Are we about to see the world’s biggest ever free-trade deal?

President Obama is confident that the US can bring the Trans Pacific Partnership a new trade deal with Asia to a "swift and successful conclusion". Are we about to enter a new era of global trade?

What's happening?

Twelve countries, led by the US and Japan, are negotiating a trade agreement that, according to the BBC, would amount to "the world's biggest ever free trade deal and possibly its most ambitious". The agreement, the Trans Pacific Partnership (TPP), has yet to be completed. However, "intensive bilateral discussions" between America and Japan are expected to "place pressure on other TPP members to liberalise their own sensitive sectors, creating momentum in the negotiations towards a high-standard agreement". At the same time, US President Barack Obama is attempting to get the US Congress to give him Fast-Track Trade Authority. This would make it much easier for him to get the deal passed, since they would only be able to approve or reject the deal, not amend it.

Why should Congress approve the deal?

Supporters of the deal argue that it has both political and economic benefits. The US Chamber of Commerce argues that, at the moment, "a typical Southeast Asian country imposes tariffs that are five times higher than the US average while its duties on agricultural products soar into the triple digits". As a result, a trade deal that removed those barriers could "could boost US exports by $124bn by 2025". Others argue that a US-led trade deal would increase America's political influence in Asia. Indeed, Thomas Freidman in the New York Times argues that "these deals are not just about who sets the rules" but also "whether we'll have a rule-based world at all". He warns that China will take advantage of any breakdown in talks by "signing bilateral trade agreements one by one across Asia".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Is there any opposition to it?

Despite this enthusiasm, there is likely to be strong opposition to the deal, with many of Obama's own party opposed to the deal. The big objection is that the deal will make it easy for cheap Asian imports to enter the US, without doing much to boost exports. Bernie Sanders, the only Socialist senator in the US, thinks that past deals have been "abysmal failures", allowing "corporations to shut down operations in the US and move work to low-wage countries where people are forced to work for pennies an hour". He quotes estimates suggesting that the Nafta deal in 1993 cost 680,000 US jobs and a later deal with South Korea also cost 60,000. The Economist notes that Japan is also eager to carve out its own exemptions in key industries such as rice.

Are these objections justified?

Virtually all economists agree that in the long-run free trade increases national income. As Greg Ip puts it in the Wall Street Journal, "by enabling countries to specialise, it makes workers more productive, gives consumers more choice, and reduces costs". The Economist also points out that globalisation "has filled people's shopping trolleys with cheaper, better goods", with imports "boosting the average family's purchasing power by $10,000 a year". However, they accept that "trade has probably also held down blue-collar workers' wages in rich countries". While technology has played the biggest role in the decline in American manufacturing jobs, around 25% of the fall can be attributed to Chinese competition. Ip also accepts that the overall gains to the US will be a "minuscule" boost to total GDP of 0.4% over the next ten years.

What about a deal with Europe?

At the moment America is also negotiating a major trade deal with Europe, the Transatlantic Trade and Investment Partnership (TTIP). However, that is progressing much more slowly. In this case the concerns are coming from European voters who are concerned about plans to "harmonise" regulations. Specifically, the fears are that they could lower health and safety standards, for instance over genetically-modified crops, and lead to the breakup of public services, such as the NHS. There are also concerns that "investor protection" mechanisms could let companies sue governments over unfavourable legislation (as has already happened with other trade deals). As a result, the FT's Shawn Donnan reports that "many negotiators and close observers now say it will be for the next US president to close a real deal".

Do we really live in a truly globalised economy?

Ip notes that "there has been a steady decline in trade barriers since World War II." Indeed, tariff levels have "fallen from an average of 15% in the 1960s to under 7%." At the same time, the rise of the internet makes it much easier to share information. Yet nation states still matter. Michael Lind argues in Politico Magazine that a completely borderless world, "not only hasn't happened yet, it is unlikely to happen in the foreseeable future". He notes that the percentage of people living in countries other than their own, is "virtually the same as it was a century before, back in 1900, when it was 3%". Even for the 100 largest global firms, "on average 40% of their business was at home". He also argues that trade deals such as TPP and TTIP show that, "the major world economic trend of our time is regionalization, not globalisation".