Barack’s gift to Hillary on TPP and trade

24 August 2016

President Obama recently stated that he would make the case for why the US should ratify the Trans-Pacific Partnership (TPP), an international integration agreement (encompassing 12 countries and some 40 percent of global GDP) that sets its ambitions beyond traditional trade agreements. When Obama makes his case, he needs to do more than just explain the virtues of the TPP: he needs to help the next president reset the US agenda on trade. More than ever, that agenda is about America’s trade-readiness at home, namely its ability to innovate and adapt, and to better divide the pie and share the pain.

What’s good about the TPP?

Like all international agreements, the TPP is a compromise. But, on balance, the deal is a good one. It takes a large step towards instituting rules that respond to the new realities of business and markets — a task that long ago evaporated at the World Trade Organization, the natural venue for advancing such negotiations.

Many great economists and pundits have focused on the incremental economic impacts versus the game-changing set of new rules that will be needed for the new economy. For example, extensive new rules on data flows and electronic transactions, which undergird virtually every business domestically and internationally, will ensure that this vital currency of business and democracy remains open. Encryption and source code provisions set a framework for signatories that means breaking and stealing codes will be against the law, protected through each member’s legal system. This is absolutely vital to ensure that plans for the future, from self-driving cars to the Internet of Things to medical devices, will be secure and work as expected. The agreement also includes labour and environmental provisions that reflect the increasing importance of managing international commercial relationships in their full context, and it extends coordination to a number of areas that are critical to expanding trade such as standard-setting and harmonising support for small and medium-sized enterprises.

Many of these TPP provisions seek to boost a new and potentially much more inclusive participation in international trade and commerce. Already, huge swathes of our populations — from North America to Africa — are directly involved in international trade, innovating and mixing outsourced and specialised goods and services that give small businesses a big reach. EBay’s data on those who use its platform to trade internationally are compelling, demonstrating more profitable and resilient businesses than their offline counterparts.

And this is not just a developed country phenomenon. The developing world is experiencing dramatic changes with new technologies transforming old businesses such as farming, for example through technology empowered irrigation and harvest information. Online markets and market information systems allow remote producers to be immediately connected to consumers through virtual market places. Business process outsourcing (BPO) services are flourishing across Asia and Africa among other regions, providing skilled work through cross-border services provision. Call “customer service” from the US and you may be served by someone from the Philippines. The potential for growth, inclusion and upgrading is immense if international rules serve as an enabler rather than as an impediment. The TPP is a step in the right direction in this respect.

So what’s the problem?

Nevertheless, making the case for TPP is an uphill battle. You would have to be in a time warp not to realise that, as the plate is being delivered to the table, the taste for globalisation has rapidly soured. The common refrain even from formerly ardent supporters is that the new economy and its most emblematic undertaking — the mega-regional agreements — are guilty as charged. They have failed to deliver on growth; have led to rising inequality; and have advanced the interests of the elites over the other 99 percent. But this diagnosis gets the story at least half wrong.

Yes, international agreements could be better, but major structural changes at home and in international markets have caught the US and others flat-footed. As long as overall growth has continued and economies have been able to reintegrate those who are displaced, the system has worked reliably if not perfectly. But the global growth engine has been sputtering. In spite of a great deal of business model innovation that has brought huge wealth to many actors, overall productivity growth and jobs have gone flat like yesterday’s beer.

Globally, policymaker responses have been “more of the same.” Prime the pumps and raise the gates. But even these measures seem to be having limited impact in clawing back growth. The models that have underpinned modern economies for the last several decades, and shaped both policies and institutions such as our international trade system, aren’t working the way they used to. This situation is the result of dramatically changed business models and technologies in which factors of production may be sourced fluidly and globally. This evolving system demands a different logic for promoting productivity and growth. The potential in productivity must be met with new national approaches for promoting innovation. Policymakers must rethink policy strategies in order to develop dynamic economies while sustaining the social fabric. Disruption is coming to policy-town and changes in markets and businesses have hit every country — some with major political and economic impacts. Policymakers must respond. Just look at the bruising battles in the US and Europe as politicians reset and retrench their positions. As consensus around outward-looking policies buckles under the weight of populist critiques, there are better and worse choices. Global disintegration and withdrawal is likely to be a very bad choice for productivity, growth and inclusion, particularly for the most trade-dependent countries.

Unfortunately, the starting point for dialogue on these issues is overly simplistic and outdated. Policymakers’ approaches to international trade competitiveness strategies, for example, have been shaped by centuries of mercantile logic and corporate favouritism, and these policies have been embedded in national and international systems shaped by an “export is winning” and “import is losing” mentality.

But new technologies and business models mean that the logic and benchmarks by which we should judge trade are not about imports versus exports. The key metric (for which we barely have data) is “added value” that can be generated through harnessing production chains, investment strategies and the vitality and adaptability of markets to produce whatever whenever, given a set of evolving resources and business and consumer demands. It is fast and fluid and governments are, on the one hand, behind in adapting to it and, on the other, constrained by institutions and actors that have built and benefitted from the old systems. What’s more, the potential gains from this complexity — and they are significant — demand international rules of the road that build trust, promote interoperability of systems and ensure a level playing field.

The next US president (and many other national leaders) must now build a dialogue that reflects the actual working of the global economy; the case for new and refashioned domestic policies; and the role of international agreements in extending these dynamics.

Obama’s gift

President Obama’s case therefore must deliver a vision for a future that puts it in the transformational context that Hillary Clinton faces as she seeks to reconcile demands from both parties for a more dynamic and fair economy. This vision, rather than being anti-internationalist, needs to call on Americans to take a path towards greater participation at home and abroad in order to deliver more openness, innovation, and competitiveness. Leading with a vigorous domestic agenda of “trade readiness,” linking domestic economy reforms targeting innovation and fairness with a strengthened global stance on trade, needs to be at the heart of that vision. Americans need leadership that will help them to rediscover what Nobel Laureate Edmund Phelps refers to as a sense of individual agency and the conditions to innovate effectively, which have been lost in the shadows and slogans of the old economy.

Bamboozled by years of highly ideological debate, Americans remain afraid and skeptical of too much government. But we suffer from too much of the wrong kind of government and too little of the kind that makes our economies adaptive and innovative, and provides a framework for doing so systemically — and not just for trade.

The time for such initiatives is ripe. Americans find that an increasingly competitive global economy is an opportunity for some, but not necessarily for those that are displaced. Finding new work in this economy is made more difficult through inadequate support for adaptation, transition and new innovation. This includes vocational and higher education, but also an intellectual property (IP) system that has become heavy, litigious and ineffective in promoting innovation.

All companies, particularly smaller ones, face increasing barriers to the commercialisation of innovation in the face of a highly complex system dominated by large players who use the system to capture assets to prevent competition and beleaguered with patent trolls who use the courts to extract rents. The system is no longer performing the public, creative function for which it was intended and is therefore in need of reform. (The TPP provisions on IP are one of the sorest points of the agreement for those who oppose it, but attacking the shortcomings of a global IP system by stopping TPP will not work and instead promises to kill the many important parts of the agreement as a cost.)

Individuals are actively discouraged from getting the vital knowledge and skills they need to adapt and transition, faced with the fear of becoming saddled with unbearable debt and no job to pay it off. The US economy is also riddled with senseless regulatory barriers that make it difficult for workers to change fields or move geographically. Try working as a teacher, a doctor, or even a hairdresser in one state and moving to another state. Recertification can take years and thousands of dollars.

The employer-based system of benefits and insurances made sense in the old single-employer economy but it does not make sense in the new one, where morphing business models and mobility are the rule. Countries in which these are universally mandated and supported by the state are helping to advance labour and business mobility while strengthening labour competitiveness and giving their small businesses — which are particularly hard hit by these systems — a leg up.

America’s faith in the market “working it out” is a sop to those who face these barriers and to those who have lost their jobs to trade-driven disruptions. It is too little, too late. The new economy demands investment in the capacity to innovate and in policies that provide regulatory frameworks that promote competition and labour-market support for training and transitioning. This includes building mechanisms that extend training, as well as supportive regulatory frameworks that enable Americans to better create and compete, providing on-ramps into international commerce. For those that are displaced — and this will be an increasing proportion of the economy even in the absence of trade — new shock absorbers must be available that help people adapt, transition and retool.

The government must redefine its role to make sure these changes generate positive results, not simply to oversee an economy with fewer jobs and more mergers and acquisitions. The government must provide the policies that guarantee that our most innovative businesses can compete while ensuring continued competition. But it also has an increasingly important role to play beyond unemployment insurance in securing access to job markets, training and retirement benefits for workers. Increasingly, as the American economy transforms towards greater use of robots, artificial intelligence and other hugely productive technologies that will displace even more existing jobs, we need to cultivate the welfare of our population, while maintaining a vibrant and inclusive social fabric.

TPP: From good to great?

As the fate of TPP is about to be decided, the prospects for trade and who can participate have never had more potential. But in order to realise this potential, the TPP needs to go hand-in-glove with national reforms that provide the infrastructure and social systems to promote and sustain innovation and adaptation. Passage of the TPP gives the US and its next president an opportunity to walk the talk in reshaping US domestic policies and making it more trade-ready, while extending its ability to usher in a new era of international trade. Such steps have the potential to radically change who participates in our economies — both at home and abroad — as well as the political constituencies that support extending international commercial relationships. A potent vision is a nation in which all of its citizens have the domestic structures and international agreements that enable them to engage in creative and entrepreneurial commercial activity domestically and internationally.

So, President Obama, when you take the stage to defend the TPP, please do what you have been doing so well for the past eight years and tee up a vision for the future that Hillary Clinton can grab and run with: a nonpartisan agenda to adapt to the new economy and reinvigorate domestic innovation with an ambitious role for international trade. This is important not only for the US strategic interest, but also because US leadership in this area can help to define important principles and precedents for the next generation of global economic relationships. It may not save the TPP in the short run, but America’s and the world’s livelihoods depend on it.

Andrew Crosby is Managing Director at ICTSD. He is the Convener of the E15 Expert Group on the Digital Economy.