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It is a good time to take a look at the upcoming trade agreements affecting trading partners across both the Atlantic and the Pacific. The one affecting the EU and the USA is the so-called T-TIP or Transatlantic Trade and Investment Partnership. The one affecting the USA and many Pacific Rim nations is the Trans-Pacific Partnership (TPP). Both have common elements that can, if properly negotiated, result in all trading partners being better off. However, this does not mean that individual sectors of each economy all benefit.
Since you have just been reminded last month of the problems which can happen when trade policy is used for purposes other than causing increased profits for all parties involved, we have a chance to get it right in these treaties as they are still in the negotiation phase. Lots of the details of the treaties (especially the Pacific one) are being kept hidden to protect countries from facing political pressure for changes before the final deal is fully negotiated. Tabulating the winners and losers within an economy or trading block is sometimes tricky and is often buried in aggregate figures put out by governments so that the folks with torches and pitchforks don’t start gathering at the various legislative bodies before the deal is done. Nevertheless, I feel confident even at this stage that we can assure Pope Francis that while the treaties are likely to increase free trade, the final result will be nowhere close to “unfettered capitalism”.
In a nutshell, the agreements attempt to settle upon trading terms across at large number of items in advance among a select group of countries. This prevents but doesn’t eliminate shenanigans around individual goods or services. For instance, some countries like the EU and the USA have very heavy fines for bribery to secure an international contract. Other nations do not and regularly “out compete” EU and US companies by providing a little padding to the deal. If all partners face the same fines for corruption (for instance), the trading will take place around real attributes and costs of the goods or services.
In addition, the agreements try to preserve and protect the special characteristics of brands and origins so that poorly crafted counterfeits do not both steal business from legitimate developers but also ruin the brand equity when the fakes underperform anticipated results. US producers of olive oil pay over $1,600 per US ton in tariffs to export olive oil to the EU. Similarly, the US places tariffs of more than 20% on most vegetables imported and over 30% tariff on powdered garlic (don’t ask me why!).
Now, I mention one I am personally passionate about eliminating: Most EU meats, cheese and truffles face a 100% or more tariff to enter the USA. This leads to the understanding among some Europeans after a visit here that we have only two US cheeses, yellow and white. It also explains why a producer of the famed Iberico pigs for the Jamon de Bellota, whose farms I visited recently in the Dehesa area of southern Spain, spat his drink across the table when I told him the whole hams typically cost between $1,200 and $1,600 apiece in the US when they are available. There are some export disease risks in there somewhere too but we have the ability to sort that out at far less cost than double the price.
It is the position of the EU that both trading partners (EU and the USA) will permanently create about a half of a percent increase in total gross output as a result of the agreement. That is a very big amount though it sounds small in percent terms. Maybe bad news for EU pork producers though, as a recent report by the EU indicates there is expected to be very little impact directly on EU agricultural production except for maybe some processed goods. And the little impact there is seems to be from increased efficiency or decreased costs of production from the use of imported goods that are cheaper.
Some things people don’t consider are that it may become more profitable for some EU producers to send goods or produce to the USA vs their current sales now to other EU countries. This can increase the cost to some unlucky EU consumers and benefit US consumers while still making the EU as a whole better off. This impact can go both ways of course.
I remember a related slogan which cropped up during the dramatic increase in hog production in the rural Midwest during the 1990’s. One outspoken activist used to snarl, “Japan gets the pork and we get the manure”. Good for US exports but not so much for him and those of similar viewpoint since they were not in the fertilizer business.
Turning attention to the Pacific agreement, the countries involved are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The US already has free trade agreements with several of the countries listed above but the really significant new one to the negotiating group is Japan. Japan has the third largest economy in the world and trade between the US and Japan is massive.
Needless to say, pork producers in the US and the EU are watching this very closely as the US could benefit dramatically from more trade and less tariff interference with Japan. Not only is Japan the largest importer of pork in the world, with steadily declining domestic production, the US has the highest market share of those imports and it is mostly the high value cuts as the Midwest gentleman in the 1990s pointed out. EU countries are second and could easily expect to lose some future market share if Japan successfully negotiates a place in the TPP agreement. Some believe the TPP is an attempt by the US to establish strong trading relationships with the most important economies of the Pacific Rim to compensate against any threatening aspects of Chinese influence which is growing fast in the region.
Another issue both agreements attempt to prevent, though the current example in the news involves India, namely, India just lost an important appeal with the WTO regarding its ban on the importation of US chicken meat, eggs and live pigs. The stated reason for banning trade in chicken meat and eggs is “fear of introducing Avian Flu Virus”. This was judged by the WTO to be a “COOL-like” (my comparison), thinly disguised restraint of trade to protect higher cost Indian chicken meat producers rather than any scientifically justified fear of virus introduction.
The US can produce chicken meat far cheaper than India but once we flood their markets with cheap chicken meat, the local high cost producers are pretty much done and their unemployment can create substantial social costs if nothing is done to help them. Better for everyone in both countries if India invests in helping transition high cost farmers to other products or work rather than blocking trade. The TPP and the T-TIP are designed to substantially reduce these kinds of protections between members.
Here are some other feared impacts of either agreement. Some people today place a relatively high value on attributes to food like “locally produced”, even though the cost is frequently higher even after the cost of shipping for the “same” imported goods is accounted. Importing the same product at lower cost does not necessarily make these people “better off”, by their standards. However, if less scarce global resources are used with trade for the same products, do folks make a good argument when they demand that their idiosyncratic desire for local produce be protected with tariffs or by importing bans? Better that the actual costs for each are in the marketplace and people can choose. Unfortunately folks like this usually try to dream up some dubious defect in the imported goods or use various scare tactics or appeals to nationalism to get their way, like a ban, when the facts are not on their side.
On the other hand, some TPP and T-TIP partners may very well have to “dumb down” important worker safety, food safety or animal welfare considerations for food animals as you can bet the country with the highest standards for these things will not have their rules adopted for everyone. For instance, it is unlikely that the UK animal welfare scheme will become the standard throughout the US and the entire EU for instance. There will be some negotiation to the middle most likely, which could increase trade for countries with lower standards and put those in higher standard countries at some increased financial, health or ethical risk.This happens almost certainly without notifying the customers of affected countries. Countries may agree to certain production protocols and on-site production inspections before shipment as a trade for less border inspection and bureaucratic border delays which have sometimes been used to cause food spoilage as a form of retaliation.
The oldest principles articulated in economics are about trade and are so amazing regarding the outcome that they border on counter intuitive. For instance, David Ricardo showed in the 1800s that even if a country can produce everything with less cost or resources than another country, both will be better off if each of them specialize in and increase production of a subset of products that they do best and trade with the other for the one they reduce. You can’t beat trade when it comes to wealth creation for all countries, as long as it’s fair and free.
