Officials from the U.S., Australia, Brunei, Chile, New Zealand, Peru, Singapore and Vietnam began meeting on March 15 in Melbourne, Australia for the first round of talks on an expanded Trans Pacific Partnership (TPP) trade agreement. Except for the U.S., the countries in the negotiations are relatively small, but an agreement could serve as a framework for larger countries to join in the near term.

The Trans Pacific Partnership (officially the Trans-Pacific Strategic Economic Partnership Agreement) is a free trade agreement among Brunei, Chile, New Zealand and Singapore signed in June 2005. It came into force in May of 2006 with the goal of eliminating 90 percent of tariffs immediately with all tariffs removed by 2015. It is a comprehensive free trade agreement including sanitary/phytosanitary measures, rules of origin and intellectual property rights, but is a slim 160 pages.

On a trip to Asia last November President Obama announced that the U.S. would join negotiations in March of 2010. At a recent Export-Import Bank annual meeting the President said the negotiations “will result in a new standard for 21st century trade agreements that aren’t just good for workers, businesses and farmers but also consistent with our most cherished values.” While those words generally mean labor and environment provisions, which are included in the current TPP agreement, they have much wider applications.

Free trade agreements in their truest sense allow consumers more product choices at lower costs and provide producers access to additional technology and resources, provide economies of scale and reduce costs of production while improving profits. Freedom for consumers and producers to pursue an increase in their stand of living by reducing costs and increasing incomes is among those “most cherished values” for many people in the U.S. Growth in the number of jobs is a natural result of lower costs for consumers and more income for labor and capital.

U.S. producers should not fear the creation of a strong TPP agreement. Less than 5 percent of the world’s consumers live in the U.S.; trade agreements that reduce import tariffs and regulatory impediments outside the U.S. are needed to access some of the other 95 percent of consumers. The U.S. has much more capacity to produce many goods and services than can be consumed in the U.S. and international markets provide the opportunity for labor and capital to achieve a greater return.

A truly 21 st century trade agreement has to have as a bedrock principle that all goods and services be included in the agreement. Transition periods will be needed for some products; we learned from other trade agreements that long transition periods usually result in most of the adjustments occurring in the last few years.
Before the first negotiating session was held, some U.S. producer groups wanted to be excluded from increased international competition. Dairy interests have raised real concerns that New Zealand will increase exports of dairy products to the U.S. if the current import limits are removed. The major New Zealand dairy product exporter, Fonterra, is accused of having monopoly power and that issue needs to be addressed. Australia could increase beef exports to the U.S. if Asian markets do not take it. The U.S. and Australia already have a free trade agreement that limits sugar exports to the U.S. If New Zealand and Australia cannot gain access to U.S. markets, why should they participate? If the U.S. and other countries remove many products from consideration for trade opening, there is nothing to be gained.

While U.S. industries have concerns about domestic economic policies of other countries, those countries also have concerns about U.S. policies. Government control and financing of General Motors may be an issue. While the current Administration promises to not again bail out banks and other large financial institutions, that promise will be viewed with skepticism. Countries may have concerns about subsidies to U.S. dairy farmers and producers of grains and cotton. Domestic policies of all countries should be part of the discussions. The initial talks included six negotiating groups: rules of origin, agriculture, technical barriers to trade, intellectual property rights, legal, and institutional issues.

A TPP agreement also has wider trade policy implications. Asian countries are becoming more economically integrated with 150 free trade agreements with other Asian countries or outside countries and another 50 agreements in negotiations; most of those agreements do not include the U.S. The U.S. could be shut out of major growth markets in Asia if the Doha WTO talks continue to stall and a TPP agreement is not developed. Asian countries are the fastest growing market for high-value U.S. products that would help create the 2 million high paying jobs that President Obama seeks. If the U.S. is not part of Asian trade agreements, the center of trade will shift more toward China and India rather than a broader world complex of trade. Canada, Mexico and Malaysia may choose to enter the agreement at any time. South Korea and Japan have expressed some interest. If successful, some believe the agreement will eventually attract China and Russia.

There is never a perfect time for negotiating a trade agreement. Obstacles remain for topics like food safety, labor laws, human rights and social issues. If costs of these become too burdensome, they could sink an agreement, but additional trade opening could also make these requirements easier to accept. Three other rounds of talks are scheduled this year with some hope of an agreement by November 2011 when the U.S. hosts the Asia-Pacific Economic Cooperation forum in Hawaii.

The U.S. won’t achieve major gains from trade unless it gives up its mercantilist approach of only looking at exports and ignoring that U.S. consumer and producer gain from increased imports. Working out an agreement that opens markets in Asia is critical to U.S. hopes of increasing opportunities for high paying jobs in the U.S. Other TPP countries are unlikely to make serious concessions on sensitive issues unless they are convinced that the Obama Administration will make equal commitments and the U.S. Congress will agree to them.