Bernard L. Schwartz Senior Fellow and Director of the Renewing America Initiative, Council on Foreign Relations
Senior Fellow for Japan Studies, Council on Foreign Relations
David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Maurice R. Greenberg Center for Geoeconomic Studies, Council on Foreign Relations
Following the agreement reached on the Trans-Pacific Partnership by the United States and eleven other countries, Council on Foreign Relations experts assessed the trade deal’s consequences for the global trade regime, geopolitics, and the international economy.
LEVI: Good morning. And welcome to this call on the Trans-Pacific Partnership, where we’ll be looking at its implications for the global trade regime, for geopolitics, and for the international economy.
My name is Michael Levi. I am a senior fellow here at the Council on Foreign Relations and director of our Maurice R. Greenberg Center for Geoeconomic Studies. I am thrilled to be joined by two fantastic CFR senior fellows to help us look through a variety of facets of this agreement.
Ted Alden is the Bernard Schwartz Senior Fellow at the Council on Foreign Relations. He specializes in U.S. economic competitiveness. Among other things, Ted was project co-director of the 2011 Independent Task Force on U.S. Trade and Investment Policy, well worth revisiting now for some context on what’s happening. He writes frequently on these issues; among other things, has a piece in the FT today looking at what yesterday’s agreement means.
Sheila Smith is Senior Fellow for Japan Studies at the Council on Foreign Relations. You will not be shocked to learn that she is an expert on Japanese politics and foreign policy. She is the author of a recent book that I recommend to all of you, “Intimate Rivals: Japanese Domestic Politics and a Rising China”—may have some relevance to the call today.
As a basic layout for this call, this call is on the record. I will be moderating a conversation with Ted and Sheila for 20 or 25 minutes, and then I’ll open things up to all of your questions so that you can ask Ted and Sheila about whatever is on your mind.
Ted, I want to start with you. You’ve been deep in the trade debate for a long time. You’ve followed it intensely at the FT, for many years now at the Council on Foreign Relations. Put yesterday’s announcement in context for us in this historical context of how the trade regime has been evolving.
ALDEN: Thanks very much, Mike. And it’s great to be here with you and Sheila. And thanks, everybody, for calling in.
This is clearly a big and historic deal—I mean, assuming that it’s ratified by the U.S. Congress and by the other 11 nations involved. It’s certainly the most significant international trade agreement since the conclusion of the Uruguay Round two decades ago, which created the World Trade Organization. And if you look at where the trade system has gone since that time, it’s been impossible to build in any significant way on the accomplishments of the Uruguay Round at the multilateral level. The Doha Round has largely been stalled now for more than a decade, though there was a trade facilitation agreement reached about 18 months or so ago.
Lots of countries have been engaged in all sorts of bilateral free trade agreements—U.S., Europe, Japan, Korea. China’s building its own network in Asia. But no agreement of this scale and magnitude has been concluded in two decades. This involves about 40 percent of the global economy. And at the same time, there are other things moving forward. If you look at the U.S. negotiations with Europe—the Transatlantic Trade and Investment Partnership—if those come to fruition—and they’re on a somewhat slower track—you’re going to reach a position for the United States where two-thirds of its trade is covered under free trade arrangements of some sort of another.
So really this represents, I think, a kind of important end run around a stalled multilateral system, and as a result I think is going to light a lot of fires that are really hard to predict at this point. May change the dynamics in the WTO. May encourage other countries to try to dock on to these agreements. But I think it really could be the start of a new generation of movement that we haven’t seen in trade negotiations for a long time.
LEVI: So let’s talk about one of those fires that you just pointed to. You talked about how this is an end run around a stalled global trade agenda, at least the Doha Round agenda. But you pointed to the possibility that this might get people who are focused on building that global trade agenda sort of back into action. Talk us through that a little bit. Is this a spur to the global trade discussions and sort of a tombstone on that era of trade discussions, where we’re going to move more to these mega-regional agreements? How do you see the odds? How do you see the prospects?
ALDEN: You know, I think it’s actually difficult to predict. I know—and I know I hate answers like that, but I mean, the basic reason for the—for the end run is that you’ve had a stalemate in the Doha Round for more than a decade now between the advanced economies—primarily the United States, Europe, Japan to some extent—and the big emerging economies—China, India, and Brazil. And they’re just at loggerheads over a whole series of issues, from, you know, farm subsidies in the—in the U.S. and Europe to the pace of opening up manufacturing markets in the developing countries. So they really have been stalled.
But now that you’ve got—you’ve got this deal, those emerging economies are going to have a difficult kind of set of calculations to make, which is, do they try to stay outside? So, you know, if you got a TPP and a TTIP, do they just stay outside and live with their position in the multilateral system as it exists? Do they try to negotiate their own regional trade arrangements as an alternative to the U.S.-led trade arrangements? Or do they go back to the WTO and say, we really ought to revitalize the multilateral system because that serves our interest better?
And if you go back to the—to the 1980s, the late 1980s, the first kind of U.S. overture to Asia with the creation of APEC played some significant role in finally bringing the Uruguay Round to fruition, because the Europeans and others were worried about these regional blocs coming to dominate. So maybe you’ll see that effect again, where this will kind of galvanize the Doha Round and actually revitalize it, rather than sort of putting the final nail in its coffin.
LEVI: You emphasized something really important—that, despite the fact that this covers 40 percent of the global economy, it doesn’t include the big emerging economies. The other big chunk of the world that it obviously doesn’t include is Europe, and the United States is engaged in ongoing negotiations over the Transatlantic Trade and Investment Partnership—TTIP. Does this provide a spur to that? Is there a prospect of the Obama administration concluding a TTIP agreement as well in the—in the next, you know, 15 or so months?
ALDEN: I don’t think so. I think the issues that remain in the TTIP are probably too difficult to see them resolved before President Obama leaves office. But I do think it will provide a spur to those negotiations. I mean, the Europeans are always very conscious about not losing their relative trade advantages, and the possibility of Japan, and then if Korea docks on to the TPP as well—the possibility of those countries having better access to the U.S. market than European companies would enjoy, I think that will be a spur to action at the—at the U.N. to try to work through some of the domestic issues that they have to work through to move forward on the TTIP agreement. They’re not easy. I—(inaudible, background noise)—all aware of how politically contentious trade is in the United States. It’s equally contentious in Europe and in a number of other places. But yes, I do think that this will galvanize the TTIP negotiations, which have been moving quite slowly for the last couple of years.
LEVI: It may also free up some capacity among U.S. trade negotiators.
ALDEN: That’s a good point. Yeah, I mean, USTR’s a small agency, right? We’re, you know, talking a couple hundred people. So they’ve been rather busy with this agreement. So they’ll have a little more time, at least after it gets through the Congress, assuming that it does.
LEVI: Sheila, let’s pivot to Asia. TPP has been advertised as not just an economic agreement, but a geopolitical one. It’s been advertised within the United States as central to this rebalancing toward Asia. And within that, Japan has been at the—at the core. Let’s talk about a few aspects of how this plays out in Japan and how it plays out for Japanese foreign policy.
Why don’t we start with the economy? How does this affect the Japanese economy? And why should Americans care?
SMITH: Thank you, Mike. And again, it’s great to be here with you and Ted.
You know, the Japanese have for a long time wanted a free trade agreement with the United States. Even though we’re allies in the security field and lots of Japanese companies invest in the United States, we are not free trade partners. And so the TPP is a vehicle for Japan to integrate its economy more thoroughly with the United States, and so it’s a win for them in terms of our bilateral relationship.
But I think, you know, on the numbers side of what Japan stands to gain from this, there’s some interesting reports. Peterson Institute, for example, thinks that Japan is going to gain upwards of $119 billion in absolute gains from TPP—and again, that’s a guesstimate, but it’s a pretty significant number for Japan—largely from the liberalization of service and investment sectors inside Japan. Japan’s own Cabinet Office in 2013 did a similar sort of number-crunching exercise and came out with the idea that once all 11 countries, 12 countries had eliminated their tariffs, GDP could go up 0.66 percent, or 3.2 trillion yen—or I think in dollars it’s about $26 billion, roughly. So on the number side of things there’s a lot for Japan to gain from this.
I think the interesting thing right now for us to focus on is what Abe, the prime minister, gains. And again, these are largely domestic benefits to the Japanese government. TPP is an instrument of Abenomics, the broader structural reorganization inside Japan, and it leverages for Abe all kinds of transformations that would be difficult to accomplish on its—you know, by a Japanese government on its own.
LEVI: Let’s drill down a little bit on that, because you hear this discussed frequently, that the explicit trade and investment benefits of TPP for Japan may not actually be the dominant economic—may not be the source of dominant economic impacts there; more it may be that it enables Abe to effect a broader transformation in the Japanese economy, which strengthens Japan more broadly. Is that—is that a fair way of looking at things?
SMITH: Exactly. I think that’s—no, that’s the story. Nobody’s looking at the big numbers. They’re looking really at how the Japanese government is trying to lead in this sectoral adjustment in Japan. Obviously, the most obvious area to think about is agricultural reform in Japan, as the Japanese LDP—the conservatives, Abe’s party—have been already hard at work in preparing for TPP. They have changed land-use policy for small-scale household farms in Japan. They have gotten rid of the longstanding postwar price subsidy for rice production. They have tackled one of the strongest political groups that have been supporters of their conservative party, the cooperatives—the bureaucrats in between the political party and the farmers themselves. So they’ve really been doing an awful lot of work to restructure the agricultural sector to make Japan much better-positioned to participate in TPP and to make compromises on TPP. But I think across the board you’re looking at a Japanese consumer that is looking for an economic policy that will speak more to consumer interests—that will offer better prices, will reduce the longstanding protections for some sectors of the Japanese economy.
So I think there’s a broad percentage of Japanese who support participation in TPP. There’s some loud minority voices of criticism. But overall, the opinion polling in Japan has really embraced this notion of TPP participation.
LEVI: So is this effectively a slam dunk in the Japanese parliament?
SMITH: Well, that’s an interesting—I’m not quite sure “slam dunk” is the word I’d use. But Abe’s government at the moment has a two-thirds majority in the lower house, and that of course will continue to be the case until the next lower house election, which could be as early as next year but probably is a couple years down the line. If he manages the criticism carefully, that two-thirds majority should be sufficient to see TPP through.
The criticism that I think is most significant for Abe, though, doesn’t come from opposition parties, it comes from within his own party. The LDP has long been the protector and party that has advocated on behalf of Japan’s farmers. It is now leading this agricultural reform, largely because Japan’s farmers are aging. They’re getting older. And there’s a demand from within the agricultural sector for these reforms and a more competitive-oriented agricultural policy.
Nonetheless, in some parts of Japan Abe’s party still is seen as betraying some of the core interests of its postwar conservative protections, and so he’ll have to tread a little bit carefully to make sure that he can pay off or make sure that the farmers will not be mistreated. And so expect to see in the next budget some pretty hefty supplementary subsidies to take care of those farmers who are coming out of the industry.
LEVI: So, Sheila, this is—the agreement’s often portrayed not only as bolstering U.S. allies like Japan, but as anti-China in various—in various forums. FT, front page today: “Sealing a Pacific trade pact gives political boost to Abe and Obama.” “TPP to counter rise of China.” Is that how it’s seen in Japan? And more broadly, how do you think this affects Japan-China relationship?
SMITH: Well, there’s—you know, Japan’s own economic competitiveness is clearly the antidote to dealing with a rising China. And again, the Abe Cabinet has very forcefully argued that Japan’s own competitiveness is the focal point of Abenomics. But the backdrop for that, of course, is a decade of stagnant growth in Japan, and in that decade the rise of Chinese economic influence and political strategic influence in the region.
So Japan needs to do two things. It needs to become more competitive economically, but it also needs to reassert its role in the region. And the economic instrument is one instrument that the Japanese have long relied on in terms of shaping that part of the world.
I don’t think it’s directly addressed as an anti-China measure. But again, the headlines of the FT could have been written, I think, by many Japanese newspapers in terms of how most Japanese see this. I think the Japanese business community will be a little bit hesitant to use that language, largely because we should remember that the economic relationship between Japan and China is very deep and broad. It’s about ($)345 billion, annual, in trade—dollars, that is, annually, in trade between the two countries. Japan continues to be the largest foreign direct investor in China, although the rate of growth of that FDI has slowed considerably. So Japan’s own exporters and manufacturers located in China are hoping to be a full participant in the Chinese economy and have Chinese consumers as their customers, so the business elite will not want to use that geostrategic language.
Abe uses is implicitly rather than directly. But I do think, for most Japanese, they see the TPP as a way to integrate with North America, and particularly with us. And that’s a hedge or a balance—counterbalance to Japanese economic engagement with China.
LEVI: Ted, often TPP is talked about as writing the rules and as an open architecture approach that allows other countries to come in if they’re willing to play by those rules, and the country that stands out often in that discussion is China. Can you imagine China ever making the reforms that are necessary to join the TPP and being driven by the desire to be part of TPP?
ALDEN: I do think it’s quite possible. I mean, the open architecture is one of the most interesting features of the TPP, you know. Of course, the bilateral trade agreements that have been the main tools of U.S. trade policy over the last couple of decades, they’re just—you know, they’re one-offs. You do a deal with Colombia or you do a deal with Panama, you do a deal with Korea. The TPP is set up to allow and encourage other countries to join if they are willing to sign onto the rules as written in the TPP and to negotiate an adequate market-access agreement.
And there already seems to be something of a queue developing. The Koreans want in as quickly as possible. They, of course, already have, you know, FTAs with the United States, Canada, Europe. They’re an obvious candidate. They had hoped to be in in the first tranche, but were asked to wait. So I think they’ll be at the head of the queue. Several other countries—Philippines, Indonesia—have indicated some interest.
You know, China is the—is the real question mark there. Initially the rhetoric out of the Chinese government was reasonably hostile to TPP. That has softened in recent months. But clearly, to make the sorts of reforms that would be necessary to join the TPP would be a very big lift for China. I mean, I think what we’ve seen with the WTO is that—is that the WTO has not really served to maintain, I think, what the United States had hoped would be a rapid pace of reform in China. We’ve seen retrenchment in a variety of ways, much more focus on, you know, indigenous innovation and developing domestic industries. You know, foreign investors are growing increasingly restless with the conditions inside China.
So I think what you could see happen with the—with the TPP is more and more foreign investment ending up in the TPP countries instead because there are advantages to having—being inside the rules of the TPP, not just in terms of lower tariffs, but regulations, intellectual property protection, and all sorts of other benefits that arrive. And so I think to the extent that China is worried about losing that foreign investment—losing it to other countries in the region or even to the United States—that will likely be a pretty big incentive to consider seriously joining the TPP at some point down the road.
I still think that’s quite a few years away. I mean, the next step in the U.S.-China trade relationship is negotiation of a—of a bilateral investment treaty, what they call a BID. And the U.S. and China have been engaged in relatively serious negotiations for several years now, not a lot of progress to report. But I think that will be a good kind of interim signal. If the Chinese want to move towards TPP-type rules, I think their willingness to conclude a BID would be a strong sign of that.
LEVI: Sheila, how is this prospect viewed in Japan? Are Japanese interested in having China join TPP down the road?
SMITH: I think so. I think, you know, again, given all of the complexities of transformation inside China that Ted outlined here, I think, you know, this is not something I think most Japanese see as happening anytime in the near future. So there’s a certain amount of comfort in the fact that TPP will move forward, and then eventually it will be enticing for the Chinese to consider participation.
I think ultimately, in the real—in the ideal world, Japanese business, of course, would welcome that immensely. It would take a little bit of the pressure off the way that they’re interacting with their government in terms of trade talks between Japan and China.
As you probably know, Japan, China, and the ROK have been trying to reach some kind of basic agreement on a trade agreement for years now. That effort has sort of been taken hostage by the political tensions between those three countries. So, again, the prospects for that to come to fruition are not as bright as many in the Japanese private sector had hoped. The other alternative, of course—
LEVI: Does TPP provide a spur to that, or does it make it less exciting for Japan to try?
SMITH: You know, it’s interesting. It might. If TPP moves forward, this may be another venue through which the Japanese, Koreans, and Chinese can talk a little bit more. Their focus in that dialogue also is on an investment treaty, and standards and norms and practices. So I think it may give some fuel to that, but we’ll have to wait and see.
RCEP, as you know—the Regional Comprehensive Economic Partnership—is the other venue in which Japanese and Chinese are working together. It’s at a much—I wouldn’t say lower level of liberalization, but it is a—you know, it is a lower common denominator in terms of where the participant economies are and where they’re trying to go. But it’s really building on the ASEAN structure of FTAs in the region, and of course Japan has an ASEAN FTA. China has a FTA with ASEAN as well. So it’s trying to meld those together a little bit.
So, again, Japan will have opportunity to work with China in these other venues. But I think ultimately, at the end of the day, a TPP and a China that is capable and willing and interested in joining that TPP would be Japan’s best—ideal outcome.
LEVI: I’ve got one more question, so people who are waiting on the call, get your questions ready.
Ted, we’re talking about geopolitics. We’re talking about the global trade regime. But the next thing coming up is TPP going to Congress. How much are members of Congress going to be talking about geopolitics in the global trade regime? How much are they going to care about it as they decide how to vote?
ALDEN: That’s a really interesting question, Mike. You know, the historic wisdom on this was—has always been that the hard vote on trade is the vote for fast track, or what they now call Trade Promotion Authority, because that’s kind of a vote on trade in the abstract. You know, do we want to give the president the power to pursue and complete trade agreements? So that’s an easier “no” vote. The thinking has usually been, once the deal is actually done, then all of these geopolitical issues are suddenly on the table. So, you know, if Congress rejects the TPP, that’s a slap in the face to 11 other countries, including close allies like Mexico, Canada, Japan, Australia, and New Zealand that have made difficult decisions domestically in order to be able to conclude the deal. So the thinking has always been, at the end of the day, Congress is going to be very reluctant to do that.
But the fact is, it’s been a long time since we’ve done a deal of this magnitude, and politics in the United States is, if anything, a lot more fractured and divisive than it was during the NAFTA debates or the Uruguay Round debates. This is going to hit in the middle of the presidential primary season. You’ve got popular candidates in both the Democrat and Republican Parties who have come out very strongly against TPP. And there are also some business interests that aren’t happy with some of the final deal: the tobacco industry—the pharmaceutical industry, not pleased with some of the compromises that the Obama administration made to conclude the deal yesterday. And so there are Republicans who will be important for the president, like Senator Hatch and Senator McConnell, who are grumbling about the deal.
So, I mean, at the end of the day, I think the old logic holds, that the cost of saying no at this point are enormously high, and that the Congress will see that and approve the deal. But I don’t think it will be easy by any stretch of the imagination. I think this is going to be a heavy lift for the administration.
LEVI: All right. Well, that sets us up well for questions from everyone on the call. Operator, can you give instructions for people who want to ask questions, please?
OPERATOR: Thank you. At this time we will open the floor for questions. Our first question comes from Yuqing Feng with China Business News.
Q: Thank you very much for the briefing. It’s very inspiring. I have a question regarding the impact to China. Right now, China’s economy is already slow, you know. Without participation in TPP, what’s your evaluation of the—of the TPP’s impact to China’s economy?
LEVI: Ted, do you want to have a crack at that?
ALDEN: Sure. You know, I am not an expert on the—on the Chinese economy, so I just want to—want to preface if that way.
But if—you know if you look at the sources of Chinese economic growth, China is heavily driven by exports and by investment. You know, the consumer portion of the Chinese economy is around 30 percent, less than half of the United States and quite a bit lower than even most developing countries that are at a similar level. So China currently, in the way its economy is structured, depends heavily on international markets—on investment for export and on—and on exports themselves.
The TPP as it is implemented will reduce somewhat China’s advantages in export markets. I mean, those advantages are already being reduced for other reasons, particularly rising labor costs, but the TPP will mean that production in TPP member countries has something of a competitive edge on production in China. And so, you know, I expect that it will have a slightly negative impact on Chinese economic growth over the mid-term, at least, after the various provisions are implemented.
Now, countering that, of course is if—you know, if countries in the region are growing faster—if Japan’s growing faster, if Vietnam’s growing faster, if Australia’s growing faster, other trading partners of the Chinese—then that could translate into increased purchases of Chinese exports. So hard to completely predict. But I do think, over time, as I said, the pressure will grow on China to want to either join the TPP or at least begin moving towards TPP-type rules to try to reduce the comparative disadvantage that it will have as a result of the TPP.
Q: Thank you.
OPERATOR: Thank you. Our next question comes from Richard Garwin with IBM.
Q: Yes. Just wondered about the policy of making the text available only sometime after the treaty has been signed. Will it be available from other countries? How long will it be before the White House makes it available here?
ALDEN: Mike, do you want me to take that as well?
LEVI: Please. Why don’t you start on this, Ted? And then, Sheila, I’m curious about how this sort of secrecy—access to the text that we talk about a lot in the United States—how this plays out in Japan. Ted, why don’t you take a first crack?
ALDEN: Yeah. I mean, as I understand it, there are—there are fairly detailed provisions written into the Trade Promotion Authority bill. And I hope I get all the details right, but if I—if I mess them up, just please double check. But, you know, my understanding is what will happen now is that there will be a legal scrub of the text. They’ll have to get all, you know, the T’s crossed and the I’s dotted. It could be released, I think, as early as about a month from now, and then it has to be at least 90 days before formal submission to Congress for the vote to take place. So there are—there are rather novel transparency provisions that stipulate that the agreement has to sit out there available to anyone who wants to read the text for several months before Congress moves to a vote. So that’s a much longer time period than has ever existed under previous trade agreements.
I know there have been criticisms of secrecy on this, and I’m troubled by some aspects of the ways in which trade agreements are negotiated, particularly the advisory process. But if you actually look at what was concluded here, there’s been a lot of transparency. I mean, we knew—anybody who was paying attention knew exactly what the issues were, knew roughly the parameters of those issues, understood what was being debated in the compromises. I mean, thanks to WikiLeaks, a bunch of the early negotiating texts were released. So I don’t think there are going to be a lot of surprises when this text is made public. I think we already know in a pretty considerable level of detail what’s in it. So I think the secrecy argument is not going to have a huge impact on the debate here in the United States just because of those transparency provisions in the—in the—in the TPA bill.
LEVI: Sheila, does the secrecy discussion play at all in Japan?
SMITH: Not in the same way that it plays here, Mike. I think it’s—a couple of things. Japan has, you know, for a decade or more now been negotiating free trade agreements around the region. I don’t think the Japanese public wants to get into the nitty gritty.
On this one, I think you’re going to—however, you’ll have certain consumer advocacy positions that will be expressed, and probably through political parties and other advocates. But the consumer is not the most organized in Japan, so it’s not as critical of an interest group. But it will be an important interest group for the LDP to consider.
Food safety—you know, questions about origin of food, questions about health—pharmaceutical care—where the drugs are coming from, what kind of labeling—those kinds of things I suspect will be questioned in the Diet perhaps, and in the media as well.
I think on the financial services side, clearly there will be some pushback. But I don’t think it’s going to get in the way of the broader agenda of TPP. I think—you know, we’ve just come out in Japan of two or three months of pretty intense parliamentary deliberations over new security legislation by the Abe government. There’s a little hangover there of antagonism towards the Abe Cabinet. So it may not be about the specifics of TPP or any particular line item or compromise, but I think you’ll have some skepticism of the Abe Cabinet that will probably factor into the parliamentary discussions on TPP. But again, nothing that—
LEVI: Politics exist everywhere.
SMITH: Yes, exactly.
OPERATOR: Thank you. Our next question comes from Mario Calvo Platero (ph) with the Italian newspaper Il Sole.
Q: Yes, thank you for taking the call and for the interesting comments.
I was wondering, what kind of impact will this have on TTIP in terms of accelerating the negotiation, if we can go a bit in depth into that, if anyone is familiar with that. Thank you.
LEVI: Ted, you talked a little bit about that before. Can you dig in a little bit more?
ALDEN: No, I was going to say, yes, I do believe it will—it will have the effect of accelerating the negotiations. I mean, it may—it may be a few months before the Obama administration entirely refocuses on it because it will be focused on trying to get the TPP through the Congress. But I think clearly, as I said, I think the Europeans are not going to want to be in a position of any sort of relative trade-rule disadvantage on trade with the United States, and so I think there will be incentive to move forward as quickly as possible on the TTIP.
I also think it’s important for the Europeans in terms of maintaining their position as a writer of trade rules. I mean, if you kind of look historically at the GATT agreements and at the Uruguay Round, they were really to a large extent U.S.-EU deals with, you know, a little bit of input from Japan and Canada and a few others. And so I think, you know, the Europeans very much see TTIP as setting a new kind of high bar or high standard for global trade rules. TTIP is dealing with a lot of novel areas. I mean, some of the efforts being made on the regulatory front go beyond what we’ve seen in previous trade agreements. I expect we will see in the TTIP some significant changes to the investor-state dispute settlement procedures, which have been so controversial and I think really are in need of rethinking, and I think that’s the context in which it’s going to happen.
So, yeah, I do think that there will be a lot of incentive, both for the United States and the EU, to move forward as quickly as possible. I think the Obama administration would like to hand to the next president a deal that’s pretty close to fruition to make it very hard for whoever succeeds the president to walk away from that agreement. So, yes, I do think this will help on the TTIP front.
LEVI: OK, can we pursue that just a little bit more? The TPP is something that the Obama administration joined into the negotiation and then it now has concluded the negotiations. TTIP seems much more likely to be something that the Obama administration starts but that they have to look to another administration to finish. How does that affect those negotiations? How does it make—how would it make those look different from the ones we’ve just seen on TPP?
ALDEN: Well, you know, I mean, in some ways it’s an exact parallel, of course, because it was the Bush administration that initially latched onto TPP, which had started as a smaller initiative from—you know, from four countries. I’m going to remember New Zealand and a few other—I’m not going to remember all the original participants. But it was a Bush administration that latched onto the TPP as a vehicle for its trade ambitions in Asia, and the Obama administration that eventually came to embrace that—through after several years, really, of a lot of uncertainty. I mean, when the president came to office after the 2008 elections, he was quite skeptical about the value of these trade agreements, really changed his position quite dramatically over the course of his two terms.
So I think you could actually see a similar situation in which the next president inherits a TTIP that’s been under negotiation for some time. I think it will be relatively farther along than the TPP was when President Obama came into office. So it’ll really just be a question of whether the next president wants to pick that up and run with it, and there will be a lot of pressure to do that, you know, because, you know, the Europeans will have invested a lot of time and energy in this, and not a good thing for U.S.-European relations for the next president to walk away. So I think, similar to Obama embracing the TPP, I think the next president is almost certain to embrace the TTIP.
LEVI: All right. I want to remind callers that this is an on-the-record call.
OPERATOR: Thank you. The next question comes from Nils Daulaire.
Q: Yes, good morning. I’m a public health physician and find one of the most important provisions that’s been talked about here is the tobacco investor-state carveout. I’d appreciate comments from your side in terms of what this means more broadly in terms of the trade regime.
ALDEN: Yeah, I’m sorry, I’ll take that one again if that’s OK, Sheila.
ALDEN: So I think this is—this is very significant, of course. So the origin of this was—I mean, very briefly, investor-state dispute settlement provisions, which have been around for a long time, allow companies to sue governments for behavior that is either outright expropriation or seen as tantamount to expropriation. The very famous case where Philip Morris has sued the government of Australia over Australia’s plain packaging requirements for tobacco, which are designed to discourage smoking, which is obviously a public health priority. And so, I mean, this caused a lot of outrage in Australia, and I think around the world, you know, the notion that trade agreements could be used to undermine a public health initiative in that way. And so there was a lot of pressure from the public health community and others to create special rules for tobacco in the TPP, and that, as I understand it, has been done. So what Philip Morris has tried to do with respect to Australia you will not be able to do under the investment rules of the TPP. The tobacco will not have access to the investor-state dispute settlement provision.
So I think it’s interesting, first, in carving out one product for special treatment. Of course, we’ve done that. You know, lots of countries do that domestically. But internationally, the principle tends to be we treat all goods and services the same. So I think that’s a significant departure that I think will have future ramifications.
Secondly, I do think it’s the—it’s the, you know, camel’s nose under the tent on investor-state dispute settlement more broadly. There are lots of issues surrounding the current provisions and fears in Europe, the United States, Canada, other places that they really give private companies too much power to go after regulations that are legitimate for the protection of the public health or consumer safety. And you’ll see this, I think, play out in the TTIP negotiations.
So my prediction is that this is the first step in a gradual undermining of that investor-state dispute settlement provision, and its replacement with something else—I’m not saying arbitration will disappear, but I think the rules under which it is conducted are going to be changed. So I think this was a very significant development.
I mean, just a footnote: obviously there are a number of members of Congress in the Republican Party who are not particularly happy with that outcome, so that could factor into the congressional debate.
LEVI: Sheila, obviously, sitting in the United States you see enormous controversy around these investor-state dispute settlement rules. Are they equally controversial in Japan? What does the—what are the politics of this piece of the trade deal in Japan?
SMITH: You know, that’s a great question. It hasn’t been at the forefront of the conversation. It may be within the government ministries themselves that this is where this is being discussed, and of course with the business community in Japan. It has not been at the forefront of what the Japanese are concerned about in the end. I think they’re watching our debate to see how it’s going to move forward. And I think that, for the Japanese, it’s going to ultimately be a question of, you know, where the investor-state settlement is going to be applied will be of critical interest. But I don’t see them at the moment taking a very strong stance on this. I think there’s a kind of wait-and-see attitude at the moment.
You know, just on the broader politics of this, though, you know, we’ve talked a lot about how important this is for the Japanese—for Abe himself, but also for the Japanese government, and very important for the U.S. and Japan and their role in the region. But I think what probably keeps the Japanese prime minister up at night is watching our politics. There’s been an awful lot of attention, not only in Japan but in Australia and Singapore, and other countries have sent their leaders here to communicate with our Congress about just how important this is for the United States in the region, but also for our relationship with them. But I think there’s a lot of concern about the complexity that Ted outlined in terms of how the administration is going to pursue this inside the Congress, about new interests speaking up and trying to be—you know if not derail TPP, at least to try to change the way the agreement has been negotiated. They can’t, but I think the politics of our election year, of course, and Donald Trump coming out so forcefully against it is causing a lot of, you know, stomachache, I think, in Tokyo at the moment.
I think there’s trust that the Obama administration can move it forward. I think there have been assurances also by the Republican leadership that they want to support TPP and make it happen. So I think there has been a communication quietly to Tokyo on bipartisanship on this, that the TPP is in the greater good of the American people. But I think, again, the political capital that Abe has expended on this will make it a tough couple of months ahead as they watch our politics unfold.
LEVI: And briefly, Sheila, you talked about a range of Asian countries pressing in Washington, trying to make sure Congress hears their voices. Is this sort of a set of disconnected parallel efforts, or is there coordination within Asia? Is Japan working actively with partner—Vietnam, Singapore, Malaysia, others—to present a united front in Washington?
SMITH: Well, I don’t think there’s a lobbying effort, I mean, if I can use that language for foreign leaders. But I do think these are countries—you know, Australia has played a leading role, I think, in advocating for TPP and advocating for U.S. leadership on TPP. So I think it’s Australia itself that sees the need for an American economic engagement with the region far beyond what we’re doing at the moment. So it’s a strategic rationale. I think Australia—clearly there are some issues in the TPP negotiations that have come up, but I think largely TPP has been an area where Australians have seen common cause.
Singapore is a trading state, as you know. It is a—its lifeblood is its trading relationships, both in the region and of course beyond the region and with us. And again, the advocacy on the part of the—the foreign minister has been in town multiple times. I don’t think it requires Tokyo to urge the Singaporeans to make that case for us. But I do think there’s a lot of people who watch our politics, and especially the tensions between the executive branch and Congress, the complexity of our Congress to date on trade. And they understand that they need to make it very, very clear that the region is looking to the United States to lead on this issue, and so it’s not just a question of American domestic politics, it’s also a question of American leadership in the region.
OPERATOR: Thank you. Our next question from from Mac Destler with the University of Maryland.
Q: I want to push you a little more on the U.S. domestic side. As you all know, Senator Hatch, chair of the Finance Committee, came out with a very critical statement yesterday, focusing particularly on the pharmaceutical issue and the cutting of the term of protection from 12 years to five to eight years. Obviously, the pharmaceutical industry, which is used to winning on these things, is not going to be happy. And the question becomes whether this and other issues really begin to strike at the core of Republican support. We’ve also got a transition, obviously, in the House leadership. McCarthy may not be as certain or as stalwart on the issue as Boehner was.
But particularly on the extension of—the reduction of the time period of protection, is there any way—I mean, there’s no wiggle room. There is an agreement. But one can think of various things, including the possibility that this issue could be removed from the—from the TPA if it were, in extremis, felt to be a deal-killer.
LEVI: Ted, what does your crystal ball tell us?
ALDEN: Well, Mac’s crystal ball may be better than mine. He’s been writing about this stuff for longer than I have.
I mean, you’re right. I mean, I do think, you know, we know from the process by which the U.S.-South Korea deal was ratified that there can be wiggle room in these things. I mean, if it looks like the deal as structured is not going to pass the Congress, sometimes it’s possible to tweak it a little bit or to come up with side agreements or to do other things that make it palatable.
I mean, the hard thing in this case is that it really was, you know, the United States against all other 11 countries. I mean, the 12-year data exclusivity terms in the United States are far out of line with what every other country is doing, and there was a lot of pressure from public health advocates and others as well. So, I mean, I certainly don’t see that being revisited in a fundamental way.
The deal, as I understand it, is sort of five years plus this kind of vague language that talks about an effective data exclusivity extension to as much as eight years. So there may be some way to sort of tweak it in that five- to eight-year period to make it a little more acceptable.
You know, at the end of the day, again, if I have to predict, I don’t think the Republicans are going to kill a deal like this just over the data terms for one class of drugs. Now, I mean, I may be wrong. You know, it’s possible that the industry is so powerful that you will have important Republicans in Congress who are willing to jeopardize important U.S. foreign relationships simply over that issue. But I think at the end of the day that will not be the case. I think there will be a lot of to-ing and fro-ing, there may be some efforts to come up with face-saving compromises, but at the end of the day I don’t think this issue derails congressional support for the agreement.
LEVI: You’re also saying implicitly here, Ted—or not so implicitly—that the foreign policy part of this is actually very important at this point. You set up the sort of trade-offs there as not wanting to take steps that would jeopardize important foreign relationships.
ALDEN: I do think it becomes very important after the deals are done, and in part because TPA—you know, the Trade Promotion Authority vote was so late relative to the negotiations, probably even had some influence on that vote as well. It’s just—you know, it’s difficult given the historic leadership role of the United States post-World War II to have a situation where we’ve asked important allies to make difficult decisions, to come to an agreement that the United States has said it wants, that Congress has said it wants, and then to say, oh, sorry, we’re not going to do it because every other country is not willing to accept our provisions on one issue, that just seems unlikely to me. But, you know, as I did say in kind of my opening remarks, politics these days in the United States are more divisive and fractured than they’ve ever been before, so the past isn’t necessarily a perfect guide to what happens this time. But for the moment I’m sticking with it, which is that I really—I really do think these larger—these larger interests mean that the Congress at the end of the day will support the deal.
SMITH: Can I add a comment on that? Just another piece of the puzzle here is, you know, there’s an election in Canada coming up, right? Australia has just shifted its leadership—within the ruling party, but nonetheless a slightly different tone is being set in Australia. We talked a little bit about Japan. This is not necessarily an electoral issue for the Japanese, but it’s an important piece for Abe.
And I guess I just want to support what Ted said. I think we—if you start to open up the basket, open up the deal to our domestic political process, then we should fully assume that other countries are going to follow suit. So there is a kind of, you know, pull a thread and the deal becomes very easy to unravel in the domestic politics of the other participating countries.
So I think there’s a—you know, in the quiet conversations, as I understand it, between the administration and folks on the Hill, there is an understanding that this is a 12-member, right, multilateral agreement. And despite the fact the TPA came late to the United States, it did come in the end. And I think there is a desire to make sure that we are not the ones that pull the thread—that we don’t start the process of the unraveling of this deal. And I hope that that’s understood on the Hill.
OPERATOR: Our next question comes from Hani Findakly with Potomac Capital.
Q: Good morning. Very good comments, and I appreciate very much the expertise on the call.My question is slightly different. It relates to foreign exchange implications of this—of this deal. Most of the countries that are members of this TPP have their currencies devalued significantly against the U.S. dollar—Canada, Japan, Australia, New Zealand, countries like that. And I’m just wondering whether you have any views about the long-term implications of the trade competitiveness of the member of the trade, given the very wild gyrations in foreign exchange, and what implications membership in TPP will have to the foreign exchange movements of member countries.
LEVI: Ted, I can remember not too many months ago when you were highly engaged in the very hot issue of whether and how currency might be integrated into the TPP. That seems like ancient history.
ALDEN: Well, I mean, it is and it isn’t. There is—there is a bit of language involved.
I mean, just to go back, you know, there had been folks in Congress who wanted to require binding commitments on currency as part of the TPP. That was not, finally, approved by the Congress, and we’ve ended up with something that’s far more modest.
I mean, just to say, I am concerned about this. I mean, I’m concerned about the strength of the U.S. dollar. I mean, in order to continue maintaining, I think, public and even corporate support for these—for these trade agreements in the United States, I mean, the United States needs to be able to compete with other countries in the—in the trade arrangement. And a—and a very strong dollar makes that difficult to do. You’ve had at least one company—Ford Motor Company—come out and say that it’s going to urge Congress to turn down the deal simply because of the absence of a currency provision in TPP.
So what they’ve ended up with—and my understanding is this is actually still being negotiated—there’s going to be a kind of side agreement in which the member countries of the TPP will agree to cooperate on an ongoing basis in discussing currency values, assessing whether currencies are over- or undervalued, being more transparent about their monetary policies, but nothing binding at all. And so, you know, the real issue in the—in the currency debate is there just has never been any sort of international arrangement that has teeth with respect to the currency issue. The IMF in theory does, but it’s never used that power. The G-20 talks a lot about currency, but again there are no kind of enforcement mechanisms. TPP will now become another forum in which member governments talk about currency, but again, no enforcement mechanisms as such.
So I do think this is an important issue to keep an eye on. I mean, even some of the large tariff cuts that are included in the TPP, those can be washed away pretty quickly by large currency exchange movements. So I do personally believe that currency needs to be more closely integrated into trade. The TPP does a little bit on that, but falls short of what I and others—I mean, most prominently Fred Bergsten—had hoped to see in this context.
LEVI: Sheila, we have 30 seconds left. How does Japan view the potential of integrating currency into trade discussions?
SMITH: Well, of course the Japanese have just begun, since Abe came into power in 2012, to use the monetary instrument to try to boot its—reboot its economy. I think there’s been a lot of concern about the movement in the yen, and of course, the Ford Motor Company position was largely aimed at what was happening with the yen, the yen’s decline. I think that I’ll leave it to Ted to talk about the long-term impact. But I think the Japanese are quite happy that it has been de-linked from the TPP, and that they’re quite willing and able to talk about enforcement and consultative processes in a separate agreement that will be more constructive to reassure people that it is not deliberately changing the value of the currency.
LEVI: All right. Well, we are at the end of our hour. Clearly, the TPP has come a long way. But this is far from the end of the story, both for this agreement and for the broader—for the broader trade regime.
So I want to thank Sheila and Ted for helping us understand a bit of this brave new world, and to all of you for joining the call this morning. This concludes our call.