The TPP – a U.S. "Slow Growth" Pacific Club


THE character of the Trans-Pacific Partnership (TPP) becomes clear immediately after an examination of the fundamental economic data for its 12 intended signatory countries. They are dominated by the G7 economies of the U.S., Japan, and Canada. These, together with Australia, constitute 90 percent of the GDP of potential signatories. Participating developing economies – Mexico, Malaysia, Chile, Vietnam and Peru – make up only eight percent.


Figure 1 shows that in 1985 economies in the proposed TPP accounted for 54 percent of world GDP while by 2014 this had dropped to 36 percent. The TPP therefore constitutes a group of advanced economies, with a “fringe” of developing countries, whose share in world GDP has been significantly declining.


The percentage of world trade accounted for by potential TPP economies is substantially lower than their combined weight in world GDP, and is also falling – declining from 33 percent of world merchandise trade in 1984 to 25 percent in 2014. That the percentage of world trade accounted for by the TPP economies is significantly lower than their percentage of world GDP shows that this is a grouping of relatively “closed” economies in which trade plays a less than average role. The TPP is therefore fundamentally different to the World Trade Organization, which covered the overwhelming majority of world trade.


These trends contrast with China, whose role in world GDP and trade has sharply increased but which the U.S. excluded from the TPP negotiations. What, therefore, was the U.S. rationale in creating a TPP of relatively closed economies with a declining weight in world GDP and trade?


The answer lies in trends in the U.S. economy. This dominates the TPP, accounting for 62 percent of its GDP. The U.S. promotes a mythology that it is a dynamic economy but the reality is that the U.S. economy has been sharply slowing and its weight in the world economy declining. From 1984 to 2014 the U.S. share of world GDP fell from 34 percent to 23 percent, at current exchange rates,  while the U.S. share of world merchandise trade dropped from 15 percent to 11 percent.


Even more significantly the U.S. economy has been decelerating for over half a century. Taking a 20 year moving average, to eliminate the effects of short term business cycle fluctuations, Figure 2 shows that U.S. annual average GDP growth fell from 4.4 percent in the late 1960s, to 3.5 percent by 2000, and 2.4 percent by 2015. Detailed analysis shows this was rooted in the falling percentage of fixed investment in U.S. GDP, but for present purposes it is sufficient to note the impossibility of rapidly reversing a half-century-long decelerating trend.


Given the impossibility of short term U. S. growth acceleration the only way to maintain U.S. economic and geopolitical supremacy is therefore to slow competitor economies. Once this is understood then the apparent illogicality of grouping a number of relatively slowly growing and closed economies into the TPP becomes clear.


In essence the TPP extends the mechanisms responsible for slowing U.S. growth to cover competitors. To secure this the TPP enshrines that the legal rights of private companies in participating economies are superior to those of member governments. Private companies, therefore principally the U.S. ones, have the right under the TPP to sue participating governments in courts which will be dominated by the U.S. but whose decisions are binding on national governments. As the well-known U.S. economist Jeffrey Sachs noted of these TPP provisions: “Their common denominator is that they enshrine the power of corporate capital above all other parts of society, including…even governments… The system proposed in the TPP is a dangerous…blow to the judicial systems of all the signatory countries.”


Some TPP features are astonishing. For example Article 14.17 gives de facto legal protection to software companies, overwhelmingly the U.S., to spy in member states: “No Party shall require the transfer of, or access to, source code of software owned by a person of another Party as a condition for the…sale or use of such software…in its territory.” While it is stated this does not apply to “critical infrastructure,” this does not exclude banks, commercial companies, etc.


The TPP’s dynamics, and the response required by China and other countries to it, flows from the TPP’s nature. As the TPP legally enshrines features which led to slowing U.S. growth, creating negative direct and indirect consequences for the U.S. population, the TPP has become the subject of major U.S. political opposition. The two leading Democratic Party presidential candidates, Hillary Clinton and Bernie Sanders, oppose the TPP as well as the leading populist Republican candidate Donald Trump. It remains to be seen if the U.S. will ratify the TPP.


Second, the institutions the TPP imposes on participating economies, and the right the U.S. and its companies acquire to override participating countries’ governments, will inevitably lead to rising opposition in participating countries as well as locking them into slow growth. This will necessarily lead participating countries to seek free trade and other agreements with non-TPP members such as China whose economies are undergoing more rapid growth.


Third, the U.S. strategic aim is not to exclude China from the TPP. Indeed this would defeat the TPP’s  purpose as China would then not be subject to TPP constraints which slow other economies. If China remained among more rapidly growing economies outside the TPP this would inevitably lead to other countries seeking agreements with China. The aim of the U.S. is therefore to negotiate with China at a later date.


Assuming that the TPP is ratified at all, then China’s interests, and those of other countries, therefore lie in allowing it to be clearly shown over a period that the TPP will not work to enhance growth. This will then give China the choice, depending on the circumstances, of either negotiating agreements with individual TPP members as part of its Regional Comprehensive Economic Partnership strategy, or negotiating a more general revision to remove the more damaging features of the TPP and allow China to participate in a wider agreement aimed at more rapid economic development.