What is TPP and Why Does it Matter to Australia?

If you’ve never heard of the Trans-Pacific Partnership (TPP), you’re not alone. That’s partly because no one actually knows what it is.

What we do know is that the TPP is as close to a global free trade deal as we’ve ever seen. Australia is part of the 12 nations currently undergoing negotiations. In total the nations involved make up 40% of global GDP. And they account for over one-third of all international trade.

That makes the TPP a rather big deal. But the negotiations remain secretive. Few know what it would mean for the nations involved.

What is a free trade deal?

A free trade deal (FTD) is exactly what’s it name suggests. Removing protectionist trade policies frees up the movement of goods. FTD’s aim to boost bilateral investment and trade. In theory that should lead to economic growth and development.

As foreign competitors flood the market, they push down prices. This can lead to cheaper goods for consumers. Supporters of FTD’s also argue that it leads to new job creation too.

But free trade deals are renowned for having the exact opposite effect. The US-Canada-Mexico free trade deal (NAFTA) has decimated industries. US manufacturing and Mexican agriculture have been hardest hit. Over 1 million US jobs were lost to low cost Mexican labour. And NAFTA has displaced more than a million Mexican farmers.

NAFTA’s  made it easier for rich, (mostly) US conglomerates to gorge on Mexican industries. But they’ve also hurt the American people as jobs got shifted to lower wage Mexico.

Remove the barriers to entry and domestic industries often can’t compete with foreign ones. This is especially the case if the affected industry has no competitive advantage.

Why the TPP is harmful to Australia

The TPP could lead to more business opportunties for large Australian companies, it’s true. It would certainly make doing business in countries like Japan, Singapore or Malaysia easier.

Corporations with a comparative advantage would find an enormous new market to compete in, minus all the burdensome regulations. Some consumer products would also become cheaper as a result, too. But that’s where the benefits end.

The downsides for Australia’s economy are too great to ignore. The TPP is dangerous because it would open Australia up to foreign multinationals. There would be no sector left untouched. That’s because the TPP wants to remove restrictions spanning the entire economy.

Normally FTD’s protect key sectors that are politically (and economically) sensitive. But the TPP wants to remove all non-tariff barriers. These could be existing restrictions on trade which are harder to measure than tariffs. An example of this might relate to environmental laws. A foreign company might be precluded from developing projects in environmentally sensitive areas.

Companies and industries that can’t compete with lower cost competitors could face ruin. There’s no telling what that’d do to domestic jobs. Would our industries be any less averse to the risks than the US or Canada? It seems unlikely. And our high cost labour would become uncompetitive in some industries. Manufacturing, and what’s left of it, would suffer first. Australia’s wheat exporters would come up against the second and third largest wheat exporters.

Why the TPP is a corporate takeover

Australia has never seen a free trade deal on this scale. Big business is supportive of the move because it serves their interests. It’s able to take advantage of their scale to dominate uncompetitive foreign industries. But it makes little sense for the rest of the economy when we look at the competition.

Critics have rightly labelled the TPP a sham. They think it would only damage industries and cost jobs. Some worry domestic food regulations could give way to slacker American rules.

Take poultry for instance. Australian poultry producers don’t use harmful chemicals to prepare their product. The Americans do — at least by our standards. Inspection procedures aren’t as strict in the US.  Traces of arsenic, toxic chemicals, and even feces have been found in American poultry. Those standards could impact health and safety standards in Australia.

In 2013 Wikileaks released a leaked draft of a chapter of the TPP. The ‘Environmental Chapter’ gave an insight into living under the TPP could be like. In it, the report says that disputes over environmental issues wouldn’t carry any penalties. That gives corporations permission to act irresponsibly without the threat of criminal sanctions. I’m sure you’ll agree that’s not something Australia wants or needs.

We can only guess what other clauses the TPP includes. But that’s also part of the problem. We just don’t know enough about it yet. The TPP is so secretive it’s hard to tell which industries face the greatest risk.

It’s interesting that China was overlooked for TPP membership. They’re the biggest economy in Asia, and the second biggest in the world. In fact, they weren’t even invited to join. The reasons for this are political, and not economic. And much of it has to do with America’s wariness of China’s growth.

China’s growing influence in the Asia Pacific region

The China-US economic relationship was built on low cost labour in China. That benefits Chinese exporters and American consumers who receive cheaper goods. Last year trade between them was worth a staggering US$590 billion.

But not everyone sees the relationship so positively. The US trade deficit with China is almost US$350 billion. On top of that, many US politicians put political concerns above economic ones. They see a rising China as the biggest competitor to American influence.

But China continues to flex its financial and political muscle. It plans to build a New Silk Road connecting Eurasia from China to Europe.

They’ve also recently launched the Asian Infrastructure Investment Bank (AIIB). The AIIB will compete with other banks, like the IMF, in lending to member nations. China will be able to use the AIIB as a political tool to bend others to their will.

The AIIB will allow Australian companies to compete for more business in the region.

China’s slowing demand for resources could redirect Australian exports towards other emerging markets. Gina Rinehart has talked about bypassing China altogether with the new Roy Hill mine.

For Australia, China’s expanding influence brings tangible economic benefits. Over 60% of global infrastructure expenditure in the coming years will be in Asia. That gives Australia significant advantages to improve trade relations with Asian neighbours.

Why the CFR wants a more aggressive approach to China

China’s development is bad news according to the Council on Foreign Relations (CFR).

The CFR is frequently ranked as the most influential voice on US foreign policy. So what they say matters in American politics.

It currently has a membership base made up of powerful individuals and companies. This includes former US Secretary of State Madeleine Albright. And it counts giant defense contractors Lockheed Martin [NYSE:LMT] among its ranks.

The CFR says that US foreign policy should focus squarely on containing China. It believes China is the most capable nation of dominating the Asian continent. The CFR feel that it’s in US interests to ensure Asia remains free of Chinese hegemony.

It’s odd that the CFR fails to mention America’s own hegemony in the region. The US has been actively engaged in Asia since the end of the Second World War. And US military bases currently encircle China.

The CFR also criticised US President Obama for having a soft attitude towards China.

‘[The US worries] that such actions would offend Beijing and damage their enduring cooperation’. They think the ‘self-defeating’ US strategy of cooperation with China should end.

They don’t provide much context for this either. Their reasoning appears to be that an influential China is bad for everyone. But it’s unclear how bad it is for the US even. It might lessen their global influence but China is not a security threat to the US.

The CFR’s sees the TPP as for the main way to contain China.

But that’s not what they’re really getting at. If it was, why did the CFR criticise Obama for being soft? The TPP is something Obama has made it a personal goal to see through. So he’s already trying to use an economic tool to derail China. Yet the CFR doesn’t seem to think this is bold enough.

By failing to credit Obama the CFR admit they want defense spending to increase. Otherwise they wouldn’t be so harsh on the US president.

Why US defense contractors could be the biggest winners

Editor Kris Sayce recently wrote about defense contractors in Tactical Wealth. Kris thought they’d profit soon from America’s need to respond to Russia’s military build-up.

But the US defense industry has even more to gain from the containment of China. It can strike arms deals with nations worried about China’s growing influence (like India). That might explain Obama’s visit to India earlier this year.

The CFR does have a history of making hostile recommendations. It’s endorsed almost every US military operation this century.

The new report takes direct aim at Beijing — and it’s confrontational. Not that it will concern defense contractors gearing up for potential new arms deals.

Mat Spasic,

Contributor, Markets and Money

PS: Phillip J Anderson is The Markets and Money’s foremost expert on China. In 2010 he was one of the only voices to argue against an imminent Chinese collapse. Phil sceptical of the mainstream’s take on China, and he thinks you should be too.

He’s written a new report, ‘The Cassandra Syndrome: After This Report You Won’t Worry About China Again for Another Decade’, to show you why. In it, he reveals the two reasons why most analysts are wrong about China. And he’ll show you how to profit from their ignorance.

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