Why Obama's big trade deal isn't a no-brainer for the world's poor

Economists love free trade, not least for its positive effects on residents of poor countries, and naturally this has become a frequently invoked argument on behalf of the Trans-Pacific Partnership trade pact. "Here is an assessment from the Peterson Institute that Vietnam will be the biggest gainer from TPP," Tyler Cowen writes. "Do you get that, progressives? Poorest country = biggest gainer. Isn’t that what we are looking for?"

But Kimberly Ann Elliott, an economist at the Center on Global Development who studies the effects of trade policy on the global poor, says the issue is more complicated. Overall, she's neither strongly for nor strongly against TPP, and thinks its effects are likely to be small. But she also argues that supporters often exaggerate the benefits for developing countries, and that some of its effects will actually hurt the world's poorest people.

There are other poor countries, and TPP could hurt them

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The basic argument that free trade helps poor countries is that by reducing trade barriers, rich countries boost poor countries' exports and growth. One might expect TPP to have that effect with the US and Vietnam. But the deal only includes 11 countries besides the US: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Elliott notes that growth in Vietnamese exports could come at the expense of exports from other, even poorer countries outside the deal.

"There's a particular concern about some of the least developed countries in the Asia region, particularly Bangladesh and Cambodia, that currently do not have any preferential access to the American market," she says. "They're paying the full freight, in terms of 15 percent and up average tariffs on US clothing imports. If Vietnam were to get substantial new access to the US market, I think that could have potentially serious trade diversion implications for those countries."

Vietnam is substantially richer than those countries, with a GDP per capita of $1,910.50 in 2013, compared with $957.80 for Bangladesh and $1,006.80 for Cambodia. Diverting trade from a poor country to one that's twice as wealthy is not exactly a desirable outcome from a humanitarian perspective.

There's a way out of this for the US. It could ensure that all countries classified as "least developed" by the UN (including Bangladesh and Cambodia) can access the US market free of all tariffs and quotas. That would prevent Vietnam from gaining at the expense of poorer nations. "Among the rich countries, the United States is actually the only holdout that is not already providing duty-free, quota-free market access to these countries" for at least 98 percent of products, Elliott says.

The European Union and Canada are already on board, and the World Trade Organization agreed to duty-free, quota-free access for at least 97 percent of products in 2005. But the US has been slow and scattershot in implementing that — and was also the key force pushing for exempting 3 percent of products, which Elliott describes as a "pretty big loophole" that lets the US keep tariffs on key products like textiles, dairy, and sugar. It does provide duty-free (but not quota-free) market access on certain goods to African countries through the African Growth and Opportunity Act, and to Haiti through the HOPE and HELP programs, but poor Asian countries are left out.

But expanding duty-free, quota-free access to Bangladesh and Cambodia is a tall order politically. "Part of the reason the US has not moved on duty-free, quota-free is not just our own protectionist textile interests, but also the fact that the Africans and the Haitians are concerned about the potential for preference erosions if Bangladesh and Cambodia were to get in the market," Elliott explains.

It's less good for Vietnam than it initially appears

(Hoang Dinh Nam/AFP/Getty Images)

Trade deals include what are known as "rules of origin" for determining from which country a product ultimately originated. This prevents the use of countries within free trade pacts as intermediaries. For example, suppose Brazil and Argentina had a free trade deal, but Brazil and Chile didn't. That makes it tempting for Chilean producers to send their wares to Argentina first, and then duty-free to Brazil. Rules of origin keep that kind of thing from happening.

But they can also hamper legitimate businesses that use inputs purchased from overseas. "In the apparel area, the default rule of origin for US trade agreements is called 'yarn forward,'" Elliott explains. "What that means is that from the yarn, through the fabric, to the final apparel item, all of those inputs are supposed to be sourced — typically in a regional trade agreement — from countries within the region."

Vietnam imports a lot of inputs for apparel from China, just as many Asian apparel-producing countries do. That would not be allowed under a "yarn forward" rule of origin. Normally, agreements allow for duty-free exports of goods using outside inputs up to a certain limit, but beyond that, any trade barrier reductions associated with the deal go away. "If it doesn't meet the rule of origin, it wouldn't get the tariff preference," Elliott says.

Based on that precedent, Elliott predicts that TPP will wind up providing substantially less benefit to Vietnamese textile producers than the tariff reductions would seem to suggest: "I will guarantee you that whatever we give in terms of reducing tariffs, the rule of origin will be such that Vietnam will not be able to take full advantage of those tariff reductions."

Harsh intellectual property rules are bad for poor countries

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Like most trade agreements, TPP isn't just about trade. It's also about spreading US economic rules abroad so American companies compete under more favorable conditions. One form that usually takes is the imposition of harsh intellectual property rules. Those can often hurt poor countries by driving up the cost of prescription medications that enjoy US patent protection, and by reducing access to new technologies.

Elliott thinks TPP is likely to be better than many trade deals on this point, because the non-US countries are forcefully pushing back against certain American demands on IP. "Most past US free trade agreement negotiations have been more or less 'take it or leave it' with countries that were desperate to have an agreement with the United States and were willing to sign on to almost anything," she explains. "There's a lot of pushback from some of the TPP countries this time around, so I don't expect that what we're going to get out of this is what the US negotiators originally demanded."

Generally, though, Elliott argues that efforts at standardization across borders are often ill-advised. "My reading of the literature is that intellectual property rights are something where countries at different levels of development do have different interests," she says. "Having a common set of rules is just really not a development-friendly way to go."

TPP distracts from trade negotiations that could really help the poor

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But the biggest problem with TPP is that it's not big enough. Ideally, trade negotiations should go through the World Trade Organization. Deals made at that level reduce barriers globally, preventing beggar-thy-neighbor dynamics like poor African countries' opposition to extending preferences to poor Asian countries. By contrast, regional deals like TPP exclude most countries, reduce attention on WTO negotiations, and encourage still more smaller-scale deals that even further undermine the WTO process. For that reason, many trade experts like Elliott and Columbia's Jagdish Bhagwati think they are a distraction at best and actively harmful at worst.

It's understandable that the administration would look outside the WTO. The Doha Round of WTO negotiations have been stalled for years (in large part because of US and European intransigence on agricultural subsidies), and show little sign of reviving soon. That makes bilateral and regional deals appear to be attractive means of tearing down trade barriers, especially if Obama is unwilling to adopt agricultural policies that let farmers in poor countries compete globally. But getting Doha done is significantly better for the world's poor.

"I remain a hardcore multilateralist. I really wish they'd put at least equal attention back into trying to get the WTO moving again," Elliott says. "That's the biggest potential negative impact for the vast majority of developing countries who are not party to these mega-regional agreements. It's further undermining the credibility and the relevance of the multilateral system. That's my number one concern."

Read more:

• Elliott on mega-regional trade agreements' effects on poor countries.
• Vox's TPP explainer.
• TPP will be great for elites, especially in intellectual property-heavy fields. Does that mean it's good for consumers too?
• Why the White House is so insistent on passing TPP over heavy Democratic opposition.

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