US President Barack Obama

Despite obstacles, the White House continues to pushpreferential trade deals in Asia and Europe. But neither canreverse the erosion of U.S. innovation and in Asia Pacific theproposed pact is more likely to divide than unify the region.

Recently, President Barack Obama said on the U.S. public radio that China could eventuallyjoin the Trans-Pacific Partnership (TPP) agreement: “They’ve already started puttingout feelers about the possibilities of them participating at some point.” However, thatstatement may reflect even more the White House’s concern about an impendingTPP vote in the U.S. House of Representatives.

Only a day before the President’s statement, Wikileaks had announced an effort tocrowd-source a $100,000 reward for the remaining chapters of the TPP deal (it hasreleased three draft chapters of the deal in the past). “The transparency clock has runout on the TPP,” Wikileaks founder Julian Assange urged. “No more secrecy. Nomore excuses. Let’s open the TPP once and for all.”What’s going on behind the TPP façade?

Why the Obama administration wants the trade deal?

Not so long ago, analysts were still predicting the U.S. growth rate to exceed 3percent in the years to come. Then came still another harsh winter and U.S. economy contracted -0.7% in the first quarter; almost a percentage point more than initially expected, according to revised data.

In addition to climate change, the short-term reasons extend from strong dollar and labor disputes at West Coast ports, to the plunge of oil prices, whereas consumer spending remains slow. Disinflation may continue until the fall. After contracting three separate quarters since the end of the recession in mid-2009, the current recovery has proved most disappointing since the 1950s.

As Washington is preparing for the post-Obama era, America’s economic growth issuboptimal relative to its potential. The proposed “free trade” deals with Europe and Asia are not likely to reverse the long-term growth trend.

In the medium- and longer-term, U.S. innovation and competitiveness have historically supported productivity and growth. Today both are eroding. America’s structural erosion in innovation continues, as evidenced by significant shifts instudent performance, R&D, and patents.

Since 2000, the U.S. has no longer been featured in the OECD’s top-10 PISA (Program for International Student Assessment) lists for mathematics, science, orreading. America’s share of the higher-quality triadic patents, which reflect international innovation race, has decreased to less than 30 percent.

U.S. companies still account for more than a third of R&D investment by the top 2,000 companies worldwide. However, China’s share of R&D spending has grown by
a factor of 15 over the past decade, while spending has decreased in Europe (-1%) and North America (-6%).

While America continues to lead in the international competitiveness rankings, thelatter look into the future by staring at the rear-view mirrorand China is likely tosurpass Europe in R&D spending by the late 2010s and the U.S. by the early 2020s. Since new innovation advantages are less likely to support U.S. competitiveness and twin deficits continue to prevail at home, the White House has been pushing its free-trade agreements aggressively abroad.

But the proposed pacts are less about free trade and more about geopoliticalalliances.

Instead of “free trade,” preferential regional pacts

Originally, the Trans-Pacific Partnership (TPP) was a more inclusive free trade agreement (2005) among Brunei, Chile, New Zealand and Singapore. Since 2010, Washington has led to talks for a significantly expanded FTA, which is to be a “high-standard, broad-based regional pact.” It excludes China.

Reminiscent of the proposed Free Trade Agreement of the Americas (FTAA), whichin the early 1990s failed to open South America to free trade and effectively split the region, the TPP, in its current form, has the potential to split Asia into two rivalblocs. That, in turn, could undermine the promising economic integration in theregion.

With Brussels, President Obama initiated the talks on the Transatlantic Trade and Investment Partnership (TTIP) in early 2013. In contrast to the proposed TPP, theU.S.-EU talks have lingered longer than anticipated.

For all practical purposes, both deals are less about “free trade” than about“preferential regional trade”, as the free trade economist Jagdish Bhagwati hasargued, or simply about geopolitical alliances rationalized in the name of trade, aspolitical realists believe.

Nevertheless, in each case, the White House has achieved some success in the pastfew weeks.

Last week, members of the European Parliament gave thumbs up to the EU-U.S.trade talks backing away from the expected confrontation with the Commission overthe controversial issue of investor/state protection rights (ISDS) – although 97percent of the public opinions requested opposed the inclusion of the ISDS in thefinal deal.

In order to complete the TPP talks in Asia, the White House requires the fast-trackTrade Promotion Authority (TPA), which ensures President Obama the authority tonegotiate trade agreements that Congress can accept or decline but not amend ordelay. Right before the Memorial Day, after months of nerve-wracking political games, President Obama got his TPA after the Senate passed the trade bill.

While it had bipartisan support, the successful outcome can be attributed mainly tothe Majority Leader Mitch McConnell and the Republicans. The 62-to-37 vote wasnot the kind of awesome demonstration effect that Obama needed to ensure anoverwhelming victory in the House.

Like the majority of the Republicans, the Speaker of the House John Boehner supports the TPP agreement. However, only days before the critical vote, barely 10 percent of the House Democrats had come out in favor of the TPA.

Overall, the deal is splitting and alienating Democrats. Most believe the TPPsupports big business rather than public interest, including such presidentialcandidates as the progressive former Governor of Maryland Martin O’Malley; Senator Elizabeth Warren popular for her stress of Americans’ financial protection;and the self-described democratic socialist, Vermont Senator Bernie Sanders.

Of the current frontrunners, former Secretary of State Hillary Clinton has tried toshun the issue, which she and other Democratic centrists regard as a form of political plague. However, her nemesis, former Governor of Florida Jeb Bush, does supportfree trade but more inclusive approach toward China.

The age of disquiet

If the U.S. administration fails to complete the trade talks in the Asia Pacific,President Obama’s legacy would be at risk, while the 2016 presidential race would delay or defer new talks. However, even if the deal can be completed, it would not
reverse the relative erosion of U.S. competitiveness and innovation; nor would itmitigate America’s twin deficits and unsustainable leverage.

In its current form, any TPP deal could prove a short-term victory, but a medium-term burden. Asia Pacific is big enough for both the United States and China.

Consequently, any exclusive trade pact in the region would constrain rather than facilitate trade and investment in the region. What Asia Pacific needs is a broad-based, but inclusive free trade deal.

In turn, the only way to secure high living standards in the United States is adequateproductivity and growth, which rest on world-class, cutting-edge innovation.In the absence of structural reforms, stagnation in America is sustained byhistorically low policy rates, unsustainable leverage, and half a decade of debt purchases.

In the absence of major policy changes, America is moving toward the age ofdisquiet. That’s not good for the United States but nor is it good for China – and itcertainly does not support U.S.-Chinese economic relations.