product. According to David Parker, New Zealand’s Trade Minister:

“I think this agreement serves as an antidote to the protectionist trend we’re seeing in the world. I think the CPTPP is more important than it was a year ago. This rise of protectionism is worrisome…. Countries that are in the agreement have got a different route where they can club together in a friendly manner, and facilitate the growth of their own economies for the benefit of their people.”

Although the United States is no longer party to this deal, several leaders of the signatory nations have indicated that they would welcome the U.S. back into the fold, although this seems unlikely to happen so long as Donald Trump is president. There are also indications that a post-Brexit Britain might seek to join the CPTPP.

Sources: Caitlin McGee, “Controversial TPP Pact Signed amid New Zealand Protests,” Aljazeera, February 4, 2016; Catherine Ho, “Fact Checking the Campaigns for and against the TPP Trade Deal,” Washington Post, February 11, 2016; Tripp Mickle and Theo Francis, “Trade Pact Sealed,” The Wall Street Journal, October 6, 2015; Peter Petri, and Michael Plummer, “The Economic Effects of the Trans Pacific Partnership: New Estimates,” Peterson Institute for International Economics, working paper 16-2, January 1, 2016; “China Picks Up the U.S. Trade Fumble,” The Wall Street Journal, November 17, 2016; “The New TPP Trade Deal: Going Ahead without Trump,” Aljazeera News, March 24, 2018; and “Japan Approves Bill to Ratify Successor to TPP Free Trade Pact,” Japan Times, March 24, 2018.

What were the potential drawbacks of the United States entering the TPP? What would be the drawbacks to other nations?

Is the CPTTP a threat to American economic interests?

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