Affiliate sales back to the home market tend to respond to US tariff cuts, writes Leonardo Baccini

Baccini, Leonardo

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blogs.lse.ac.ukhttp://blogs.lse.ac.uk/businessreview/2015/09/23/tpp-may-benefit-both-global-businesses-and-the-developing-countries-where-they-operate/TPP may benefit both global businesses and the developingcountries where they operateAt times, negotiations have been close to failing in the Trans-Pacific Partnership (TPP), the free trade area (FTA)being negotiated by 12 countries in the Americas, Asia, and the Pacific. These difficulties can be explained by twomain factors. First, countries involved (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand,Peru, Singapore, the US and Vietnam) are geographically dispersed and economically quite heterogeneous interms of development, size, and type of regime. These geographical, economic and political differences haveoften been an obstacle to reaching a deal. In particular, the road to cooperation between democratic andauthoritarian regimes and between free-market and state-led economies has been often paved with mutualdistrust. The hard-nosed negotiations faced by China, Russia, and Vietnam to enter into the World TradeOrganization (WTO) demonstrate this stumbling block.Average tariffs are low, but they are still substantive in some industries.Second, the TPP is not only about cutting tariffs, but is also about reducing behind-the-door barriers. In fact, manywould go as far as to say that the TPP is mostly about reducing regulatory non-tariff barriers. While the TPP aimsto be particularly ambitious on these issues, this is hardly a new phenomenon. According to the DESTA database,the number of trade agreements including detailed provisions regulating investment, government procurement,and services, protecting intellectual property rights, and enhancing competition policies has been steadilyincreasing over time. Not surprisingly, this trend is particularly pronounced for trade agreements between Northand South countries. In sum, in the era of a major WTO round deadlock, agreements like the TPP have theambition of being instruments of trade governance rather than mere tariff deals.Given that countries negotiating the TPP are all members ofboth the WTO and trade agreements, it is fair to ask is whatwould actually be the economic benefits of concluding thisdeal. According to Paul Krugman, the TPP is no big deal. Infact, Krugman advised President Barack Obama not to spendpolitical capital on this pact. His argument is that tariffs arealready quite low and so the benefits would be trivial. Whilesound, the argument is somewhat simplistic. First, averagetariffs are low, but they are still quite substantive in someindustries. For instance, Japanese tariffs on beef are roughly40 percent. Second, economic benefits from removing non-tariffs barriers would be quite sizable, especially incountries like Australia and Mexico. Third, economic studies, such as this one by Trefler, have already shown thateven relatively small tariff cuts produce significant increases in productivity in the long run.If the benefits are not trivial, who is going to reap them? According to Krugman, the real beneficiaries of the TPPare going to be Big Pharma, which will see a further increase in their profit. Similarly, Joseph Stiglitz believes thatthe TPP would increase the power of multinational corporations, jeopardizing American jobs and worseninginequality. The argument that benefits are likely to be concentrated is confirmed by a recent working paper on UStrade agreements and foreign investment. According to our recent study, trade agreements produce a substantialreallocation of sales from the least productive to the most productive US affiliates in host markets. In other words,even among a very selective sample of US multinational corporations (MNCs) involved in global production, onlya handful reap significant benefits from preferential liberalization, whereas many lose.Corporations have incentives to lobby for tariff reduction in their own home markets, where goodsare ultimately shipped back.In which way would the TPP help US MNCs? While regulations and non-tariff barriers matter, old-fashion tariffsremain pivotal. Specifically, offshoring activities, i.e. affiliate sales back to the home market, respond to tariff cutsimplemented by the US. This is because cutting tariffs cuts production costs for MNCs. By benefiting largecorporations involved in global production networks, even the TPP is likely to create an unexpected collusionbetween MNCs based in North countries and governments of South countries. Indeed, MNCs have incentives tolobby for tariff reduction in their own home markets, where goods are ultimately shipped back, rather than in hostmarkets. Given this unusual alliance between North MNCs and South countries, it comes as no surprise that,according to a recent survey by the Pew Research Center, the Vietnamese are the most TPP-enthusiastic.A final note should be made with regard to China. An alternative way of looking at the TPP is that the deal is allabout China. Specifically, the US aims to lock in its own regulations and standards before China becomes an evenmore relevant actor eager to do the same, especially in its own backyard. A recent working paper by RobertGulotty and Li Xiaojun (“Domestic Responses to Global Production Diversion: Evidence from ChineseManufacturing Firms” 2015) shows that the cost of being excluded from the TPP can be significant for Chinesefirms involved in global production activities. Indeed, Chinese firms, especially state-owned enterprises, are likelyto face investment discrimination in terms of higher non-tariff barriers in those markets negotiating the TPP. Toconclude, although it has been a long drawn-out process, all signs point to the TPP eventually being signed.When that happens, the TPP will be a landmark agreement on par with NAFTA.Featured Image: Google Map of the Pacific Ocean.  Container Photo Credit: Daniel Ramirez CC-BY-2.0Leonardo Baccini is an assistant professor of International Relations in thedepartment of Political Science at McGill University. His research focuses oninternational political economy and comparative political economy with an emphasison international trade. His first book, Cutting the Gordian Knot of Economic Reform,was published by Oxford University Press. Professor Baccini’s research has beenwidely published in leading social science journals, such as British Journal of PoliticalScience, The Journal of Politics, and World Politics.Copyright © 2015 London School of Economics

TPP may benefit both global businesses and the developing countries where they operate

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