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America’s proposed TPP: Buyer beware

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Despite President Barack Obama’s charm offensive in the region, Pacific nations are well-advised to remain wary of the US government’s position on the Trans-Pacific Partnership (TPP) agreement.

If US trade negotiators got their way, the Pacific Rim would reap surprisingly few gains—but take on big risk. Until the United States starts to see Asia as a true trading partner, rather than a region to patronize, it is right to hold out on the TPP.

Despite Obama’s charm, the rosiest projections—from an unsuspecting report at the Peterson Institute for International Economics, no less—say that the TPP will raise incomes among the parties to the treaty by a mere 0.3 percent of GDP in 2025.

Many economists see these projections as gross overestimates. For one, they heroically assume that a doubling of exports automatically leads to more than a doubling of income. Yet even if these estimates were taken at face value, they amount to just over one penny per day per person way out in 2025 for TPP nations.

In exchange for these small benefits, the United States’ partners in Asia and Latin America have to take on big risks. One big risk that may be a deal breaker is that the United States is insisting that TPP partners surrender their right to regulate global finance.

Through its financial services and investment provisions, the TPP would allow Wall Street banks to move into TPP countries’ financial services sectors. To do what? If you can believe it, to push the very financial products that triggered the biggest global financial crisis since the Great Depression.

That’s not progress. That’s regress, given what the world now knows about these often toxic instruments.

What is more, if US trade negotiators, acting at the behest of US industry, got their way, the deal would prohibit the ability of these banks to be regulated to prevent and mitigate a financial crisis. They would be “free” to recreate the mess all over again.

In the early 1990s, Chile showed the path to resilience. It put in place regulations on surges in the inflow of financial flows that can trigger financial crises. Such regulations have been

broadly credited in helping Chile avoid some of the worst impacts of the Latin American financial crises of the 1990s.

Likewise, Malaysia was among the least hard hit during the East Asian financial crisis because it put in place regulations on the outflow of financial flows after the crisis came. Malaysia’s measures helped its economy rebound by 5.4 percent the year after the crisis.

Such measures may be considered impolitic in Washington and New York, where it is always preferred that capital—especially US capital—can always move in and out of a country without any restrictions.

The wisdom of such precautions is now even understood in the erstwhile citadel of financial orthodoxy, the International Monetary Fund. In its official view on regulating global financial flows, the IMF expressed concern that agreements like the TPP “do not provide appropriate safeguards.”

The same cannot be said for the US Trade Representative’s office. As a result, regulating the inflow and outflow of financial flows would not be permitted under the TPP—if the US side got its way.

What is perhaps most risky for America’s TPP partners is that the foreign banks themselves will be able to directly sue governments for violations of the agreement. This puts the other governments at a natural disadvantage, given the zealousness, might and cost of Washington and New York City lawyers. They are the specialists in such proceedings—and always on the prowl for business.

Indeed, Malaysia knows this all too well.

Under a treaty similar to the now proposed TPP that Malaysia had with tiny Luxembourg, a private investor there attempted to sue Malaysia for its postcrisis regulations on financial flows. That time, Malaysia was lucky that the case was thrown out on jurisdictional grounds.

But it shows that foreign firms are ready to pounce on such regulations if given the opportunity. And when the suing party is based in the United States, the TPP partners might not be so lucky.

It is in the well-understood self-interest of Chile, Malaysia and other TPP countries to continue to push back on Obama’s proposals to deregulate financial services and investment. It is also in the interest of financial prudence and international fairness.

In light of that, it is disconcerting to find a recent study which shows that these nations have been able to safeguard the ability to regulate finance in treaties with other nations such as the European Union, Canada, and China, but that it is America which is pushing back with great determination.

Thankfully, there are important voices in the United States as well who are pushing Obama to act with more prudence than the US financial industry wants him to do. Americans are also painfully aware that financial crises hurt US jobs and financial stability.

US Rep. Sander Levin and others have been pressuring the Obama administration to ensure that trade deals don’t trump regulating global finance. In 2011, over 250 economists from across the world urged Obama to make trade deals consistent with financial reform as well.

With so little reward on the negotiating table, Obama will be hard pressed to get a TPP agreement from the Pacific Rim nations. They are better off to remain holdouts until the US government gives up its rather extreme, risk-enhancing negotiating position on finance.

The fate of its own economy in recent years, still on the ropes from the fallout of the last

financial crisis, would certainly suggest much more caution than US negotiators are currently pursuing in their dealings with the TPP partner-countries. Copyright The Globalist

Kevin P. Gallagher is a professor of international relations at Boston University and a regular contributor to The Globalist.


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