A serviceable deal
TPP is intended to spark a boom in trade in services, but it will be decades in the making Nov 14th 2015 | From the print edition Timekeeper IT DID not take long for America’s presidential candidates, busy though they must be, to digest the 6,000 pages of the agreement creating the “Trans-Pacific Partnership” (TPP). America and 11 other countries of the Pacific Rim struck the trade deal in early October, but the full text was not released until November 5th. Within days Bernie Sanders, a Democrat, had rendered judgment: “It’s even worse than I thought.” Donald Trump, a Republican, labelled it “insanity”.
Even people of a less protectionist bent are unimpressed, complaining that TPP’s short-term benefits will be indetectably modest. One estimate suggests that in its first ten years it will cause its members’ exports of goods and services to rise by just $308 billion in total. In 2003-13 global trade in goods and services grew by more than $1 trillion a year on average. A ten-year horizon misses the point, however. TPP’s real promise lies in the liberalisation of trade in services. Just as it took decades for supply-chain integration to flower into the rapid goods-trade growth of the 1990s and 2000s, the pay-off from TPP, and deals like it, is further off. TPP cuts tariffs for some important industries, such as cars and agriculture, but its main concern is to eliminate non-tariff barriers, such as onerous customs procedures, buy-domestic rules for government agencies and regulatory barriers to trade in services. Indeed, Hillary Clinton, another Democratic presidential candidate, who was for TPP before she was against it, once said it set “the gold standard” in this respect.
Not all services can be traded: outside of border-straddling cities, the international trade in manicures, say, is limited. Yet parts of other service industries, including finance, telecommunications, education and health care, are increasingly tradable thanks to advances in information technology. Such services account for an enormous share of GDP and employment in most rich countries, but only a tiny sliver of trade. Liberalisation could open them up to global competition. Hospitals in America, for instance, could outsource patient monitoring to nurses in Malaysia, diagnostics to technicians in India, and consultations to doctors in Canada, to the benefit of all four countries.
Fulfilling that hope will be hard. Trade typically grows in step with GDP. It grew rapidly in the decades after the second world war, for example, largely because the world’s big economies were expanding so fast. So TPP’s benefits may be held in check in the short-run by weak demand around the rich world.
But instigating a trade boom takes time as well as a propitious environment. Beginning in the 1980s trade began behaving strangely, growing twice as fast as GDP. This burst originated in a revolution in supply chains that had been decades in the making. For most of industrial history, countries traded raw materials or finished goods, with the process of turning the one into the other located entirely within a single country, and often within a single factory. From the 1980s, however, a large and rapidly growing share of trade consisted of “intermediate goods”. Rather than produce a computer from scratch in one country, for example, a tech firm would source components from several different countries, bring them together in yet another country for assembly, and then ship the completed good to consumers around the world. As a result, rising GDP led to even greater jumps in trade.
The great supply-chain revolution was slow in coming, however. Tariff rates fell precipitously from the 1940s to the 1980s, by which time the duties imposed on most goods traded between rich economies had fallen to negligible levels. The shift to container shipping, which made transit by sea much faster and more reliable, was largely over by the early 1980s. From 1950 to 1985 the cost of a long-distance phone call dropped dramatically. Yet it was not until the 1990s that the supply-chain boom really got going, abetted in part by China’s economic opening.
About half of the current slowdown in trade growth represents the exhaustion of this process. At the turn of the century, for instance, imported parts accounted for nearly 55% of goods exported by China. By 2012, that share had fallen to 35%. Some large economies, like America and China, are keeping more of their supply chains for themselves. As China’s rich coastal cities have progressed from the assembly of electronics to the development of more sophisticated components and designs, assembly work has often moved to poorer inland cities rather than to China’s poorer neighbours. Hence the importance of services.
Long-haul service
There are lessons here for those awaiting a service-trade boom. TPP in its present form is just one element of several which must fall into place. Barriers to trading services remain prohibitively high, equivalent to an average tariff of 15-17% in Canada, Australia and Japan and 44% in Mexico, according to the Peterson Institute for International Economics, a think-tank. Provisions within the TPP deal to work toward mutual recognition of some professional certifications still need to be seen through. Adding China, which is currently excluded, would greatly help. So would completion of the Trans-Atlantic Trade and Investment Partnership, a mooted trade pact between America and Europe which is also preoccupied with services, and a multilateral Trade In Services Agreement being negotiated at the World Trade Organisation.
Technological change is also needed. Cross-border internet traffic grew 18-fold between 2005 and 2012, according to the McKinsey Global Institute, an arm of the consulting firm. Further advances—to enable even better digital translation, for example—would help overcome the cultural and personal barriers to trade in services. One day service industries may be as efficient and as globally integrated as manufacturing is today. TPP is a step toward that ideal, but just one of many that are needed.
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