Economics

The TPP – Commercial or Foreign Policy Victory?

Jing Han, MJLST Staffer

The Trans-Pacific Partnership (TPP) is a proposed trade among twelve Pacific Rim countries, which are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, United States, Singapore and Vietnam, concerning a variety of matters of economic policy, about which agreement was reached on October 5, 2015 after 5 years of negotiations. The 12 countries including the United States of America have agreed to build a new cooperation structure through this agreement. TPP’s 30 chapters have set binding rules on everything from service-sector regulation, investment, patents and copyrights, government procurement, financial regulation, and labor and environmental standards, as well as trade in industrial goods and agriculture. The combined Gross Domestic Product-GDP of the world’s largest pact of these 12 countries is nearly 28 trillion dollars. Those dozen states account for roughly forty percent of global gross domestic product, thirty percent of global exports and twenty-five percent of global imports.

Some people believe that one of the reasons for the recent push for new trade initiatives is a feeling that the WTO system is not working. This view is probably not an uncommon one. But is it correct? It is worth looking at just what the WTO does, and how it compares to the TPP as a possible alternative trade agreement and organization.

First, all 159 WTO members have made promises not to charge tariffs above rates that are set out in legally binding schedules. The TPP does have the potential to go further than the WTO in terms of tariff reductions and services liberalization. Of course, such commitments would be preferential, only given to a handful of trading partners, and thus would not be truly free trade. There are significant economic benefits to having free trade cover as many countries as possible, including the avoidance of complex and trade-restricting rules of origin.

Second, WTO rules also discipline special tariffs imposed against dumping and subsidies. Through the WTO, these tariffs are subject to detailed rules to prevent them from being abused, which they frequently have been over the years. The TPP will not address anti-dumping/countervailing duties or subsidies at all. And the WTO’s rules on regulatory protectionism are already working quite well, so it is difficult to imagine what the TPP would do in this regard.

Third, WTO rules govern customs procedures, including valuation and classification issues, to prevent these procedures from being used as a disguised means of protection. Furthermore, WTO rules include general prohibitions on using domestic regulations and taxes for protectionist purposes. The WTO’s jurisprudence on these issues is widely respected, and WTO rulings have addressed a range of regulatory protectionism. The TPP would also go beyond the WTO in areas such as intellectual property protection, foreign investment protection, and environmental and labor regulation. But further is not necessarily better. These items have been added to the trade agenda to drum up new support. However, they have also stirred up a good deal of new opposition, and made trade negotiations more complex and difficult.

Fourth, Congress recognized “the growing significance of the Internet as a trading platform in international commerce” and instructed President Obama to achieve objectives concerning digital trade in goods and services and cross-border data flows. The Obama administration wants “digital trade rules-of-the-road” in the TPP agreement. These rules could mark a turning point in the global governance of digital commerce. The importance of digital technologies to trade has grown without multilateral rules keeping pace. The WTO is the main source of multilateral trade agreements, but it was established before the Internet transformed how companies produce, sell, and deliver products and services. In a declaration of 1998, WTO members agreed not to impose customs duties on electronic transactions and recognized the need to address e-commerce directly. However, the WTO’s e-commerce work program has not progressed much because WTO members disagree on various issues.

Fifth, beyond the commercial implications, many experts regard the TPP as a key part of American foreign policy. Amid the rise of China and its increasing exercise of political and military power in East Asia, the Obama administration has said it would turn its attention more to the East, the so-called pivot to Asia, in an effort to strengthen U.S influence in that region. The challenge for China, should it wish to join the TPP, is undertaking the reforms that the agreement would require. For instance, joining TPP will require opening markets in areas such as services and investment and agreeing to new rules in sensitive areas such as the role of state-owned enterprises and access to the Internet. That said, many of the reforms that becoming a TPP party would require are consistent with the internal reforms that China has already identified as being necessary, including reform of its financial sector, strengthening the role of services in the Chinese economy, and encouraging innovation.

In sum, The WTO is an excellent system. Its great strength is its multilateral framework, incorporating most of the world’s nations. However, with the advent of the 21st century, the limits of the WTO’s functions have become increasingly apparent. The Doha Round, marked by conflict between the opinions of developed and emerging nations and the subsequent stalling of negotiations, stands as a symbol of these limits. With more nations participating and more comprehensive liberalization being pursued, it is unavoidable that negotiations will face difficulties. In relation to the TPP, a former senior U.S. official is said to have commented that the U.S. sought to demonstrate its level of commitment to the Asia-Pacific region through its active involvement in the agreement negotiations. The Asia-Pacific region is becoming increasingly important to the U.S., and this fact is manifested in the nation’s initiatives in relation to the TPP. In this respect, the TPP has more political implications compared with its commercial considerations.


Regulating the Sharing Economy: Fostering Innovation and Safety

Steven Groschen, MJLST Managing Editor

The sharing economy is a marketplace for individuals to exchange goods and services directly with one another. In the past, sharing economy participants, whom wished to lend their property and time directly to others, had the challenge of finding a way to connect with individuals seeking to borrow property and services. The internet and other modern communication systems have provided opportunities for overcoming this barrier. Consequently, the cost of matching a particular individual’s demand with another individual’s supply (i.e. transaction costs) within the sharing economy has been greatly reduced. As a result, sharing is quickly becoming a cost-effective and environmentally friendly option for ordinary consumers.

Not everyone is fond of the sharing economy movement. Long-established institutions and industries are experiencing increased competition by competitors whom are not always required to play by the same rules. For instance, the increasingly popular ride sharing system, Uber, has received scrutiny from players in the current taxi system. They argue that Uber is unfairly competing because it is not subject to the same regulations as traditional taxi drivers.

Regulators are challenged to find the optimal method of regulating the emerging sharing economy. Enacting regulations that are too strict will impede the innovation generated by sharing economy startup companies. On the other hand, regulations that are too lenient may threaten another core value: protecting the safety of consumers. Unregulated and non-centrally controlled systems of transportation run the risk of having a wide variance in outcomes. One Uber taxi driver may be perfectly safe, whereas another creates a hazard on the streets. Some are concerned there should be more government oversight and regulation addressing these risky drivers.

Professor Sofia Ranchordás suggests “establishing, broader, principle-based regulation[s]” is the answer to the legal problems created by the sharing economy. The use of principles rather than specific regulations acknowledges that technology is constantly changing. Broad regulations are designed to be more adaptable to changes in technology. As a result, this method of regulation protects two of the important goals of the sharing economy. First, bottom-up innovation is not stifled by rigid regulations that prohibit experimentation. Startup companies in the sharing economy are free to experiment so long as they stay within the boundaries of the broad principles. Second, there is more flexibility to create regulations addressing concerns for safety and general consumer protection. Regulators are not restricted to a narrow definition of what is “safe,” thus technology changes affecting safety are more easily managed.


Bitcoin Regulation: Lifeline or Kiss of Death?

Ethan Mobley, MJLST Articles Editor

Bitcoin’s ever-increasing popularity has sparked fierce debate over the extent to which the alternative currency should be regulated, if at all. Bitcoin, a “cryptocurrency,” is the leading digital currency used today. The cryptocurrency can be used to buy and sell goods online or in traditional brick-and-mortar stores but is also used for speculative currency trading. As Bitcoin is adopted by more and more users, numerous businesses have sprouted geared toward facilitating Bitcoin transactions. One such company is Coinbase, which serves as a currency exchange allowing users to buy and sell Bitcoin (XBT) for USD and other currencies. Coinbase also acts as a “wallet” for Bitcoin, allowing users purchase Bitcoin at the market exchange rate, store that Bitcoin on their phone, and then pay for items using their phone’s “wallet.”

Bitcoin proponents claim the cryptocurrency is superior to traditional fiat for several reasons: 1) Bitcoin supply is self-regulating, and hence not susceptible to changes in government policy; 2) Bitcoin eliminates transaction costs between the buyer and seller of goods, which is especially helpful for small merchants; and 3) buyers using Bitcoin are not vulnerable to identity theft if the merchant incurs a security breach. Bitcoin opponents argue the cryptocurrency is problematic because it can be used for illicit purposes (e.g. transactions on Silk Road) while protecting its users due to relative transaction anonymity. Whatever the advantages and disadvantages, Bitcoin’s success is ultimately dependent upon wide-spread use by buyers and sellers and government regulation that permits free-use of the currency.

Recently, California legislators introduced a bill to regulate digital currencies. California isn’t the first state to consider such legislation, but it is arguably the most important considering California is home to more Bitcoin users than any other US state. Specifically, California AB-1326 would establish a regulatory framework for entities engaged in the “virtual currency business,” which would impose licensure and fee requirements on those entities. As defined, a “virtual currency business” is one that maintains “full custody or control of virtual currency in this state on behalf of others.” Specifically excluded from the bill are entities primarily engaged in buying and selling goods or services. Thus AB-1236 would not impose any burden on retailers–only quasi-banking entities like Coinbase would be subject to the regulation. Such regulation would ideally reduce Bitcoin market risk and volatility, thereby making the cryptocurrency a more viable alternative to traditional fiat. Nevertheless, Bitcoin advocacy groups disagree over whether the bill will ultimately encourage or inhibit widespread adoption of Bitcoin. After all, Bitcoin’s government-independence is one of its most beloved features. Agree or disagree with policies advanced by AB-1236, but one thing is clear—Bitcoin’s ubiquitous influence makes widespread regulation inevitable, and early legislation such as AB-1236 will serve as a model for other states to follow.