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Why TPP Is Good For America Today, But Probably Not Tomorrow

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All startups tells some version of the same story about their early days.  Either they ran as fast as they could or crossed many bridges to get velocity for their company.  Underlying their preferred cliché is the image of a robust infrastructure they use to build their idea and create value.   We need to think of the Trans-Pacific Partnership (TPP) as part of building that infrastructure.

TPP is shorthand for a massive free trade agreement that the United States is negotiating with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  According to the United States Trade Representative (USTR), the United States ships more than $1.9 billion in goods to TPP countries every day.  This Free Trade Agreement promises to pave a smoother road and build bridges by addressing issues like intellectual property, tariffs and legal recourse that slow the speed of commerce between these nations.

So is TPP good for entrepreneurs, startups and small business owners? Upon reviewing the official documents, the answer appears to be that it depends on where you live.  If you are a startup in the United States, the TPP could have some important benefits in the short term, but will also increase the speed at which America’s competitive advantages erode.

If you are a startup or small business in some of the other nations, the TPP is probably a huge deterrent to growth in the short term. But if leveraged correctly, it could level the playing field faster than if there is no free trade agreement in place.

So entrepreneurs…hold your nose and support TPP.

As far as we can tell, TPP negotiations have generally not focused on high-growth startups or the innovation that they create.  Governments have publicized TPP as the first trade agreement with a “chapter” about small and medium enterprise.  But all indications are that TPP only promises to help SME’s get information about foreign tariff schedules and import-related regulations.  More telling, negotiations on the SME “chapter” ended in May 2012 – before globally disruptive technology like WhatsApp even existed.

This is short-sighted.  According to the Congressional Research Service, “small- and medium-sized enterprises (SMEs) account for the majority of firms involved in international trade (about 97%), but they account for a much smaller share of the value of U.S. trade – only about 30%.  And yet, they employ approximately half of the U.S. workforce in the nonfarm private sector.”

If I were a startup or small business owner, this set of statistics should make me wary about TPP.  It would seem to imply that the treaty is skewed towards larger companies and sectors outside the knowledge economy like agriculture.

But America is the world leader in innovation, research & development and entrepreneurial climate.  And when viewed through this broader lens, there are several components of TPP from which American startups and small businesses will benefit greatly.

First, the intellectual property section of TPP could be extraordinarily beneficial to Americans for the next decade or so. TPP extends IP protection for innovation, products and services even further than the WTO or TRIPS framework did.  It also extends copyrights up to 70 years, and it promotes patent “ever greening” – the practice of extending patents based on minor adjustments.  America’s startups are often funded based on defensible IP and grow based on strategies to extend that IP.

Secondly, there are many things that the technology industry can support here, including agreements to ensure that data can move freely across borders and that this data can remain exclusively with the company hosting the data (with safeguards for privacy and emergency).   In addition, there will be no customs on digital content or software; no discrimination with regards to the source or location of data, and reasonable network access for telecom providers. Given America’s leadership in Big Data, these guidelines will disproportionately benefit American firms.

Thirdly, participating countries will not be allowed to favor local industry.  They will not be allowed to erect tariffs or other non-competitive barriers for nascent industries they are seeking to nurture.  America wins here again, particularly in the innovation economy, where countries are often creating investment incentives and regulatory barriers in order to create or prop-up domestic industry.  In areas like life sciences or Big Data, where American innovation is generally superior, our startups can compete head-on without fear of IP theft or protectionism.

There are other areas where American startups will benefit in the short term as well, including the free movement of capital and an arbitration process that countries must agree to.

And less discussed, but equally important, is that TPP is a stepping stone towards future free-trade agreements and bilateral investment treaties with China and India.  Along with the United States, they will be the two largest economies in the world by 2030, and the stakes for American business are much greater than with the TPP nations.  A successful TPP should make negotiations with China and India easier.

If you are a startup outside the United States, however, TPP is not looking very good.  It may be good for large-scale, low-wage manufacturers and extraction industries like mining and timber, but it could put a clamp on innovation-driven high growth startups.

The same IP regime from which American innovation can benefit will be misused by larger companies to stifle progress in the developing world.  In the pharmaceutical industry in particular, there has been rightful indignation about the extension of patents and stifling requirements on the pricing of medication.  TPP aims to keep the generics industry outside its borders, and potentially may keep lifesaving medications away from citizens – particularly in Malaysia, Mexico, Peru, and Vietnam, which still qualify for reduced-cost medication under World Bank and United Nations rules.

Not only will TPP stifle an entrepreneurial generics industry, but the arbitration process generally mirrors that of the United States and Europe, which again, stacks the odds in favor American startups with patents or larger companies with lawyers. To be fair, arbitration has not historically proven to be radically unfair in determining outcomes, but the potential will exist.

Lastly, the global entrepreneurial movement has been largely funded by governments.  There has been a boom in government funding, with national, state and local officials realizing that entrepreneurs are the job and industry creators of the future.  And they have adjusted their strategic plans to fund entrepreneurship centers, R&D and accelerators.  The TPP’s prohibition on preferences for local industry could have a chilling effect on this movement.  If governments cannot subsidize local entrepreneurs or industries with procurement preferences or cash incentives, and if those startups have to compete head on with well-funded, technologically superior American startups, they are going to lose.

If you believe that innovation, entrepreneurship and private enterprise are important to improving living standards around the world, then stifling it for short-term benefit will not create the goodwill that the United States seeks from this treaty.

On the other hand, we can hope that the other nations in the TPP use this platform to invest in the education of their citizens, fund R&D, and nurture entrepreneurship.  If they can do this, then America’s advantage will quickly erode.  Vietnamese and Chilean startups will be able to manipulate the same rules that currently favor Americans for their on growth.

Startups want to run fast.  TPP is the dirt road that gives them a path to run on.  We just need to ensure that it eventually gets paved and doesn’t become a toll road for fat multinationals.