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A Big Deal: Canada and Mexico Join the Pacific Trade Pact

Tuesday, June 26, 2012

Accounts of the G-20 summit in Mexico largely miss the most significant development.

The most significant development during the G-20 summit in Mexico occurred on the sidelines and was largely buried in media reports: The decision to invite Canada and Mexico to join negotiations for the Trans-Pacific Partnership agreement (TPP). Adding Mexico and Canada to the current nine-member TPP will result—if negotiations are successful—in a free trade area covering some 658 million people and about $20.5 trillion in economic activity.

Further, many trade analysts predict that the move by Canada and Mexico will produce a domino effect, beginning with the addition of Japan and South Korea within the next year. That would produce a free trade area encompassing more than 700 million people with a combined GDP of some $26 trillion. It is this prospect that gives substance to the claim that, in an otherwise lackluster and frustrating G-20 summit, such a breakthrough is potentially a really big deal.

For most of their history, the TPP negotiations have been conducted beneath the radar of publicity or media attention. They began with four small nations—Singapore, Brunei, New Zealand, and Chile (P-4)—aiming for a high standard, U.S.-model Free Trade Agreement, with the goal of providing a pathway to an inclusive, trans-Pacific trade and investment open market. Subsequently, Australia, Peru, Vietnam, and Malaysia signed on, but the transforming event came with the Bush administration’s decision to start the process for membership in its last months in office.

The incoming Obama administration, though conflicted and hampered by a Democratic Party deeply divided on trade policy, decided after months of deliberations that its much-touted “pivot” to Asia would have little credibility absent U.S. leadership toward greater trade and investment liberalization throughout the region. It was also aware that Beijing was busily promoting an intra-Asian trade structure that would exclude the United States.

Adding Mexico and Canada to the current nine-member TPP will result—if negotiations are successful—in a free trade area covering some 658 million people and about $20.5 trillion in economic activity.

Detailed negotiations began in early 2010, and since then some 12 rounds have been conducted. Aware that the WTO Doha Round has bogged down in failure after a decade-long slog, the TPP nations set an ambitious goal of completing the pact by the end of 2012. They will not meet that goal, but most observers believe that they will work through the remaining tough issues by the middle of 2013. One complicating factor is the uniqueness of the negotiating process: Unlike any previous trade negotiation, TPP negotiators face the challenge of adding new members (Mexico and Canada, and possibly others) as they are hammering out the details of the pact itself. To preclude reinventing the wheel in the coming months, Canada and Mexico have agreed not to reopen sections of the text where issues have been settled.

What differentiates the TPP from other trade agreements or will make it—if the negotiations are successful—a 21st-century FTA? The key is an attempt to lower or eliminate “behind the border” barriers to competition from foreign goods and services. Thus, among the twenty-odd chapters of the agreement will be rules for government procurement, services (viz. financial, telecommunications, accounting), investment, health and safety regulations, intellectual property, fair competition with state-owned-enterprises, supply chain management, and regulatory due process.

Despite the emphasis on 21st-century regulatory reform, it turns out that some longstanding 20th-century trade issues are proving the most difficult to resolve. For the United States, the greatest challenges stem from sugar, dairy, and cotton protection and subsidies; textiles and so-called rules of origin that hamper clothing supply chains; and union demands for interference with the labor laws of U.S. trading partners.

In the end, the key to success will come down to trade-offs between 21st century liberalization and old-fashioned 20th century protectionism. By all economic analyses, the benefits are clearly worth the short-term adjustment costs. In the most cited study, it is estimated that region-wide integration in the Asia-Pacific would generate almost $2 trillion in additional trade by 2025, with an additional $290 million for U.S. exports.

It is estimated that region-wide integration in the Asia-Pacific would generate almost $2 trillion in additional trade by 2025, with an additional $290 million for U.S. exports.

Much could go wrong in the crucial endgame negotiations after the U.S. elections and in the first months of 2013. For instance, the Obama administration has fed the high ambitions of American corporations to get their way on major issues. There are bound to be disappointments and compromises for which they have been little prepared. Conversely, other TPP members may reciprocate with rigid final positions—as examples, New Zealand on intellectual property, or Australia on the international arbitration of investor disputes. But over the past two years, a strong esprit and commitment has developed; and there is a reasonable chance that the negotiators can craft workarounds for the most intractable differences.

A final note of full disclosure: In the week before the G-20 summit, I chastised the Obama administration for dragging its feet on the crucial invitations to Canada and Mexico. But they then moved with dispatch (no claim here of cause and effect). So kudos and hats off to them: For once, the national interest coincided with the political agenda.

Claude Barfield is a resident scholar at the American Enterprise Institute.

FURTHER READING: Claude Barfield also writes “The First Carbon Trade War?” “Reforming the Patent System: How Did We Do?”  “Why the Next IMF Leader Should Not Come from Europe,” and “Let's Bring Canada and Mexico into the Pacific Trade Pact.” Alex Brill reports “A Victory Celebration and a Wake for Free Trade.” Daniel Hanson contributes “Missing the Slow Pitch on Free Trade.”

Image by Darren Wamboldt / Bergman Group

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