Opinion: Cold, Hard Reasoning Behind the TPP

Feb 16 2016 |
Workers in a Vietnamese factory. | Photo by Jos Diells

Ask a multinational, and they’ll tell you what they think of the deal.

The post below is an opinion piece written by award-winning journalist Richard McCormack, the founder and publisher of Manufacturing & Technology News. McCormack also served as the editor of the 2013 book on revitalizing manufacturing, ReMaking America. You can follow him on Twitter at @RichardAMc.

I just spent three days reading through dozens of submissions to the U.S. International Trade Commission (USITC) from companies, labor unions, public interest groups, and trade associations describing how they are in favor of – or opposed to – congressional passage of the Trans Pacific Partnership (TPP).

It took me those three days to understand the true intent of the agreement: TPP is a means by which multinational companies will be able to shift production from China to less expensive Vietnam and Malaysia. As much as the agreement is about eliminating 18,000 tariffs on U.S. exports to the 11 TPP countries, it's more about eliminating tariffs on products imported into the United States from Vietnam and Malaysia.

The TPP also has as much to do with geopolitics as it does with trade. If investment flows out of China and into Vietnam and Malaysia, it blunts China's growth as an industrial superpower.

Thanks to the legal protections written into the agreement, American companies will be assured that their investments in factories in low-labor cost Asian countries will not be jeopardized by government takeover and discriminatory taxes and regulations.

Simply stated: Multinational companies will be able to export their goods from Vietnam and Malaysia to the United States at lower prices than they are able to export those same goods to the United States from China.

The Support on the Surface

U.S. retailers are among the biggest cheerleaders, since the products they import from Vietnam and Malaysia will be cheaper with the elimination of hundreds of millions of dollars of U.S. import duties.

And without any real provisions regarding currency manipulation, the TPP assures that products made in those countries will be even cheaper for U.S. consumers (and more profitable for American importers), making it even harder for U.S.-based producers to compete.

TPP puts what little remains of American manufacturing in peril.

Many American companies operating in China are eager to move, having tired of government-backed IP theft, cyber attacks, the lack of freedom of speech, Internet censorship, tech transfer requirements, indigenous innovation policies, and government favoritism toward state-owned enterprises. At the end of 2015, 25 percent of U.S. companies operating in China surveyed by the American Chamber of Commerce in China "have either already moved or are planning to move capacity outside of China."

"American business feels less welcome [in China] than in prior years," writes James Zimmerman, the group’s Chairman, in its 2016 China Business Climate Survey Report. U.S. companies operating in China "report increasing concerns about transparency, predictability and fairness of the regulatory environment, as well as the extent to which they are allowed to participate in the ongoing reforms and serve China's market."

The Semiconductor Industry Association notes that passage of TPP should help thwart China's damaging embrace of mercantilism. "China, the largest single-country market for semiconductors, has long pursued a policy of indigenous innovation and protectionism that challenges the free and open trading system supported by the United States and its global partners."

Real Goals Revealed

By digging deeply into the written submissions made to the ITC, the intentions of companies become clear.

General Electric Vice President of Global Government Affairs Karan Bhatia, formerly Deputy U.S. Trade Representative during the Bush administration, stated that TPP's provisions related to rule of law, anti-corruption, patent protections, and state-owned enterprises will make Vietnam and Malaysia "more attractive to investors, foster domestic innovation and support jobs" in those countries. The agreement "would make GE more inclined to invest in the TPP area." The last sentence in Bhatia's submission to the USITC states: "Countries like Vietnam and Malaysia will become more attractive destinations for investment, attracting more capital into the country, improving infrastructure and improving the quality of life for its citizens."

The Emergency Committee for American Trade, an organization representing the largest U.S. multinational corporations, says the investment chapter of the TPP "provides a more secure and predictable legal framework for a wide range of U.S. investors in TPP countries."

Numerous trade associations representing importers of goods into the United States made the argument that eliminating U.S. import tariffs would increase employment in the retail sector and save consumers money.

The Outdoor Industry Association, for instance, said U.S. tariffs on travel goods made in TPP countries will be eliminated "on day one of the agreement's entry into force." The impact? "We expect outdoor companies to utilize these provisions to expand operations in Vietnam, which currently accounts for 3 percent of all travel good imports."

Footwear is another example. Right now, the United States imports 99 percent of the shoes it consumes. In 2014, Vietnam supplied 12 percent of U.S. shoe imports, with China accounting for 79 percent. With the TPP’s passage, Vietnam's share of U.S. imports will increase to 22 percent by 2019, while China's will shrink to 67 percent.

With the majority of U.S. duties being eliminated in the first year of the agreement's implementation, U.S. footwear companies "will greatly benefit because Vietnam, a TPP partner country, has become a major footwear supplier to the U.S. marketplace," writes the Footwear Distributors & Retailers of America. "A vast majority of FDRA members currently source in Vietnam with plans to increase orders with factories in Vietnam in the near future."

Not Everyone is Excited

In its submission to the USITC, the Tile Council of North America noted that when TPP goes into effect, Malaysia and Vietnam will "have the potential to target the North American market and likely will do so when the TPP eventually eliminates U.S. tile tariffs. Clearly, duty-free access for Vietnam and Malaysia constitutes a threat to the U.S. tile industry."

The tile association notes that after Peru entered a bilateral free-trade agreement with the United States in 2009, tile imports surged by 175 percent in four years. "Peru's export growth demonstrates how quickly countries can ramp up exports to the United States once tile tariffs are reduced."

The same thing happened to the U.S. titanium industry after the United States signed a free trade agreement with Korea. Titanium Metals Corp. said TPP presents "an immediate and significant risk of serious harm to the United States titanium industry." It recommended that TPP not be approved.

Passing on the Savings?

Proponents of TPP don't talk about the impact the deal will have on U.S. Treasury revenue collections. The United Sates government will lose $2.4 billion in revenue from Vietnam from duties they pay on apparel, footwear, and travel goods. The companies claim those savings will be passed on to American consumers (or will they be siphoned off for increases in executive pay?). But they don't mention that taxpayers will be on the hook for the loss of revenue.

TPP will "reduce income inequality [in the United States] by reducing high tariffs on key items for hard-working American families," argues the U.S. Fashion Industry Association. With cheaper imports "increased growth by retailers and brands will create jobs," it adds.

Writes Walmart Senior Director of Global Government Affairs Sarah Thorn: "Lowering the cost of products we purchase and investing those savings into everyday low prices for our customers so that everyday needs are affordable and simple joys accessible is also why we support the TPP."