What You Really Need to Know About the TPP Agreement

There's little doubt that the agreement this week on the Trans-Pacific Partnership (TPP) is a big win for Barack Obama. Up until now his “pivot” to Asia has been long on talk, but short on action. That all changes with this, the largest trade deal since the creation of the World Trade Organization 20 years ago.

But here are three features of TPP that will determine its long-term impact on the Asia-Pacific that the current media frenzy tends to miss: 

1. TPP is more about geopolitics than economics

The simple fact is that pre-TPP tariff barriers among the 12 countries in the new agreement are already very low, mostly because the countries have, over time, tied themselves together in a dense network of bilateral free trade agreements (FTAs). The US, for example, already has FTAs with more than half the TPP countries. TPP is hyped as a “21st Century” trade agreement that does more than further reduce tariffs. But if you look closely, the economic benefits of TPP are likely to be relatively small and incremental, not game changing.

So why all the fuss? The answer is the US wants the TPP to show that America, not China, is going to define the economic rules of the road in the Asia-Pacific region. Make no mistake, TPP is a US-led agreement. And it is the fact of the agreement, not its provisions, that seems to matter most to Obama.

A defeat for Obama would be a disaster, for him, and for America’s Asia agenda.

The irony is that to get the agreement through, the US had to make some major concessions. The US wanted Japan in the tent but, given Japan’s notoriously protected agricultural sector, that meant lowering the sights on what TPP could achieve. And in the TPP negotiation end game this past weekend, the US allowed roll backs regarding the ability of American multinationals to sue TPP member governments for unfair treatment. IP protections for American drug companies were also limited. All in an effort to get the deal done.

2. Getting TPP approved by Congress in 2016 will be very difficult; 2017, under a new President is more likely

Obama desperately wants to get TPP through Congress on his watch, to cement his Asia Pacific legacy. But trade deals are always tough in Congress. Even more so in election years, plus the current environment finds many average Americans still hurting after the global financial crisis and very anxious about their future economic security. This just makes the normal anti trade agreement mantra about “exporting jobs overseas” all the more powerful.

A lot of Democrats will want to vote “no” on TPP. Republicans should be more supportive. While that is true for “establishment” Republicans, it is much less true for the radical populists who forced John Boehner and Eric Cantor out of Congress and who are behind Donald Trump and Ben Carson.

But a defeat for Obama would be a disaster, for him, and for America’s Asia agenda. If the going gets too tough, the deal might get pushed back into 2017. That is what happened with NAFTA more than 20 years ago, with new President Bill Clinton ultimately signing a deal negotiated by George Bush senior. Maybe a President Hillary Clinton will face the same opportunity? Who knows, but Hillary has been very cautious where TPP is concerned.

Negotiating with the Chinese is much harder now than it was. It is, however, much more important too.

3. To reshape the Asia-Pacific economy, TPP will have to find a way to include China

From the outset, there has always been a strange feature haunting TPP–it does not include China, the world’s largest trading nation. In fact, China is the largest trading partner for most TPP members. So why is it out? 

The official US position on China is “not now,” i.e. let’s do the deal first, then figure out a way to get China in later. This is what happened with WTO. The US led the creation of the agreement in 1995, and then worked with China on what it needed to do to join. China ultimately joined–on largely American terms–in 2000.

But a lot has changed in the past 20 years, most notably 20 years of 10% annual growth in China which is now the world’s second largest economy. Negotiating with the Chinese is also much harder now than it was. It is, however, much more important too.

The biggest win from TPP would be an agreement that binds the US and China together in an Asia-Pacific economic regime that both countries support and contribute to. That would be a massive win for regional and global stability. Maybe congressional opposition to TPP will give a new US President the chance to negotiate early Chinese entry? That would be a real achievement for the next president.

For additional perspectives on TPP read "Will the Trans-Pacific Partnership Deliver on Its Promises?" on Knowledge at Wharton.

Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter.