America's Collapsing Trade Initiatives

Chinese president Xi Jinping will be in Washington this week on an official state visit. President Obama had hoped to impress Xi with an all but sealed trade deal with major Pacific nations called the Trans-Pacific Partnership (TPP) to demonstrate that America is still a force to be reckoned with in China's backyard.

But Obama's trade policy is in tatters. The grand design, created by Obama's old friend and former Wall Street deal-maker, trade chief Mike Froman, comes in two parts -- a grand bargain with Pacific nations aimed at building a U.S.-led trading bloc to contain the influence of China, and an Atlantic agreement to cement economic relations with the European Union.

Both are on the verge of collapse from their own contradictory goals and incoherent logic.

This past June, the President, using every ounce of political capital, managed to get Congress to vote him negotiating authority (by the barest of margins) for these deals. Under the so-called fast-track procedure, there is a quick up-or-down vote on a trade agreement that can't be amended.

The assumption was that the Administration could deliver a deal backed by major trading partners. But our partners are not playing.

A final round of negotiations in Maui in late July for the Pacific deal, featuring trade ministers from the 12 participating countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam), ended in deadlock and revealed multiple schisms. The ministers will try again in late September, at a session in Atlanta, but they are no closer to agreement.

Australia, New Zealand and other nations reject special interest provisions designed to help giant pharmaceutical companies resist the use of generics. Several countries object to U.S. efforts to lengthen patent and copyright protection at the expense of the public domain. Japan is resisting US pressure to import more rice. New Zealand wants more dairy exports. The Australian government is outraged that the deal would treat tough regulation of tobacco as an illegitimate restriction of profits. And a great deal more.

The U.S. negotiators, increasingly, are prepared to give away the store, to get a deal. The most pathetic and revealing capitulation involves rules of origin for automobiles and auto parts.

The core geo-economic idea of the TPP, let's remember, was to slow the influence of China in the region. A key U.S. goal was to make sure that American companies would be part of the supply chains of Asian companies that are increasingly producing in China.

However the provision on autos, accepted by the U.S. in a last ditch effort to win over the Japanese, suggests that the game is already over.

Japanese automakers are in the process of massively shifting production to China. Under the provision demanded by the Japanese and accepted by the Americans, as much as 86 percent of a vehicle could be sourced in China and the vehicle still labeled "Made in Japan" (or elsewhere).

Presumably, American automakers are outraged by this sellout. But no, GM likes it fine -- because GM also wants to increasingly produce in China. So much for containing China. Ford doesn't like the deal because Ford is still committed to manufacturing in North America. The governments of Canada and Mexico, rivals for Chinese production, hate it.

Here's the point: With so many governments already in bed with Beijing, the TPP, even if enacted, will not slow China's economic dominance. But there are so many provisions opposed by so many countries that the deal is unlikely to be sealed at all. And even if the deal should be negotiated, Congress could well balk at the screwball special interest provisions that add up to strategic mush.

Another indicator of the lack of Washington's strategic seriousness: there is no chapter on currency manipulation -- one of the profound sources of the US trade deficit with Asia. But that would be another deal-breaker for Japan, a recidivist currency-manipulator.

Time is not on the Administration's side, given that Republicans are less and less likely to give Obama a big win as the next election approaches. And as Obama becomes more of a lame duck, Democrats, who don't like the deal, are less likely to support him out of partisan loyalty. Congress gets 90 days to review it, and unless there is a miracle in the next round of talks at Atlanta, opponents of the deal will be saved by the clock.

There is also an election next month in Canada, and the prime minister, Stephen Harper, currently running third in the polls, is unlikely to back a deal that doesn't serve Canada's interest. His probable successor, either a Liberal or a social democrat from the surging New Democrat Party, is even less likely to approve.

What about the parallel Atlantic deal -- the so called Trans-Atlantic Trade and Investment Partnership, known as TTIP?

That agreement is also likely to fall of its own weight. A key provision allows corporations to challenge health, safety, environmental and consumer regulations as incursions on profits. This so called investor-state provision invites an end-run around national governments and the European Union to private arbitration tribunals that would be non-transparent, laden with conflicts of interest, and tilted towards business.

Not surprisingly, the provision is highly unpopular in Europe. Last week, the five leading political blocs in the European Parliament -- from conservatives to socialists -- agreed on a compromise that would revise the investor-state provision by creating an international court rather than private arbitration panels to judge corporate complaints of unfair regulation. The compromise would also strengthen labor standards.

Far from promoting the TTIP deal, the report showed just how toxic the proposal is.
Trade unions and environmental groups blasted the proposal as mere window dressing. "The European Commission's proposal for an 'International Court System' is tarred with the same old corporate friendly brush, Friends of the Earth Europe said in a statement. "Despite a new name and some reforms on the functioning of the system, it reaffirms the granting of VIP rights for corporate investors without giving them any obligations that would protect citizens and the environment."

But corporate groups, cherishing the private arbitration panels, were even more outraged. The U.S. Chamber of Commerce's top European official, Marjorie Chorlins, termed the proposal "deeply flawed." Much of the momentum for the deal will collapse without an agreement on the investor-state provisions.

It is a bit premature to write the obituaries for these deals. Never underestimate the power of corporate elites. But one has to ask, what was Obama thinking? The U.S. faces serious economic challenges from an economy that is still stagnant for regular people. And we face complex national security challenges from China. These trade deals address neither challenge, much less the even more daunting economic woes in Europe.

At the White House state dinner in his honor this Friday, Xi Jinping will be smiling -- and with good reason.