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A renegotiated TPP may not be in our interest

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COMMENTS

12 October 2016 08:45

After a decade of negotiation, the Trans-Pacific Partnership was signed a year ago by its 12 participants, to come into force when ratified by the partners' legislatures. America's ratification is the key, and as President Obama had achieved 'fast track authority', Congress should either agree or reject, without the option of further negotiation. But not all members of Congress see it this way. This might leave Australia with an awkward policy choice: to accept unfavourable changes to the agreed text so as to stay in the TPP club, or quietly bow out of the deal.

Senator Orrin Hatch, chairman of the key Senate Fiscal Committee and free-trade supporter, is ready to back the TPP, but only if the intellectual property protection on pharmaceutical biologics is increased to match the 12 years of market protection in American law. He has accused Australia of wanting to steal America's commercial secrets and implied that the prospects for agreement might be better if Australia was not a party.

Senator Orrin Hatch (Photo: Andrew Harrer/Bloomberg via Getty Images)

Biologics might seem a minor esoteric issue on which we could readily give ground to ensure the passage of the TPP, but intellectual property has become even more important as the mix of economic output shifts away from traditional physical goods to 'weightless' products that are largely an embodiment of intellectual property. The value-add in the new economy comes from unique skills (entertainers and sports stars), professions with restricted entry, brand-power, and slick design that can capture the imagination of the market. In these cases, competition usually erodes the ephemeral 'economic rent' earned, to the benefit of consumers. Singers go out of style, and sports-stars get tired. The news that Blackberry is ceasing production of its iconic phone is a reminder that even life-changing innovation is transient, and market competition encourages a new product which will take customer satisfaction to a higher level. 

There are, however, other products (such as pharmaceuticals) which get the special protection of a government-imposed monopoly on intellectual property. This approach rewards the creation of ideas by awarding a time-bound monopoly to the inventor. This monopoly is enforced internationally, to the benefit of the innovator, by the agreement of foreign governments.

Of course innovation should be rewarded and (more important still) further innovation should be encouraged. But monopolies are a very imperfect way of encouraging innovation: they can quickly become 'rent-seeking' (excessive profit-making) and inhibit the ability of competitors to improve on a product. Thus fixing the time-period over which the monopolist's protection will remain valid is critical to striking a sensible balance. When we get down to the detail of biologics, how do we assess what protection will operate in society's best longer-term interests? Based on the closed-door experience to date, the Australian public won't be any more enlightened about this key judgment even after the decision is taken.

Japan has signalled that it would be very unhappy to see the TPP negotiations reopened. Senator Hatch's objections should raise the same issue for Australia: at what stage should we say 'enough is enough', and be ready to let the agreement go ahead without us? 

The very thought of deciding that 'enough is enough' and consciously bowing out of the TPP seems so dramatically out-of-character in the context of Australian/American relations that it might be better to approach this thorny issue by asking a different question: what if events over which we had no control (e.g. the unanimous opposition of two American presidential candidates) were to cause the TPP to go into limbo, would it matter to us? If we were able to answer this question with clarity, we would be in a better position to respond to Senator Hatch.

The economic loss is minimal. For Australia, with an existing trade agreement with America and most of the other partners, the trade benefit from TPP was at best marginal. The alternative plurilateral negotiation is the ASEAN-focused Regional Comprehensive Economic Partnership (RCEP), which is moving slowly but will address operational issues designed to directly facilitate trade expansion. These mundane issues may do more to assist trade than the TPP's high-level requirements, none of which has much relevance for Australia – investor dispute settlement, the role of state-owned enterprises and labour regulations. The RCEP has one substantial advantage for us; our main trading partner, China, is included. China's omission from the TPP was anomalous, at least in economic terms. And there is room for the US in the RCEP when it wants to join.

What about the poorly articulated geopolitical benefits, which seem to be the powerful driver of the Australian case for joining TPP? It never made much sense to weigh down a complex economic treaty with heavy implicit geopolitical baggage, based solely on the participants' common concern about China's growing power. A sensible trade treaty must include China, and this seems at odds with the geopolitical intent of TPP. Responding to China's security threat requires a different format.

Public support for international rule-making is currently at a low ebb. Over the longer term, the constituency for globalisation has to be rebuilt, the methodology for multilateral trade agreements has to be revived, and the geopolitics of China's rise has to be disentangled from the economics. If Senator Hatch sees Australia as a stealer of America's intellectual secrets rather than a valued customer for its exports, we should be ready to follow his suggestion and bow out of a renegotiated TPP.

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