The Rhetoric and Reality of the Trans-Pacific Partnership

Since announcing its foreign policy “pivot to Asia” shortly after the election of Barack Obama, the United States has made extensive use of its institutional and discursive power to encourage denationalization among developing countries whose economies chiefly rely on manufacturing and trade—part of its global strategic goal of expanding the hegemony of finance capital at the lowest possible cost. The development of the Trans-Pacific Partnership (TTP) is a case in point. This article analyzes the TPP’s strategy in targeting China, pointing out that the TPP is a battle for the terms of economic development and discourse in the twenty-first century, as well as an illustration of the ideology of technocracy and soft power. Lastly, we criticize the TPP’s erosion of economic sovereignty, which would effectively relegate the economies of developing countries to a form of semi-colonial extraterritoriality.

Compared to the General Agreement on Tariffs and Trade, established in 1944 to secure markets for U.S. industrial production after the Second World War, as well as to the World Trade Organization (WTO), created in 1994 for the globalization of industrial capital, the true essence of TPP today is the drive toward “denationalization” of countries and economies around the world. Denationalization is an imperative of the era of financial capital, requiring developing nations to prioritize the mobility and growth of multinational capital—controlled by hegemonic countries—over national sovereignty. Though promoted as a policy of “free trade,” this ideology, which recalls the extraterritoriality imposed on non-Western countries during the era of colonial “gunboat diplomacy,” is the driving force in the current expansion of the hegemony of Western financial capital.

Based on the available official documents, there are three commitments introduced with respect to denationalization to which developing countries incorporated into the TPP would need to pay special attention. The first is the denationalization of the financial credibility of a sovereign country’s currency, to facilitate the free movement of multinational companies in and out of any country, allowing financial speculation to operate with “borderless” ease. The second commitment is the denationalization of legal systems in sovereign nations, to protect multinational companies from regulatory constraints in the investee country. The third commitment is the denationalization of a sovereign country’s security base. In severing ties between governments and state-owned capital and cancelling preferential trade policies, the TPP implies that state-owned enterprises would not be allowed to perform the function of counter-cyclical adjustments when crises inevitably erupt.

The TPP Strategy and China

The TPP was originally proposed by New Zealand, Singapore, Chile, and Brunei, as a more limited trans-Pacific trade agreement. The United States then took it over and upgraded the treaty to suit its own needs, positioning the agreement as an economic strategy corresponding to its military deployment in the region. In other words, the United States is at once advancing a kind of miniature military NATO in the Asia-Pacific region, and building up an Asia-Pacific economic NATO, both of which it would dominate.1 The return of the United States to the Asia-Pacific region aligns with the broader strategy of the TPP. Therefore, it is not difficult to understand why the U.S. government, in promoting the agreement, would be inclined to use a kind of Cold War or even “hot war” discourse. In an April 2015 speech, U.S. Defense Secretary Ashton Carter declared that “in terms of our rebalance in the broadest sense, passing TPP is as important to me as another aircraft carrier.”2

The implicit enemy targeted by this Cold War rhetoric is very clear: China. However, the paradox of the TPP is the contradiction between this rhetoric and the agreement’s true substance. On its surface, the TPP is an exclusive club that does not welcome China. Yet even as the TPP ostracizes China, U.S. officials have repeatedly implied the possibility that the country may eventually join the agreement. If we understand that by excluding China, the short- to medium-term trade benefits of the TPP are not as significant as proclaimed by the United States, we can just as easily conclude that the United States’ long-term goal is eventually to incorporate China and other emerging countries into a trade order that the United States dominates, according to rules that it has set.

In a recent paper, economist Zhiwei Peng estimated the impact of different proposed free trade agreements on real GDP and their cumulative economic benefits (Table 1).3 Of particular importance is Peng’s finding that if China is included in the TPP, the real future gains for the United States will be enormous (compare TPP 12, $45.241 billion, to TPP 13, $6083.8 billion). For all its tough talk, then, the United States remains deeply dependent on China’s eventual membership in the agreement. In other words, the U.S. strategy toward China is a preemptive move in a struggle for soft power and institution-building.

The Struggle for Institutional and Discursive Power

To understand the strategic goals of the TPP, it is also necessary to analyze its discursive power as an ideological basis for institutional construction. The designers of the TPP have claimed that the agreement is closer to the ideals of free trade than the WTO, because while the latter merely lowered tariffs, the TPP would eliminate them altogether. However, as the Financial Times has pointed out, although the agreement does plan ultimately to eliminate tariffs on thousands of commodities, it would take decades to reach this goal. Among member countries, the biggest resistance would probably come, unsurprisingly, from the United States, which currently charges tariffs on 18,000 commodities. For example, the tariff on imports of small Japanese cars would be lowered from 2.5 to 2.25 percent in fifteen years, only reaching zero after several decades. The tariff on trucks will only be completely eliminated in thirty years. At such a snail’s pace, the TPP would actually have little advantage over the bilateral and multilateral regional trade agreements already in effect.4

Another example: today, tariffs of 18 to 36 percent are levied on Vietnamese textile exports to the United States. The commitment to a zero tariff would thus be a huge advantage to Vietnam. Yet under the requirements of the TPP, in order to benefit from a zero tariff, the raw materials and processing of these products would have to be completed in TPP member countries. Given that the raw materials for Vietnamese textiles come mostly from China, and with few supply chain alternatives available within the current TPP zone, the supposed advantage of a zero tariff would in fact be little more than an unreachable mirage for Vietnam and for other developing countries whose key industries are in manufacturing.5

Consider Peng’s estimate of the impact of different free trade proposals on the imports and exports of Asia-Pacific countries (Table 2).6 Of course, any estimate of the economic impact of free trade proposals at this stage can only be speculative. Yet one conclusion may be drawn from the preliminary estimate in Table 2: the impact of the TPP on the imports and exports of the region’s key economic entities may not in fact be as large as proclaimed. It can even be argued that the trade benefits of the TPP are more modest than those of other, more inclusive, agreements, such as the Free Trade Area of the Asia-Pacific or the Regional Comprehensive Partnership Agreement.

The gap between the lofty rhetoric and the TPP’s real benefits indicates that the strategic goal of the TPP for the United States is not “free trade,” but instead a struggle for international institutional power in the twenty-first century. As Barack Obama stated in a 2015 speech: “When more than 95 percent of our potential customers live outside our borders, we cannot let countries like China write the rules of the global economy. We should write those rules, opening new markets to American products while setting high standards for protecting workers and preserving our environment.”7

Obviously, to claim that China has the power unilaterally to “write the rules” for global trade and development is a gross exaggeration. More often than not, China’s participation in international organizations requires that it submit to international specifications beyond its control. Obama’s true intent, then, is to prevent developing countries from changing the status quo whereby core countries would continue to dominate the global economy. In other words, the key question is not one of freeing or restricting international trade, but whether global institutional power in the twenty-first century will remain in the hands of core countries, just as in the nineteenth and twentieth centuries—or, alternatively, whether emerging and developing countries will also be able to claim a right to participate in the development and enforcement of fair and mutually beneficial international regulations that take into account the actual circumstances of each country.

Recognizing that the agreement is not an innovation, but instead part of an old struggle over the rules of the game, will help us understand the disparities between rhetoric and reality that have characterized the TPP negotiations. The fact is that the TPP is involved not merely in the international trade system, but more broadly the entire set of economic and social systems that serve to define the advanced phase of financial capitalism. Of the thirty chapters of the TPP agreement, only six are directly related to the realm of “trade” as it is conventionally understood. The others discuss aspects of finance, information, intellectual property, enterprises, fiscal policy, social services, and public welfare. In simple terms, the TPP outlines a new institutional framework, one designed to suit the advanced phase of financial capitalism. Its potential impact would be widespread and profound.

The Issue of Transparency

At every stage of the TPP negotiations, media in the member countries have sharply criticized the secrecy surrounding the proceedings. For most of the five years that the negotiations have taken place, the text and terms of the agreement have been kept highly confidential; the public, the media, and even most elected officials had no knowledge of its contents. Only a few senior diplomatic officials and multinational executives have been permitted to read the text of the agreement or allowed any role in setting its terms. Obama has a total of twenty-eight trade advisory committees on areas including aviation, aerospace, agriculture, the chemical industry, pharmaceuticals, finance, technology, industrial standards, telecommunication, e-commerce, and so on, all led by large corporations and trade organizations.8

If this agreement supposedly sets fair and rigorous standards intended to benefit a broad majority, why have the negotiations been kept so opaque for so long? Part of the answer is that the negotiations have been dominated by the interests of multinational corporations based in the core countries.9 The U.S. legislators who have been kept in the dark throughout the process can only vote to support or reject the entire agreement, unable even to propose any amendments.

Japan recently criticized the lack of transparency in the Asian Infrastructure Investment Bank, which it has refused to join. Yet in participating in the TPP, Japan is in effect shooting itself in the foot. Economist Joseph Stiglitz has criticized the TPP as having to do not with free trade but with control of trade, meant to protect the interests of each country’s largest commercial conglomerates and to manage trading and investment relationships among member countries. He even considers some terms to be restrictive to open competition, hindering free trade. More forcefully, Noam Chomsky has called the TPP “a joke” as a free trade agreement, a “neoliberal assault” that would impose protective and restrictive measures related not to trade but to the interests of investors.10

ISDS and Denationalization

In the name of fair competition, the TPP would effectively compel developing countries to give up any ability to adjust their economies. Together with the long legacy of unequal global industrial competition between core and developing countries, the TPP amounts to a covert installation of a form of “externalized sovereignty.”

The most controversial part of the TPP agreement is the section on Investor-State Dispute Settlement (ISDS). Under these rules, if foreign investors consider certain measures of the host country—such as environmental, labor, or safety regulations—harmful to their present or future interests, they may bypass the legal framework of the host country to bring lawsuits against its government and demand compensation for “loss of profits.” In other words, firms that invest in a country are quite literally outside the law. If disputes occur, arbitration will no longer be sought based on the legal system of that country, but on the binding international standards of the TPP.

Under ISDS, foreign firms and investors would achieve a kind of extraterritoriality, unrestrained by borders or governments. At present, trade dispute arbitrations under the WTO or other bilateral or multilateral agreements still regard the sovereign country, however compromised, as the primary subject. The TPP elevates enterprises as economic subjects, with the right to transgress the sovereignty of any country, bringing suits against the government of that country outside its own legal framework. This accords with a long-term trend of globalization: the effort by multinational corporations to escape the administrative and regulatory structures of host countries. The TPP would systematize this trend. In this respect, the TPP, which claims to adhere to the highest standards of twenty-first century law and trade, is in fact not an innovation, but a regression. History reminds us that during China’s semi-colonial era in the eighteenth and nineteenth centuries, foreign governments and companies enjoyed effective extraterritoriality. The TPP establishes a new extraterritoriality in foreign investment, updated for the neoliberal era.

Nevertheless, some advocates have insisted that the TPP sets up stringent rules governing the conduct of arbitration committees, requiring openness in all cases accepted for ISDS, in addition to rules that would restrict the capacity of foreign investors to sue foreign governments over regulations. Admittedly, at this stage it is only possible to speculate about how the ISDS will operate. Yet whatever the exact outcomes, in international arbitration it is ultimately the relative national strength of the two sides that counts. Even Japan could experience negative effects of this kind of externalized sovereignty. Some Japanese academics have compared the TPP to earlier attempts by the United States to erode Japan’s sovereignty, such as the 1856 Japan-American Treaty of Amity and Commerce, which followed the kurofune (Black Ships) incident of 1853, in which the United States sent battleships to compel Japan to reopen its economy, and the 1945 U.S. military occupation, as well as the 1951 San Francisco Treaty of Peace.11 Furthermore, the record of similar regulations gives an idea of the likely winners and losers of ISDS: under U.S. trade and investment agreements, multinational corporations have to date claimed more than $3 billion in compensation, mostly relating to the environment, resources, and public health. An additional $14 billion worth of claims is still being processed.12

Finance without Borders

ISDS is also an important mechanism facilitating the globalization of finance. The “covered investment” items included in ISDS go beyond the traditional limits of real investments in the productive economy. According to the U.S. principle of “bilateral investment and trade,” “investment” refers equally, or even more, to financial investment—a definition suited to the interests of the United States, as a core country of developed financial capitalism. Traditional investors generally seek compensation if their real assets are impaired or seized by a foreign government, as when a state nationalization policy causes losses in fixed assets, such as land and factories. The right to intangible assets, such as intellectual property, is a further extension of the concept. The TPP’s protected “investments” even include speculative financial capital. Traditional investments in the physical economy are at least presumed to make a long-term economic contribution to the host country, and the attendant legal rights should therefore be protected by local laws. Yet the terms of the TPP are indifferent to the possibility that giving special protection to such a broad range of “investments” might imperil the economy of the host country.

Over the past two centuries, U.S. investors generally gained enormous returns from the stock market. An investment of $1 in the early nineteenth century, excluding inflation, appreciated by one million times in two hundred years, with a current value of $1.03 million today. In order to sustain the continuous flow to U.S. capital markets from countries with trade surpluses, Washington must maintain the status of the U.S. dollar as the world’s main clearing and reserve currency.13

The dollar has long been the world’s main reserve currency, making it a chief beneficiary of the system built on U.S. financial hegemony. But the reality is that $1 in the early nineteenth century after two hundred years would have lost 95 percent of its value.14 That suggests that any country that holds large reserves of U.S. dollars has little hope of making profit. On the surface, this is attributable to inflation. In reality, it has to do directly with the institutional power of the U.S. Federal Reserve, whose board acts as a technocratic oligopoly through which financial capitalists exert global control, relying on the issuance of large quantities of U.S. dollars to export inflation around the world, thereby ensuring monopolized profits for financial capital.

The unrestricted inflow and outflow of speculative financial capital, profiting from various crises and bubbles to operate long-short positions and freely transferring those profits without consideration for the impact on local economies and workers—these are the real features of financial globalization today. Any country that insists on economic sovereignty, on protecting its capacity for macroeconomic adjustments and capital controls, would represent an intolerable constraint on this kind of “freedom.” Although the TPP also allows countries to adopt appropriate measures to shore up markets during economic crises, this too has been led into a grey area by ISDS: what would constitute a crisis? Assuming, for example, that the market bailout measures adopted by the Hong Kong government in 1997 or by the Chinese government in 2015 have caused losses to foreign speculative financial capital in their shorting operations, multinational companies may well apply for compensations through ISDS. Furthermore, considering its provisions against “currency manipulation” and for “financial liberalization,” the TPP in effect requires the removal of the counter-cyclical adjustment capabilities of countries that might defend against the onslaught of a global liquidity surplus.

Put simply, capital is capital. It exists to maximize profit. This is the investor’s privilege and purpose. The “advanced” nature of the TPP in response to the contemporary phase of global financial capitalism is no longer concerned with the usual free trading of products, but with finding ways for core countries to exploit their currency hegemony to flood the world with large-scale financial liquidity, and in the process reap enormous profits.

The Threat to State-Owned Capital

A detailed examination of the terms of the TPP makes clear that control over global trade relations is deeply asymmetrical. The agreement has been designed to benefit the core countries: its terms favor their competitive industries, allowing them to enter the markets of other nations while prohibiting foreign governments from adopting suitable measures to protect and nurture local industries that might compete with those of core countries. In the recent history of industrial development, very few nations have successfully developed competitive domestic industries without the early and substantial support and protection of government policy. In other words, this kind of trade arrangement would systematize the industrial advantage of core countries, turning it from the present “comparative advantage” into a long-term absolute advantage.

For example, the TPP, in the name of “fair competition,” specifically restricts state-owned enterprises, prohibiting them from enjoying policy support, financial subsidies, or other preferential treatment. Most immediately, such rules would disrupt governments’ reliance on state-owned enterprises to protect their national economic security and weaken the function of such enterprises in facilitating countercyclical adjustments that serve the public interest. In the longer term, restrictions on state-owned enterprises would benefit the competitive industries of core countries, having effectively eliminated their competitors ahead of time.

Most developing countries endured painful exploitation and oppression under colonialism. Only a minority of these nations were able to expel the foreign capital of suzerain countries, and then to build up state-owned capital. Only state power or special protective measures have been able to develop a group of enterprises that can compete with the major multinational corporations of core countries on a global scale. Blocking the protective measures for state-owned enterprises in developing countries will effectively wipe out competition with the industries of core countries.

It is not hard to see the double standards at work here. The bailout of major financial firms by the U.S. government after the subprime-mortgage crisis was in itself a form of direct state subsidy. If U.S. companies in a strategic sector struggle or fail, would the United States allow foreign financial conglomerates to acquire those important domestic enterprises at the “natural” market price? The United States will not give up an inch of its own economic sovereignty, while insisting that developing nations surrender theirs almost completely.

System Design and Soft Power

The TPP is an upgrade and expansion of the WTO agreement and the Agreement between New Zealand and Singapore on Closer Economic Partnership. In addition to the liberalization of trade, the TPP also covers economic legislation, financial reforms, environmental protection, labor rights, intellectual property, competitive neutrality, and more. Every section, its advocates claim, sets high and consistent standards. Some commentators argue that meeting the TPP’s requirements could prove challenging even for developed countries like Japan.15 Of course, in order to reach any agreement at all, significant concessions must have been made. So does the TPP truly embody the noble standards touted by its authors and supporters?

At least in terms of ecological protections, most environmentalists would say not. Across two thousand pages of terms and rules, particularly in Chapter 20, “Environment,” there is not one reference addressing climate change or the need to improve ineffective environmental monitoring mechanisms. It merely states that “member countries agree on the need for collective actions in order to move to a low-carbon economy.” The director of the Sierra Club, hardly a radical organization, has said that a document that makes no mention of climate change cannot truly be considered a twenty-first-century trade agreement. Many rules in the chapter are weak, relying on governments to maintain environmental standards without any definite procedures or penalties to ensure their enforcement. In addition, those concerned about the free flow of information over the Internet are worried that the TPP would threaten international intellectual freedom: for example, an online whistleblower who discloses corporate malfeasance is liable to be prosecuted.

As argued above, if we focus on the long-range political significance of the TPP, rather than its economic effects in the short or medium term, we can understand the gap between the high-flown rhetoric and the agreement’s actual substance. In reality, the TPP would eventually have to include emerging countries in a trade system led by core countries in order to fulfill its long-term strategy. As U.S. leaders from Defense Secretary Carter to President Obama have made clear, the present core strategic significance of the TPP is a battle over institutional power, whose goal is the economic advantage of core countries, and particularly that of financial capital. It places the core countries in a commanding ideological and institutional position, allowing them to make further use of education, the media, and other public forums to strengthen their discursive soft power and put “reverse pressure” on emerging countries to conduct institutional transition in a direction that suits the core countries’ interests. Many intellectuals and media outlets in emerging countries already regard the soft-power propaganda of core countries as “politically correct,” and rush to praise the high standards of the TPP, welcoming further pressure on emerging countries to institute domestic reforms, to join the exclusive club of global trade at any cost.

Emerging countries should not be misled by the discourse surrounding the TPP, but should continue to go their own way—maintain their own institutional advantages, conduct reforms at a suitable pace for their own long-term interests, and organize regional trade agreements based on terms that are just, reciprocal, and considerate of the specific situation of each country. That would be the beginnings of genuinely free and fair trade.

Notes

1. ↩The combined GDP of the twelve TPP member countries constitutes 40 percent of the world total, and the trade volume among them accounts for 26 percent of total world trade.
2. ↩Ashton Carter, “Remarks on the Next Phase of the U.S. Rebalance to the Asia-Pacific,” April 6, 2015, http://defense.gov.
3. ↩Zhiwei Peng, “Economic Impact of the TPP and Asia-Pacific Free Trade Zone, and China’s Response,” China Social Science, August 20, 2013, http://econ.cssn.cn (in Chinese).
4. ↩Shawn Donnan, “Breaking Down 5 Big Sections of the TPP,” Financial Times, November 5, 2015; Wang Weidan, “TPP Agreement Text Announced,” Wall Street CN, November 6, 2015, http://wallstreetcn.com (in Chinese).
5. ↩“TPP has reached basic agreement. What should China do?” Zhuan Lan, October 8, 2015, http://zhuanlan.sina.com.cn (in Chinese).
6. ↩Peng, “Economic Impact of the TPP.”
7. ↩Barack Obama, “Statement by the President on the Trans-Pacific Partnership,” October 5, 2015, http://whitehouse.gov.
8. ↩Peng, “Economic Impact of the TPP.”
9. ↩American corporations spend a reported $2.6 billion each year on lobbying. Lee Drutman, “How Corporate Lobbyists Conquered American Democracy,” Atlantic, April 20, 2015.
10. ↩Zach Carter and Ryan Grim, “Noam Chomsky: Obama Trade Deal a ‘Neoliberal Assault’ To Further Corporate ‘Domination,'” Huffington Post, January 13, 2014, http://huffingtonpost.com.
11. ↩Sachie Mizohata, “The Trans-Pacific Partnership and Its Critics: An Introduction and a Petition,” Asia-Pacific Journal 11, issue 36, no. 3 (2013): 1–5, http://apjjf.org.
12. ↩Mizohata, “The Trans-Pacific Partnership and Its Critics,” 3.
13. ↩See the chart on the long-term performance of different types of investment assets at American Association of Individual Investors, “Total Return Indexes, January 1802-December 2013,” http://www.aaii.com, accessed November 5, 2016.
14. ↩American Association of Individual Investors, “Total Return Indexes, January 1802–Decemberr 2013.”.
15. ↩Chen Weishan, “China Holds Open Attitude towards the Push by the U.S. on the TPP,” China Economic Weekly, October 20, 2015. http://finance.sina.com (in Chinese).