How trade deals like TPP fail the global poor

The Obama administration insists that the just-released Trans-Pacific Partnership is great not only for the US economy — "supporting more well-paying American jobs, strengthening our middle class" — but for global development too. "TPP is the first U.S. agreement to include a development chapter," the US Trade Representative's office writes, "incorporating commitments to promote sustainable development and broad-based economic growth."

A pro-development deal would be a good thing indeed. Despite decades of presidents touting "free trade," the US still seriously restricts poor countries' ability to sell goods here. While the European Union imposes no quotas or duties on exports from the world's poorest countries (except on weapons), the US hasn't followed suit. It provides some exemptions for certain African countries and Haiti, but the exemptions are riddled with loopholes, and imports from poor Asian countries like Cambodia and Bangladesh face an average tariff of 15 percent. And both the US and Europe continue to provide domestic agricultural subsidies that make it extremely difficult for poor farmers abroad to compete.

But TPP has some serious failings from a development perspective. The "development chapter" is basically symbolic. It creates a committee to talk about development, but gives that committee no power. The deal has patent and regulatory provisions that could make drugs more expensive in poor countries. It reduces trade barriers for Vietnam, a lower-middle-income country, but in the process could leave countries outside the deal like Cambodia and Bangladesh worse off. And while there hasn't been time for in-depth analysis yet, Vietnam might not even benefit much, given the "rules of origin" contained in the deal.

Worst of all, TPP continues a trend of doing trade agreements regionally, excluding many of the world's poorest countries. A trade policy actually geared toward development would focus on the World Trade Organization and try to help all poor nations, not just Vietnam and a big group of richer neighboring countries.

The development chapter is insultingly vapid and ridiculous

The "development chapter" of the deal is almost embarrassingly contentless. It's like a parody of a treaty, using various formalities to dress up the fact that it does absolutely nothing. It mostly consists of the parties "acknowledging" and "recognizing" various banalities. For example:

The Parties recognize the potential for joint development activities between the Parties to reinforce efforts to achieve sustainable development goals.

…The Parties further recognize that transparency, good governance and accountability contribute to the effectiveness of development policies.

…The Parties acknowledge that broad-based economic growth reduces poverty, enables sustainable delivery of basic services, and expands opportunities for people to live healthy and productive lives.

So we all agree that governance should be good and more people should live healthy and productive lives. Good work. This is all preamble to the only actual policy included in the chapter: the creation of a "Committee on Development" composed of representatives from each party, which will meet and discuss trade and development. The committee has no explicit power or instructions to do anything besides "facilitate the exchange of information," "discuss any proposals for future joint development activities," and so forth.

Then, after the committee is created, the chapter notes that nothing in it is binding if it clashes with the rest of the deal, and in any case, you can't use dispute settlement processing to enforce it either. The kicker of the chapter exists mainly to tell you the chapter doesn't matter at all:

Article 23. 8: Relation to Other Chapters

In the event of any inconsistency between this Chapter and another Chapter of this Agreement, the other Chapter shall prevail to the extent of the inconsistency.

Article 23.9: Non-Application of Dispute Settlement

No Party shall have recourse to dispute settlement under Chapter 28 (Dispute Settlement) for any matter arising under this Chapter.

In the words of the Center on Global Development's Kimberly Ann Elliott, this all "sounds like jobs for bureaucrats and lots of talk with little action."

In summary, we have a chapter that a) acknowledges a bunch of uncontroversial facts about life, the universe, and everything; b) sets up a committee that's authorized to talk but not actually do anything; c) clarifies that if any of the meaningless stuff in a or b should somehow conflict with the rest of the treaty, the rest of the treaty takes precedence; and d) tells countries that there's absolutely no way to enforce the chapter at all. It's 1,200 words, full of pomp and circumstance, ultimately signifying nothing.

The rest of the deal does matter, but not always for good

Philippe Huguen/AFP via Getty Images

When my colleague Libby Nelson and I asked Elliott what she made of the deal, she wasn't purely negative. She praised it for denying tobacco companies the ability to fight regulations abroad. She supported commitments Vietnam has made to improve freedom of association and striking rights for workers.

But concerns remain. The deal still includes five to eight years of exclusivity for new "biologic drugs," which is likely to drive up the cost of medicines in the region. "Biologics are new, so we don't have a lot of experience," Elliott told Nelson and me. "But in principle, I don't think these are development-friendly provisions."

Elliott's colleague Amanda Glassman agreed: "Of course, there are many ways to deal with monopoly [drug] prices from a public policy and purchasing point of view, but longer periods of exclusivity do not help. The evidence is clear that generics are much cheaper and the flip to generics is the main determinant of access and adoption of new medicines in many middle-income countries." Some poor countries can get around these restrictions and buy drugs at lower prices, but middle-income countries are generally excluded from those benefits. So countries like Malaysia, Indonesia, and Peru could suffer.

The deal also doesn't touch America's domestic agriculture subsidies. Instead, it commits to eliminating agricultural export subsidies — which is, as Elliott writes, "a symbolic step, since none of the parties directly subsidize exports." This is better than the US has done in the past. At least we're acknowledging that farm subsidies are bad. But we're not doing much of substance.

When I talked to Elliott about the TPP in June, she was also concerned about how the deal would affect Cambodia and Bangladesh, two countries that compete with Vietnam in the textiles market. Vietnam is in the deal, but those two aren't. If Vietnam now has privileged access to the US and other countries, its poorer competitor nations could suffer. Lower tariffs could make Vietnam a more attractive source country to US suppliers, even if the tariff-exclusive costs of doing business are lower in Cambodia or Bangladesh. That could shift economic activity away from those substantially poorer nations to their richer peer.

However, Elliott says it's unclear how much that will be a problem, mostly because it's unclear if Vietnam will benefit much in the first place.

(Hoang Dinh Nam/AFP/Getty Images)

The problem here has to do with the deal's "rules of origin." Those are provisions in trade deals designed to prevent countries outside the deal from using countries inside the deal as intermediaries to evade tariffs. For example, suppose Brazil and Argentina had a free trade deal, and Chile and Argentina had a free trade deal, but Brazil and Chile didn't. That would make 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 told me in June. "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 limit, the old tariffs still apply. If Vietnamese textile shops keep using Chinese inputs, and accept the ensuing tariffs, that means that TPP won't benefit them much at all. Alternately, they could start using Vietnamese inputs, but that could raise production costs as well as prices, also limiting any benefit.

Elliott and others are still analyzing the rules of origin to see how much, on net, Vietnam would benefit from TPP once that factor is taken into account. It's possible the effect would be small — rising input costs in China might mean that strict rules aren't necessary a deal breaker, as Vietnam has reason to start making its own inputs anyway.

But it's bad either way. If the rules aren't prohibitively strict, then that helps Vietnam but necessarily hurts Cambodia and Bangladesh. If they are prohibitively strict, then it could wind up being a wash for Vietnam, and no one's really better off.

The biggest problem: This is not how trade policy should be made

Rabih Moghrabi/AFP/Getty Images

But the biggest issue that Elliott and other trade specialists have with TPP isn't about its details so much as the fact that it exists in the first place. Ideally, trade negotiations should go through the World Trade Organization. Deals made at that level reduce barriers globally, preventing beggar-thy-neighbor dynamics like Vietnam versus Cambodia/Bangladesh. By contrast, regional deals like TPP exclude most countries (and in TPP's case, exclude all of the world's least developed countries), reduce attention on WTO negotiations, and encourage still more smaller-scale deals that 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 has been stalled for years (in large part because of US and European intransigence on agricultural subsidies), and shows 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.

That would be way more difficult than getting the TPP done has been. It would require the US and Europe to start seriously cutting their farm subsidies, and the US to get on board with zero barriers for exports from poor countries — even for sensitive products like peanuts and sugar. It'd require middle-income countries like India and China to cut back on protectionist farm policies too. That's a much tougher lift for American leaders, both politically and diplomatically. But it would also do a lot more for the world's poor.

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