A Bad Free Trade Agreement Is Worse than Nothing

By Jomo Kwame Sundaram and Nazran Zhafri Ahmad Johari
KUALA LUMPUR, Malaysia, Jun 25 2019 – With growing economic conflicts triggered by US President Donald Trump’s novel neo-mercantilist approach to overcoming his nation’s economic malaises, many voices now argue that bad free trade agreements are better than nothing.

After US withdrawal following Trump’s inauguration in early 2017, there is considerable pressure on signatory governments to quickly ratify the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the successor to the TPP.

Jomo Kwame Sundaram

To ratify or not to ratify
Undoubtedly, freer trade is attractive, especially to consumers desiring lower import prices. Yet, it is now generally acknowledged that no country has ever developed without policy interventions, typically involving trade, to develop new economic capacities and capabilities.

Thus far, the CPTPP has been ratified by 7 of the original 11 signatory countries, with Brunei, Chile, Malaysia and Peru holding out so far. Ratification advocates claim that the CPTPP would boost economic growth by greatly increasing exports.

They cite disputed Peterson Institute of International Economics (PIIE) and World Bank studies, both by the same authors, using a dubious methodology even rejected by the US government’s International Trade Council in mid-2016, i.e., under Obama. The reports highlight increased export prospects, but are conveniently silent about the far greater increase in imports.

Dubious gains from trade
United Nations Conference on Trade and Development (UNCTAD) economist Rashmi Banga’s study of its likely economic impact on Malaysia suggests much need for caution. The original TPP promised Malaysia more exports, mainly to the USA, with such claims grossly exaggerated by the PIIE. Without the USA, export prospects have diminished greatly.

Nazran Zhafri Ahmad Johari

While exports to CPTPP countries will rise by 0.2%, imports will grow by 6.0%, setting Malaysia’s annual merchandise trade balance back by US$2.4 billion, worsening its balance of payments as its services trade balance has always been in deficit.

As Malaysia already has free trade agreements (FTAs) with other major trading partners in the CPTPP, participation has little to offer. Malaysian FTAs with Singapore, Japan and Australia affect 82% of its CPTPP exports and 84% of imports.

Hence, Malaysia will not lose much to trade diversion by not ratifying, i.e., about 0.09% of current exports to other CPTPP countries. On the other hand, it will retain revenue from its relatively higher import tariffs.

The two largest imported items are automobiles and plastic materials. Banga estimates that imports of vehicles, mainly from Japan, will rise by 36% if customs duties come down to zero. This is likely to wreak havoc on Malaysia’s already fragile automotive industry.

Over a quarter century ago, then World Bank vice-president Larry Summers infamously suggested that toxic waste might be dumped in poor countries in Africa owing to the lower opportunity costs involved.

On the cusp of becoming a high-income nation, the last Malaysian administration belatedly took his advice by licensing ostensible plastic waste recycling plants. The CPTPP will enable much more imports of plastic materials, including waste and scrap, by around 35%.

21st century gold standard?
Advocates also claim that the CPTPP represents a ‘cutting edge’, ‘state of the art’, ‘gold standard’, ‘21st century FTA’. In fact, it will mainly benefit transnational firms at the expense of consumers, workers and the public in participating economies.

With the investor-state dispute settlement (ISDS) provisions, for example, foreign investors will be able to sue the government for loss of revenue and profits if government policies are changed, or if contracts are renegotiated, even if in the public interest, e.g., by banning toxic or carcinogenic chemicals.

ISDS involves binding ‘private’ arbitration bypassing national judicial systems, significantly strengthening foreign investors at the expense of governments with typically more modest means to litigate cases, thus exercising a ‘chilling effect’ on governments to comply with foreign corporate demands. Government ability to improve public policy will thus be restricted.

Ironically, the Trump administration is now opposed to ISDS. TransCanada sued the US government, under North American Free Trade Area (NAFTA) ISDS provisions, for US$15 billion after the Obama administration cancelled its Keystone XL pipeline project. The case was dropped after Trump revived the project.

CPTPP proponents insist that strengthening intellectual property (IP) laws will benefit everyone as it will incentivize research and innovation, a claim for which there is no evidence. The TPP agreement would have lengthened monopolies on patented medicines, kept cheaper generics off the market and allowed natural biological materials and processes to be patented.

The Third World Network has long highlighted many such CPTPP dangers, for instance, citing the Malaysian government’s procurement of an Egyptian generic treatment of Hepatitis C for RM1300, instead of the patented US treatment costing almost RM300,000.

Encircling China
The TPP was originally a minor plurilateral regional trade agreement involving four countries. The Obama administration decided to use it to check China’s growing economic influence.

With the recent escalation of tensions between China and the USA, many in East Asia are understandably concerned about how the growing economic conflict will affect economic prospects. Ratifying the CPTPP is likely to be seen as taking sides, even without the USA in it.

To secure broad public support in the face of growing scepticism about the benefits of trade liberalization associated with globalization, the Obama administration involved over 700 advisers, mainly representing corporate interests, to be involved in drafting the 6350-page TPP.

Ironically, the USA is no longer party to an agreement largely drafted by US corporate interests. A few of the most onerous clauses of the TPP have been suspended in the CPTPP, but if Japan, Australia and Singapore succeed in bringing the USA back in, the White House will insist on their re-inclusion.

Withdrawing from the CPTPP would send a clear message that a government is determined to put the needs of its people over the interests of powerful transnational corporations or geopolitical considerations. In any case, there is no requirement, obligation or deadline for any signatory government to ratify.

Other governments will need to carefully consider their navigation options in the difficult times ahead as countries seek to recover and sustain economic progress. Bad FTAs are not better than no FTAs, and as the map of the world economy has changed, options are different.

Jomo Kwame Sundaram is Senior Adviser at Khazanah Research Institute (KRI) in Malaysia. Nazran Zhafri Ahmad Johari has a law degree and is currently with the KRI.

Is Inclusive Growth an Oxymoron?

Cooking by candle light. Credit: Tomislav Georgiev / World Bank

By Pinelopi Goldberg
WASHINGTON DC, Jun 25 2019 – After participating in two events on inequality at the Spring Meetings – Making Growth Work for the Poor and Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few, I received a surprising number of emails asking whether my remarks on the importance of addressing rising inequality meant I had abandoned growth as the main priority for developing countries.

One thing I certainly took away from this correspondence: Inequality is too complex a phenomenon to address in a brief session at the Spring Meetings.

This is why the Institute of Fiscal Studies in London (IFS) has put together an ambitious, multi-disciplinary project, headed by Nobel Prize winner Angus Deaton, the so-called Deaton Review, to understand the multiple aspects of inequality and propose appropriate policies. Pointedly, the project is called “Inequalities in the twenty-first century” – note the plural.

Pinelopi Goldberg

The multi-disciplinary project brings together experts from Economics, Political Science, Sociology, and Public Health aiming at a comprehensive yet nuanced, and most importantly balanced discussion of “inequality.”

Recognizing the complexity of the issues, the project has a four-year timeline. I hope by its completion, we will have a better grasp of why “inequality” (I am going back to the singular following convention) is such an important concern today, both among policy makers and the public, and what we can do to address it. But, for those of you who may not want to wait that long, here are my two cents.

Both theoretically and empirically, we expect growth and changes in the income distribution to go hand in hand. But this positive relationship neither means an increase in income inequality is inevitable nor implies that it is desirable.

Growth is simply the size of the pie increasing. In principle, a bigger pie makes it feasible to give everyone a piece of at least the same size as before, and possibly more.

This is the essence of the so-called Pareto criterion invoked by economists. But markets do not guarantee that as the pie grows, all its slices will increase – some can get smaller. Policy is needed to encourage inclusive growth.

Why should we care about equal distribution of the pie? I have three responses.

First, people care about “fairness”. Large inequalities in income or wealth are often viewed as unfair. To be clear, I am not advocating complete equality where everyone receives exactly the same piece of the pie independent of competence, effort and the demands of the market.

This would create the classic moral hazard problem economists worry about. But the vast inequalities observed today are hard to justify based on these factors alone.

Conversely, there is little evidence that a more equal distribution of income or wealth by itself reduces incentives to work and contribute to society.

Second, even if one does not care about inequality at all, in practice large inequalities create social unrest. We do not need to go as far as invoking the French or October revolutions.

In recent years, sound economic policies that produced large aggregate gains have also generated considerable backlash where they generated winners and uncompensated losers. And this backlash can impede further growth when those left behind block further change.

Trade reforms and the hyper-globalization of the past three decades are prime examples. The backlash against globalization we currently experience in many advanced economies shows not only that inequality matters to people, but also that the perception of being left behind interferes with policies that would promote growth.

Lastly, big inequalities in income and wealth often translate in inequalities in opportunity. There is evidence that rising income and wealth inequality in many advanced economies is driving disparities in health and education (which is why the Deaton Review is devoting particular attention to these aspects of inequality).

People who emailed have asked me why focus on inequality in a developing country where 70% of the population live on less than $1.90 per day? But a country will not grow rapidly unless it utilizes its productive potential.

Stunting, poor health, and inadequate education among the poorest segments of a society mean that people will be unable to realize their potential and contribute to the economy.

Countries where women have limited rights and cannot contribute to the economy on equal terms not only miss the opportunity to draw on the labor and talent of half of their population, but also tend to face demographic challenges due to high birth rates.

This points to the importance of a different dimension of inequality, gender inequality, and may serve a reminder that inequality goes beyond disparities in income and wealth.

So, “inclusive growth” is not an oxymoron. Rather, inclusiveness may be the only way to achieve growth today, in developed and developing economies alike.