Will Free Trade Ring the Pacific?

Shinzo Abe goes to Washington next week, and the White House wants to give him a shiny welcome gift: clear passage through Congress for the Trans-Pacific Partnership (TPP), a 12-nation trade deal including the US and Japan-a deal Abe and US trade reps say is close to done. But the home stretch won't be easy, even with pro-TPP legislation clearing committee votes in both chambers of Congress this week. Many barriers remain, and while a signed, sealed and delivered TPP would be great for global markets, we're skeptical it happens any time soon.

One hurdle is that aforementioned legislation: Trade Promotion Authority (TPA). The Obama Administration and other TPP partners are pushing for this, which would allow the White House to submit trade deals to Congress for an up-and-down vote, no amendments allowed. TPA isn't new: Prior administrations have enjoyed it, but it lapsed in 2007, and renewal wasn't universally popular in prior Congresses. Some argue it obliterates Congress's influence over trade, though this seems more like political rhetoric than reality. TPA gives Congress the ability to set objectives for trade negotiators, who then hash out lawmakers' agenda with the other parties to the deal before finalizing it. Accounting for Congress's wish list before finalizing the deal, not afterward, would be a positive, as it would greatly improve trade deals' chances of ratification. If Congress sought to amend completed deals, trade reps would have to go back to the negotiating table and get everyone else to ok Congress's requests. Congress's objections and requested amendments to the US/Korea free trade agreement, signed in 2007, stalled the final deal until 2010. For a multiparty deal like TPP, that would basically be a death sentence.

So it's nice and noteworthy that TPA bills cleared committee votes and will soon hit the House and Senate floors. But it won't be smooth sailing from here. Lawmakers in both chambers aim to tack on riders that would lace free trade with protectionism, potentially torpedoing a deal. The big bugaboo is currency manipulation-politicians' favorite bogeyman for years. Some argue certain countries artificially depress their currencies to boost auto and other exports to the US, claiming this gives their producers an unfair advantage akin to subsidies.[i] So they want language directing trade agreements to include "enforceable currency language necessary to ensure that foreign competitors don't use their exchange rates to subsidize exports."[ii] Bipartisan groups proposed amendments to the Senate and House bills Wednesday and Thursday, though both were defeated. House reps also proposed a full alternate bill with currency and other provisions at Thursday's Ways and Means Committee session, though it didn't get a vote. However, this isn't the last we've heard. Sponsors promise to resurrect the issue when the bills hit the full House and Senate floors, and debate could be bumpy. If currency amendments make it in, TPP's chances at becoming reality fall.

While TPP participants largely agree currency manipulation is bad, the definition is open to interpretation, making enforceable measures against it a potential deal breaker. For example, many in Congress argue Japan's quantitative easing (QE) program is currency manipulation, citing the yen's -27% fall vs. the dollar since 2013 began.[iii] Japan disagrees, arguing this is plain old monetary policy, matching the US's views about its own dormant QE program. Japan won't want to risk inviting sanctions every time they try to stimulate their economy. Nor do any of the other participants want to be labeled currency manipulators if their (free-floating) exchange rates happen to drop, inviting politicians' ire. The Treasury, US trade reps and all 12 other TPP partners oppose a strict enforcement provision, preferring the more general, less toothy language in TPA's original draft.

Currencies aren't the only potential sticking point. The Senate Finance Committee passed a separate amendment prohibiting fast-tracked deals with countries currently listed as human traffickers by the State Department. That list presently includes Malaysia, a TPP participant, leading some to call the amendment a "poison pill." Restrictions on imports made with child labor-another potential sticking point-also cleared committee. The full Senate might try to strip these amendments, but given the political sensitivity surrounding them, opposition to removal will likely be high. If the Senate version includes the human trafficking provision but the House version doesn't, reconciliation could be a tall order.

This story is a prime example of why big trade deals like TPP always have the odds stacked against them. The more countries you add to the mix, the harder it is for them to all agree. The epitome is the Doha round of world trade talks, which spanned ten years and yielded perhaps the most feckless trade deal in modern economic history when it finally finished in 2013 . It reduced few tariffs, raised some subsidies, included many escape clauses and has a lengthy phase-in. NAFTA was a big success, but it involved only three countries (with somewhat aligned interests given their proximity). The TPP would include 12 countries in North, South and Central America, East and Southeast Asia, and Australia and New Zealand, all with their own interests and pet peeves. Japan wants to protect its agriculture. The US wants to protect automakers and auto parts suppliers. Vietnam wants US garment tariffs to go. Australia wants an exemption from the investor-state dispute resolution clause, suspecting it might otherwise shell out constantly to commodity-related multinationals. But the biggest sticking points are between the US and Japan, where big disagreements remain over Japan's rice import limits and US auto part tariffs. As Abe said earlier this week, both countries must make "political decisions." We wouldn't hold our breath.

If the TPP gets done, great-talk about a WOW for global markets! Free trade across 40% of the world's economy! But we'd suggest keeping expectations low. If the Japan/Australia free-trade agreement (the offspring of TPP negotiations) is any indication, tariffs won't vanish, and the phase-in windows could be years-long. Both countries kept plenty of barriers in place. However, if the TPP doesn't come to fruition, we could get a smattering of smaller deals instead. Like maybe NAFTA + Mercosur, a South American free-trade block, of which TPP-hopefuls Chile and Peru are associate members.

And if nothing happens? That wouldn't be surprising, we guess-or a negative. Stocks and the world economy have done fine with the status quo. No TPP just means the absence of very long-term positive, albeit a big one.

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[i] This is full of economic fallacies, but that's a topic for another day.

[ii] We quoted the sponsoring Senator's press release since the amendment's text wasn't released.

[iii] FactSet, as of 4/24/2015. Dollar/yen spot exchange rate (mid), 12/31/2012 - 4/23/2015.