Economy & Budget

Five questions with…

Five questions with...

Scott Paul, President, Alliance for American Manufacturing (AAM)

Today’s Topic: Japan’s Proposed Entry into the Trans-Pacific Partnership (TPP): Will Currency Manipulation and Protectionism Concerns Scuttle the Deal?

Scott N. Paul is the founding President of the Alliance for American Manufacturing (AAM), which was launched in April 2007. AAM is a non-profit, non-partisan partnership established by some of America’s leading manufacturers and the United Steelworkers to explore common solutions to challenging public policy topics such as job creation, infrastructure investment, international trade, and global competitiveness.

As part of our continuing online series examining opportunities and barriers to free trade among global markets on October 9th HUMAN EVENTS sat down with Mr. Paul to talk about the Trans-Pacific Partnership and the significance of Japan’s interest in joining the TPP.

HUMAN EVENTS: Scott, thank you for joining this week’s “Five Questions.” Let’s start off with the basics – what is the Trans-Pacific Partnership, who’s in it, and why is Japan suddenly so interested in joining the TPP?

Scott Paul: It’s a very good question and thanks also for having me on to talk about this topic because it is important to American competitiveness and jobs and maintaining free markets. So the TPP – the Trans-Pacific Partnership – is a proposed free trade agreement. The United States has many free trade agreements – NAFTA with Mexico and Canada; we have also agreements with Chile, Singapore, Australia and Israel, and many other countries. But in the Asia-Pacific Rim this is a new proposed free trade arrangement among twelve countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, with Japan most recently expressing interest in joining the TPP.

The chief benefits for being a part of the TPP are lower barriers to trade and investment. It will create a regional trading bloc that should spur trade among the members and encourage other countries to adopt regulatory standards that are consistent with free markets. Strategically it should also send a message that this is the place to be in Asia rather than with China. While China may eventually be welcomed into the TPP down the road, because of its economy and the way it’s set up, it’s in no position to do so right now. You and I both know that China is not a free market economy – it still has a Communist government, it still maintains a lot of state-owned enterprises – and the TPP is a way to hedge against Chinese economic and strategic dominance in the Asia-Pacific Rim as well.

HE: President Obama’s much-ballyhooed “Asia Pivot” took a bit of a stutter-step when the President cancelled his plans to attend the Asia-Pacific Economic Cooperation Summit in Bali, ostensibly due to the government shutdown. Without his presence, do you see much hope for any real progress at this next round of TPP leader negotiations?

SP: I think the President’s absence had a real impact and as a result there really was no progress made, and there was no longer a goal set out to complete this. That being said, I would say it’s much more important to get the agreement right than it is to rush to complete it, so I’m not so worried by that.

But the pivot to Asia is the bigger point, and over the past two years this Administration has grown wary – frankly, I think a bit late – of what the Chinese military is doing in the South China Sea, how they’re dealing with Japan on some territorial disputes, some economic aggression, and generally building up their military. For these reasons the United States needs to have a stronger strategic and economic presence in Asia to counter the Chinese model.

From my perspective such a pivot is a good thing, but unless it’s a serious pivot, and it’s being done across several levels – involving your national security apparatus, with your economic policy, via diplomacy – it’s not going to work terribly well. We have lots of trade challenges with China, they’re not getting resolved, and obviously one way to counter against China is this Trans-Pacific Partnership free trade pact and that’s been pushed down the road a little bit as well.

HE: Japan’s current government is pursuing a weak yen strategy, which many consider flat-out currency manipulation whose aim is to boost domestic exports by acting as an illegal subsidy while serving as a barrier to U.S. goods. The U.S. auto industry in particular finds this objectionable, and that’s putting it mildly. Detroit’s share of the Japanese auto market is around 6%, while Japanese automakers sell around half of their cars in the United States. Should Japan be given entrance into the TPP if they continue to hold the yen at artificially low levels?

SP: The short answer is no – they should not, because it is a market-distorting practice, and the fact that there’s very little import penetration into the Japanese market indicates how closed it is. It’s a variety of government policies, regulatory and monetary, that have produced that.

Here is the challenge: the TPP, as it’s currently constructed, wouldn’t deal with those issues. It would only deal with tariffs, and frankly, tariffs aren’t the problem. It bears reiteration that the problems are monetary policy and regulatory barriers – and so far, it’s understandable that the Japanese business community and the Japanese government don’t want to deal with these issues. That I get – that’s their negotiating position – but what’s hard for me to understand is that the Obama Administration hasn’t been aggressive on this issue, especially given the concerns that some in Congress have. And so I have a hard time understanding how doing a free trade agreement and insisting that countries adopt practices – again, we’re not going to determine what their monetary policy is, we’re just going to say that you can’t manipulate your currency to gain a trade advantage – why you wouldn’t include that in a trade agreement.

To give this some historical perspective, let me step back into the 1990’s. When we signed NAFTA with Mexico in 1993 there were no provisions to deal with currency policy. In 1994 the Mexican government devalued the peso to gain a trade advantage, very clearly, and as a result any of the benefits that the U.S. received from NAFTA took decades to try to accumulate rather than right away. Our trade deficit went up with Mexico and it took a long time to recover somewhat, and that to me is a case study of why you have to have these currency disciplines included in a trade agreement.

Bottom line, the connection is very clear between currency manipulation, trade deficits and the impact on manufacturing in the United States. It makes it much more difficult to export into markets like Japan – and we know there are already spectacular barriers to try to do that in Japan and it also makes Japanese products artificially more competitive in the United States. The consumer may enjoy some limited benefit from that – although a lot of that gets lost along the road between production and retail – but the one clear impact is that it definitely harms our business and our workers’ ability to gain market share and to grow their operations here in the United States.

The fact is that over 95% of all U.S. manufacturing is very cost-competitive. It’s lean, it’s productive, and it can be globally competitive. That being said, it is impossible to compete against a product that’s not priced at a market rate. And that’s where we end up with some of the Japanese products coming into U.S. domestic market, some of the Chinese products coming into our market. I think if you’re a supporter of free markets that it’s incumbent upon you to insure that monetary reflect that as well so it truly is a market-based competition between firms.

HE: Opposition from the United States on the grounds of currency manipulation and protectionism is understandable. But there’s also considerable opposition from within Japan, especially from the agriculture lobby. Forgive the pun, but what’s their beef?

SP: Beef is one of them, actually, beef and rice. Japanese farmers are very highly protected – through tariffs, through regulatory policy, through their own agricultural policy. The difference is that the U.S. has an agricultural policy. It’s not as large as it once was, but we have an open market in agricultural products as well. There’s very little protection when it comes to tariffs in the U.S. market and our farmers are very globally competitive, but in Japan, for a lot of reasons, one of which is food security based on their history, they have these policies. And so Japanese rice producers, Japanese cattlemen and ranchers, are very reluctant to give up those protections. So yes, these agricultural special interests are pushing the Japanese government from the other end, so while we have farmers and ranchers from the Midwest who are saying ‘open your markets’, the Japanese government has their producers saying ‘no, you don’t want to do that’. So the Japanese government is in a bit of a bind on that.

HE: Scott, your organization, the Alliance for American Manufacturing (http://www.americanmanufacturing.org), has been very active (http://americanmanufacturing.org/blog/statement-conclusion-us-japan-tpp-consultations-alliance-american-manufacturing-aam-statement) in voicing concerns about Japan’s entry into the TPP. What would Japan have to agree to to make them an acceptable participant?

SP: It’s a very good question. I would certainly like to see expanded trade in the Asia-Pacific region and to see Japan be a part of that, but unless Japan agrees to adhere to market-based monetary policies and commits to not using those policies to gain a trade advantage, it’s hard for me to see a scenario under which U.S. workers and businesses could win in such an environment.

And so the solution is basically this: Japan has to be willing to adopt a different monetary policy, and do so unilaterally. Let me also acknowledge that the U.S. Treasury Department under Secretary Tim Geithner basically gave a green light to Japan to adopt the monetary policy they have right now, so it’s not like we weren’t aware of this. I’m more upset with our Administration than with the Japanese government on this.

But I think as part of the TPP, if a country wants into the TPP it doesn’t mean that you have to eliminate your sovereignty over your monetary policy, but it does mean that you’re expected to adhere to certain international norms that include a market-based currency, and one that is not manipulated to gain a trade advantage. And there have to be provisions in that agreement that would claw back the benefits from the agreement if Japan is unwilling to do that. There have to be teeth in the agreement – there has to be some kind of enforcement mechanism to use with Japan. That has to be in place, otherwise this agreement is not going to work.

HE: HumanEvents.com readers are grassroots conservative activists fundamentally supportive of free markets and fair trade. What can our readers do to convince the Obama administration that Japan needs to level the playing field for U.S. manufacturers before it should be allowed to join the TPP?

SP: Ultimately, the implementing legislation will have to be approved by the U.S. House of Representatives and the U.S. Senate. That’s where the role of activist comes in. And already, we have seen letters sent from the House and Senate by members of both the Democratic and Republican parties to the Administration, and a majority in each chamber – in fact, over sixty in the Senate – expressing concerns about Japan becoming part of the TPP because of currency manipulation. What I would suggest is maintaining contact with your Members of Congress to say that there should be no TPP unless we’re able to stop currency manipulation by Japan. That’s essential to it – to us, that’s the core issue. And again we think that there are a lot of merits to open markets and free trade, as long as it’s market based, on a level playing field, and that we have the same opportunity as firms in other countries. That’s a concrete way that activists can stay engaged throughout this.

HE: The Trans-Pacific Partnership is a free trade agreement ripe with promise. And there’s little argument that including the world’s second-largest developed economy raises that promise to tantalizingly high levels.

But Japan’s entry has to rest on a willingness to step away from currency manipulation and protectionist tariffs and embrace market-based monetary policies. TPP also needs to include enforceable currency provisions to stave off any thoughts of backsliding. Only with these agreements in place can TPP insure a fair, robust and mutually-beneficial trade environment for all participants.

That’s the AAM’s position, and many in the U.S. business community share it. Let’s hope the Obama administration takes note – and negotiates accordingly.

To learn more about this issue HumanEvents.com readers are encouraged to visit the Alliance for American Manufacturing website at http://www.americanmanufacturing.org or follow @KeepItMadeinUSA.

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