Is the Trans-Pacific Partnership Good for Latin America?

TPP es muerte”, read the sign of a man protesting in front of La Moneda, Chile’s presidential palace, on the afternoon of February 4. Surrounding him were dozens of other activists, assembled to condemn President Michelle Bachelet’s approval of the Trans-Pacific Partnership (TPP) and to pressure the National Congress to reject it. Among the protesters were students, members of indigenous minorities, and representatives of organizations fighting for land, seeds and water rights. At the same time, over 1,500 people were marching in Lima, Peru to denounce President Ollanta Humala’s support for the agreement. These protesters were less fortunate than their Chilean counterparts, however, as police used tear gas to prevent them from reaching the Peruvian Congress.

If ratified, the TPP will be the largest regional trade deal in history, surpassing even the European Union’s. The TPP aims to lower barriers to trade and investment between twelve countries bordering the Pacific Ocean, which account for approximately 60 percent of the world economy and 40 percent of the world’s population. So far, the only Latin American states included in the treaty are Peru, Mexico, and Chile, but Colombia, Panama, and Costa Rica have expressed their interest to join. While the TPP would increase their exports to other member countries, it may not deliver on its economic promises, and some of its negative ramifications may in fact outweigh any benefit member states could ultimately derive.

After seven years of negotiation, the agreement was finally signed on February 4, although each country must still ratify it. Civil society organizations throughout Latin America have voiced their discontent, condemning the secrecy of the negotiations and the exclusion of key stakeholders. Indeed, only a handful of government officials and trade advisors, many of whom represented corporate interests, had a seat at the table.

But while the protesters in Lima and Santiago denounced an agreement reached “a espaldas del pueblo” and as harmful to common people, the governments of Chile, Mexico, and Peru maintain it would propel economic growth and development, increasing welfare for all. Yet the case for free trade is hardly that simple, and a close look at the agreement reveals clauses that pose serious threats to society and the environment.

The decision to join the treaty reflects a policy stance by the governments of Chile, Mexico and Peru favoring increased relations with East Asia. All three countries are members of the Pacific Alliance, a regional trading block formed in 2011 with the express aim of enhancing commercial exchange with the economies on the other side of the ocean. Their governments argue that lower trade barriers will propel economic growth and development by opening up new markets, incorporating domestic firms in global value chains, and attracting foreign investment. This rationale is in line with the central tenet of free trade: if countries specialize in producing where they enjoy a comparative advantage, resources are allocated more efficiently and productivity rises, leaving everyone better off.

The problem with this postulate is that it does not consider variations in the market value of countries’ various advantaged industries. For example, while the TPP would increase exports of agricultural commodities in Chile and Peru, since they can sell them at lower prices than their partners, it would also increase those countries’ imports of manufactured products, which face lower costs in the more industrialized economies of East Asia. That would not be a problem if all goods had similar value, but manufactured products sell at much higher prices in world markets than agricultural commodities do. So the TPP could in fact inhibit growth and development in Chile and Peru, since it would not allow their governments to use tariffs in order to protect their manufacturing sectors and further diversify their economies.

Given the agreement’s nefarious social and environmental consequences, we ought to be wary of the TPP, which critics have characterized as “NAFTA on steroids”.

The situation is somewhat different for Mexico, where some manufacturing sectors have developed since the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Yet far from proving the virtues of free trade, the deal demonstrates its mixed and often painful results.

Despite lowering the price of consumer goods and increasing exports dramatically, NAFTA has not generated significant economic development in Mexico. The rapid growth the deal’s advocates imagined would ensue has remain elusive, with GDP rising by an average of 2.6 percent annually. More importantly, unemployment has increased and real incomes declined since the signing of the treaty. Not even manufacture has done that well, with both employment and wages in the sector remaining constant. These disappointing results stem, in part, from the country’s failure to develop backward linkages: connections to upstream industries that produce the materials for assembly further down the supply chain – a problem NAFTA has only exacerbated. The agreement has limited the ability of the Mexican government to devise alternative development strategies by prohibiting protective tariffs, support for strategic sectors, and financial controls.

Besides failing to live up to its economic promises, NAFTA has had important distributional consequences for Mexicans. The removal of tariffs to heavily subsidized American products such as corn has caused market prices to fall and made it impossible for small farmers to make a living. At least two million farmers have lost their jobs since the signing of the treaty, contributing to the phenomena of food poverty afflicting 20 million Mexicans. Furthermore, NAFTA has led to the establishment of transnational industrial corridors in rural areas, which have polluted water resources and sickened the population, with women bearing the heaviest impact.

Given the agreement’s nefarious social and environmental consequences, we ought to be wary of the TPP, which critics have characterized as “NAFTA on steroids”. Yet the Obama administration claims the partnership is the most progressive trade deal in history, given its extensive labor and environmental provisions. Is that the case, or was the protester holding the sign that read “TPP es muerte” on to something?

According to the White House, the improvement of labor conditions in partnering nations is one of the hallmarks of the TPP. Indeed, the agreement requires that member states respect the fundamental labor rights established by the International Labor Organization, which include the right to freedom of association and collective bargaining. It also requires the existence of laws governing minimum wage, acceptable hours of work, and occupational safety and health. These commitments are said to be subject to the same dispute settlement mechanisms as commercial disputes, which means that their violation could result in trade sanctions. However, the agreement does not specify how any of these measures would work — minimum wage, for example, could be set at a penny an hour. On the other hand, meeting these labor standards would require substantial legal and institutional reforms in some member countries. In order to facilitate that transition, the United States government negotiated consistency plans with Vietnam, Brunei and Malaysia, outlining the changes that need to be made before the agreement comes into force and promising to enforce them. But a similar program was not negotiated with Mexico, even though only one percent of Mexican workers are members of independent unions and labor abuses are rampant in the country. Moreover, the consistency plans are unlikely to be effective, since they rest on the willingness and capacity of the United States government to police and implement the necessary changes. Given the weakness and inconsistency of its enforcement mechanisms, it is improbable that the TPP will prevent a race to the bottom in labor rights.

 The deal’s environmental provisions are similarly insufficient. Although it includes measures to combat illegal wildlife and timber trafficking and promote sustainable fisheries management, it fails to make any substantial headway on climate change and would even encourage environmentally harmful activity. For example, it requires the United States to automatically approve all exports of liquefied natural gas, not allowing the Department of Energy to consider the social and environmental consequences of extraction.

Still, proponents of the Trans-Pacific Partnership claim that it has gone further than any other free trade deal to protect workers and the environment. While that may be true, a clause which protesters have called attention to could easily erase any progress made. The clause establishes Investor-State Dispute Settlement (ISDS) mechanisms. Under the TPP, a foreign investor could sue a government for unlimited cash compensation for implementing a measure that hurt its expected profits. The suit would be decided by a private tribunal not accessible to citizens, where corporate lawyers would go back and forth between representing investors and performing as judges. Even though Chile, Mexico and Peru are already subject to ISDS under other free trade agreements, the measure is increasingly used by corporations and the TPP would make it available to more corporations. Hence, the protesters in Lima and Santiago were right to denounce the agreement as an attack on democracy and a threat for labor and environmental regulations.

Although the Trans-Pacific Partnership would certainly allow Chile, Mexico and Peru to increase their exports to East Asia, it is unclear whether it would deliver on its economic promises. And if we ought to be skeptical about free trade deals in general, given the limitations they place on developing countries and their distributional consequences, on this occasion we should be especially careful. Beyond a mere reduction in barriers to trade and investment, the Trans-Pacific Partnership is poised to regulate on many more areas of life.