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Why one top economist thinks Obama’s trade deal is worth passing

President Obama makes the case for the Trans-Pacific Partnership deal at Nike HQ.
President Obama makes the case for the Trans-Pacific Partnership deal at Nike HQ.
Natalie Behring/Getty Images

Adam Posen is president of the Peterson Institute for International Economics, and a leading economist. In recent years, he's been a bit of a wonky liberal hero; as a member of the Bank of England's rate-setting Monetary Policy Committee, he fought hard against the austerity economics that took over much of Europe and seemed, at times, near to taking over the US, as well.

"People should be reading Adam Posen," Paul Krugman wrote in 2008.

Now Posen is on the other side of a debate splitting liberals from many in the economics community. He's a strong supporter of the Trans-Pacific Partnership trade deal — the one that Elizabeth Warren and the AFL-CIO are going to war with President Obama over, and that Paul Krugman has come out as a lukewarm opponent of. Recently, I reached Posen at his office, and asked him to make the case for TPP to me, and to explain what he thinks the critics are getting wrong.

The more we talked, though, the more it seemed that Posen didn't think the critics were getting much wrong about the deal itself. He actually agreed with some of the major criticisms of the TPP. His difference was that he thought the critics were sharply underestimating the good the trade deal would do.

1) The case for TPP isn't about American jobs

"The impact on US workers, in terms of the number of jobs, will be small," Posen says. He argues that the big benefits to America will come in the form of lower prices for American consumers, a stronger foundation for American foreign policy in Asia, and increases in productivity for American businesses.

That last bit is particularly important, Posen says, both to America and to the other countries in the TPP. "We have increasing evidence in recent years that the real gains from trade aren’t actually market access, they’re from putting pressure on individual businesses to be more productive," he says. "If you ask Chinese businessmen and officials what was behind their growth, they’ll tell you a lot of it was being exposed to foreign competition and international markets. The competition, the pressure for efficiency, is a really big deal here."

Posen estimates the benefit to America at a few tenths of a percentage point of GDP growth each year. "It adds up," he says.

2) It's not just about the benefits to the US

"The importing of competitive pressure, of higher standards, of opening up new markets, can be transformative for a poor country," says Posen. "But this isn’t zero-sum."

This is something Posen feels people get completely wrong about trade — that for one country to grow, another country has to shrink.

"People sometimes talk as if China got rich at the US’s expense," he says. "China’s economy has grown by several trillion dollars. Even if you added up all the trade deficits, it would only be a fraction of China’s growth."

3) Elizabeth Warren has a point about investor-state dispute settlement provisions

Posen is a strong supporter of TPP. But he's clearly a bit uncomfortable with the ISDS provisions that have been a target of Warren and others. These provisions give foreign companies what amounts to a special court system where they can protest what they see as unfair treatment. And the basic idea, Posen says, is a good one — both for companies and for countries that need foreign investment but wouldn't get it unless something like ISDS existed.

"Imagine a company invests in a place like Venezuela during the time of Chavez," Posen says. "They send in workers, resources, know-how, and then they get nationalized. They should have some right of appeal. In most countries we trade with, the civil courts are good enough to deal with that. The Germans, for instance, can be trusted on these issues. But in a Russia or Venezuela, the question is, Can you put in some protections for the countries? The fear there is literal expropriation."

But companies, Posen continues, have taken ISDS much too far. "We’re now getting into things that aren’t like buying a mine. We're getting into issues of cultural property, health, and safety. It’s legitimate for a poor country as much as a rich country to say, If you want to trade here, you need to follow our domestic rules on things like food safety and local content on films. And some companies, including US companies, have gone to extremes to try to get these local regulations interpreted as forms of expropriation. I don’t think that’s right or necessary. I don’t think ISDS should be a back door for companies to get around local regulations they don’t like."

4) But the idea that TPP is "secret" is ridiculous

A major complaint of TPP critics is that the agreement is being negotiated in "secret." Posen has little patience for this argument. He sees it as both disingenuous and, at some level, an attempt to sabotage the conditions that make trade deals possible.

"First, even if it’s secret now, there’s not going to be any hidden codicils or agreements," Posen says, referring to the fact that Congress will be presented with a final copy of the TPP trade deal to vote up or down. "Everything will be revealed. When the US Congress and counterparts in other countries get to look at the deal, there will be nothing hidden. And even now, people pretty much know what’s in this deal, if they want to.

"The other thing is, just like in congressional negotiations or labor negotiations, you don’t do all the negotiating in public because you want people to be able to hold their opinions, try ideas out, speculate. That’s how negotiations get done in the real world. If you make them transparent from day one there can be no deal, for the most part, because people can’t have every position flying through the press."

5) The intellectual property protections might go too far — particularly on pharmaceuticals

One of the major criticisms of the TPP is that it isn't really a trade agreement. Instead, it's an intellectual property protection agreement masquerading as a trade agreement. Some of its most important provisions aren't about tariffs or quotas but about patents on pharmaceuticals and protection for software. This has led some unusual — and influential — groups to oppose the trade deal, including Doctors Without Borders and the Electronic Frontier Foundation.

Posen is broadly supportive of the IP provisions in the deal, but he thinks the critics have some fair points.

"I do think there is a lot of room for increasing enforcement of rich countries’ brand protections, diminishing pirated films and music (though less of an issue in today’s digital world), and especially protecting industrial technologies," he says. But he goes on to argue that "on pharma, there has to be some sort of constructive compromise so that the US isn’t overdoing the protection of profits and costs to poor people."

Posen has a suggestion for how this could be fixed: he backs a proposal by Caroline Freund that would shorten the TPP's pharmaceutical patent exclusivity from 12 years — the current US standard that we want to see adopted by our trading partners — to seven years. This is more radical than it sounds, as it would mean reducing the length of patent exclusivity in America even as we increase it abroad. The pharmaceutical industry would hate it, and will say it would discourage innovation, but American consumers would save a lot of money because they could access generics more quickly, and the pharmaceutical industry would get the benefit of seven years of patent protections in countries that currently don't give their patents much respect at all.

6) A gentler foreign policy argument

One of the Obama administration's primary arguments for TPP is that if America doesn't set the economic rules of the road, then China will do it instead — and America will slowly lose its leadership position in the region.

Posen makes a gentler, firm-level version of this case. "A major part of TPP is potentially orienting, if not anchoring, important developing markets on a market-friendly outwards-facing, and yes pro-US and pro-democracy, path," he says. But his argument is more about the everyday interactions between executives, investors, exporters, and so on. The way TPP will turn countries towards the US, in Posen's telling, isn't through the governments, but through the "business and political integration through trade," the "winning hearts and minds" that comes through foreign investment and more routine business dealings.

"We see what having the European Union pull along first Spain and Portugal and then Eastern Europe has meant to those countries," he continues. "We have seen what the US orientation and anchor has meant to Mexico, Columbia, and Chile. We saw what happened for Japan then Korea after the war. For Peru, Vietnam, and perhaps Malaysia (admittedly a harder case) — and as importantly, likely Indonesia and the Philippines in the not-too-distant future — TPP represents the positive inducement to that path."

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