Pacific-Rim Politicians Play ‘Let’s Make a Deal’

With the Trans-Pacific Partnership finalized, will this Japanese rice get some competition? Photo by Tomohiro Ohsumi/Bloomberg via Getty Images.

Well, it's official: The Trans-Pacific Partnership (TPP) is a thing. Sort of. Negotiators from the US and 11 other Pacific-Rim nations finalized the deal Sunday, delivering a free-ish trade agreement covering nearly 40% of global GDP. Free trade is always a tough sell sociologically, but its economic benefits are vast, and markets like it. So it's tempting to greet this news with a "Yippeeeeeeeeeeeeeeeee!" But that would be premature. Finalizing the deal cleared a key hurdle, but plenty more remain before it can actually start freeing trade, and the chances TPP brings many benefits over the foreseeable future seem slim. We'd suggest investors keep their expectations in check.

As we've long said, the more participants join a free-trade deal, the harder it is to pass. Each nation has its own pet interests and industries to protect, and because abolishing tariffs and restrictions is so politically difficult, negotiators have more incentive to carve out exemptions than to fully free their markets. That creates stumbling blocks, often in niche markets, that can upend the entire deal. TPP's final stumbling blocks centered in biologic drug patents, dairy markets and auto parts. The US wanted biotech firms to get exclusive patent rights for 12 years on new drugs, annoying partners that wanted generics faster. America, Japan and Canada didn't want to import more milk. Canada and Mexico wanted to require automakers to source more parts from within the TPP area so they could get a leg up over China.

All these issues were reportedly resolved. US biotech firms will get between five and eight years of patent protection, more New Zealand milk^[i] will be available at your local grocer, and cars produced and sold within the TPP zone will be tariff-free if 62.5% of their content comes from within the bloc. In other compromises, tobacco firms won't be able to challenge cigarette packaging laws abroad, and most countries get to keep some agricultural tariffs.

But now comes the hard part-getting all 12 nations to ratify the deal. Political opposition remains high in many nations, as does gridlock. Upcoming elections add another wrinkle. Canada hits the polls in two weeks, and two of the three major parties aren't terribly keen on TPP. Polls are tight and still inconclusive, but there is a chance Canada's next government could be cooler on the deal than current PM Stephen Harper.

But the real kicker here is the US. US trade law requires the President to give Congress at least 90 days to review the deal before voting, and lawmakers haven't received the text yet. Some reports say they won't get it for months, which would put TPP before Congress smack in the middle of an election year. Alongside a Presidential contest that has already featured some protectionist talk from both parties. Even if the eventual nominees are both relatively trade-friendly, politicians generally don't run on pro-trade platforms. Protectionist rhetoric wins votes, so candidates tend to talk tough on the campaign trail and then moderate when in office. Nominees tend to be their party's standard-bearer, so if both give stump speeches decrying aspects of the deal or the need for new side agreements to make it smarter or better for American workers, Congress might sit on it until 2017 or later, depending on how House and Senate races go.^[ii] This is precisely how it went for 2007's US bilateral free-trade agreements with Panama and Korea. Both agreements were struck that June, but neither were voted on until October 2011. And if the next President does decide to renegotiate some aspects of TPP, things get even stickier-reopening a 12-nation deal isn't as easy as retooling a bilateral pact.

Even under the most optimistic scenarios, it could take a year or more, bare minimum, for TPP to be ratified and implemented. But even then, it wouldn't free trade overnight. Many of its provisions have long phase-ins-sweeteners to win over entrenched opposition. Japan, for example, gets 16 years from the TPP's implementation date to cut its beef tariff from 38.5% to 9%. Its wine tariff will take seven years to vanish, and higher rice import allowances will take 13 years (and are less than half of what the US initially requested). Canada's auto tariffs will linger for five years. These and other similar measures will benefit the TPP nations in the long run, but the impact is just too far off for it to boost growth in the here and now.

Hence why we are skeptical of most of the cheerleading that accompanied the deal. Administrations from most participating countries touted TPP as a growth-enhancing, job-creating, competitiveness-boosting dynamo. But they didn't mention the delays, which could set folks up for disappointment when implementation crawls and exporters are still paying legacy tariffs a decade from now. For all its long-term improvements, TPP won't have much (if any) impact on the current economic cycle. It might boost sentiment, and that can help stocks, but that's about it. Its fundamental impacts are probably years off.

For stocks, that's ok. We've had over six and a half years of bull market without TPP, and we can have more bull market without it. This isn't a negative-just the absence of more positive.