At long last, we are finally about to see the entire text of the proposed Trans-Pacific Partnership (TPP), a new set of trade rules for the United States and 11 other Pacific Rim countries.
The final trade agreement was announced, without details, in Atlanta on Monday. Proponents say the deal would grow the economies of all 12 partners. Critics fear it would benefit the biggest corporations at the expense of workers and taxpayers.
As Sen. Bernie Sanders, the Vermont socialist seeking the Democratic presidential nomination, put it, “Wall Street and big corporations just won a big victory to advance a disastrous trade deal.”
Stirring nativist anti-trade sentiments, Republican presidential candidate Donald Trump claimed that, as president, he would force Ford Motor and other big companies to move their factories back to the United States. Just what authority the Constitution would grant him to do this remains a mystery.
Even a designated spokesman for the staunchly pro-business American Enterprise Institute said, “The TPP should be carefully vetted … If unsound, the TPP must be rejected.”
Although promoted as a free-trade agreement, the TPP has next to nothing to do with tariffs or other trade barriers. In 2012 the U.S. collected less than $30 billion in tariffs, less than a penny on each dollar in federal revenue. Trade barriers are already minimal between the U.S. and its other big partners in the deal — Canada, China, Japan and Mexico.
So just why this deal is needed is unclear to many, leading to confusion and hyperbole. The fact that business has been closely involved in the closed-door talks, with only scant involvement by labor and none by serious critics, should make us wonder about just what the pact would do. And we won’t have a lot of time to find out: less than 90 days to examine 30 chapters with hundreds of thousands of words of fine print, written in dense legalese.
WikiLeaks obtained portions of the draft agreements. The leaked material showed good reason to be skeptical of the pact. It stank of favors for large businesses. The agreement would likely make it harder for new enterprises to arise and would put further downward pressure on American wages, especially for manufacturing workers.
Lies, damned lies and trade
The day after the TPP was announced, the latest trade data showed a huge jump in our trade deficit for goods and services because of falling U.S. exports and rising imports. The trade deficit in August hit $48.3 billion, up almost 16 percent from July’s $41.8 billion. The trade agreement needs close scrutiny to make sure that deficit does not worsen, as I fear is likely.
To be sure, our trade deficit has fallen sharply from its peak in 2006, when it was a little shy of $1 trillion in today’s money, mostly because the global economy has cooled. Last year’s trade deficit was $741 billion, meaning wealth left United States at the rate of more than $2 billion per day.
America’s trade deficits in every year back to 1992 stem from importing more goods than we export — a negative partially offset by net exports of services. The official data show service exports have more than doubled since 1992.
Barack Obama’s administration and Big Business emphasize the significance of growing U.S. exports, especially in services. They talk about banking and financial services, including accounting, as well as computers, software, pharmaceuticals and royalties for other American intellectual property.
So let’s look at the official numbers on exported services. International travel explains a quarter of our exported services, valued last year at $177 billion. Rich countries can afford lots of travel across borders for everything from promoting business to studying at foreign universities.
Bad data encourages bad policies.
Our second-largest category of exported services was royalties for the use of American intellectual property, officially reported as $130 billion last year. That figure is, however, inflated.
Much of that $130 billion is royalties paid by U.S. companies to offshore subsidiaries to which they moved ownership of their intellectual property. And a lot of that property is not sophisticated algorithms or patents on drugs or the secrets of how to make exotic materials that create new wealth but corporate logos and other promotional property.
Why do American companies pay their offshore subsidiaries to use their own intellectual property? Tax dodging, of course.
Under a one-line change to the Internal Revenue code signed by President Ronald Reagan, multinationals — but not purely domestic firms — can convert taxable profits earned in the U.S. into tax-deductible expenses paid to these offshore subsidiaries.
It’s the economic equivalent of your getting an income tax reduction every time you take a dollar out of your right pocket and put it in your left. In the trade statistics, payments that companies make to their offshore subsidiaries show up as exports, but obviously they’re really not.
When Pfizer sells a Viagra tablet in the U.S., most of the profit becomes a royalty paid to an offshore subsidiary that owns the patent and other intellectual property rights for the drug. That’s not really exporting services because the money never leaves the control of the American company.
So many companies do this that much of our $130 billion of supposed services exports are really just tax-dodging techniques in which money is moved from a company’s American pocket to its offshore pocket.
The U.S. is far from unique in facing this problem of tax dodging distorting trade statistics, the issue I am lecturing on this week at the Global Investigative Journalism Conference in Norway. A key lesson: Bad data encourages bad policies.
Whenever Obama or others make the agreement public, it will take teams of experts to scrutinize the documents in a very short time, ensuring that many subtle but lucrative details will escape notice until it is too late. I anticipate that years from now I will be writing about a hidden gem of mischief that no one spotted at the time the pact was made public, just as I keep finding such gems buried in our tax code decades after someone quietly slipped them into law.
Under the fast-track rules for approval, passed by Congress in June, the democratic process of public debate and rational review has been jettisoned in favor of a quick up-or-down vote with superficial congressional scrutiny. How could anything go wrong?
The final agreement language on intellectual property will be crucial. Patents encourage invention. Together with other intellectual property rights, they are so valuable that accounting students these days are taught that most value is not in tangibles such as factories, equipment and land but in intangibles such as the secret process for making everything from the crooks and crannies in Thomas’ English Muffins to metals so strong that jet engines may someday last as long as the airframes they propel.
Pay close attention to the trade debate. Whether you have a job — and how well it pays — may depend on it.