The TPP after Trump

Global Asia - - CONTENTS - By Jef­frey J. Schott

The con­tin­u­ing com­mit­ment of the 11 TPP mem­bers re­main­ing after the us pulled out could have pro­found im­pli­ca­tions for asia and the world trade order.

The first tar­get of US Pres­i­dent Don­ald Trump’s bat­tle against what he sees as “un­fair” trade deals was the Tran­spa­cific Part­ner­ship, a free trade agree­ment from which Trump with­drew the US shortly after tak­ing of­fice. That move, fol­lowed by others, has deep­ened wor­ries that the ad­min­is­tra­tion is re­treat­ing from global trade norms.

But to the sur­prise of many, the 11 re­main­ing mem­bers of the TPP re­vised the deal and sol­diered on with­out Wash­ing­ton. That com­mit­ment to free trade could have pro­found con­se­quences for Asia and the world trade order, writes Jef­frey J. Schott.

US PRES­I­DENT Don­ald Trump with­drew from the Trans-pa­cific Part­ner­ship on his third day in of­fice on Jan. 23, 2017, seem­ingly de­rail­ing im­ple­men­ta­tion of the world’s most com­pre­hen­sive free-trade agree­ment. With­out its chief ar­chi­tect and largest econ­omy, the TPP seemed des­tined for ob­scu­rity.

But, sur­pris­ingly, the TPP has sur­vived largely in­tact. The 11 re­main­ing sig­na­to­ries in­cor­po­rated al­most all of its pro­vi­sions in a new, re­named Com­pre­hen­sive and Pro­gres­sive Agree­ment for Trans-pa­cific Part­ner­ship (CPTPP). The ap­pli­ca­tion of 22 TPP pro­vi­sions, mostly in­cluded at US in­sis­tence, was sus­pended in­def­i­nitely, pri­mar­ily to fa­cil­i­tate rat­i­fi­ca­tion in each coun­try. The fi­nal deal was signed in Santiago, Chile, on March 8 this year. And, ironically, the new pact could well en­ter into force sooner and ex­pand its mem­ber­ship faster than if Trump had not in­ter­ceded.

Ja­panese Prime Min­is­ter Shinzo Abe and the lead­ers of the other 10 coun­tries that signed the CPTPP de­serve sub­stan­tial credit for this con­struc­tive out­come. But in a per­verse way, so does Trump. With­out his un­prece­dented at­tacks on the rules­based post-war trad­ing sys­tem, and threats to pull out of FTAS with Canada, Mex­ico, and South Korea as well as the World Trade Or­ga­ni­za­tion (WTO), the other TPP sig­na­to­ries might not have moved ahead with the trade pact with such a sense of ur­gency.

From TPP to CPTPP

The orig­i­nal TPP was no­table for its large eco­nomic foot­print, cov­er­ing 12 coun­tries that gen­er­ate al­most 40 per­cent of global out­put, and for its sub­stan­tive obli­ga­tions that achieved the most com­pre­hen­sive up­dat­ing of trad­ing rules and trade re­forms since

the es­tab­lish­ment of the WTO in 1995. And, equally im­por­tant, the TPP com­ple­mented and re­in­forced US strate­gic en­gage­ment in the Asia-pa­cific re­gion at a time of grow­ing Chi­nese in­flu­ence. Some ob­servers ar­gued that the TPP was de­signed to “con­tain” China, an im­plau­si­ble goal for a trade pact whose mem­bers have sub­stan­tial trade and investment ties with China. But, in fact, the aim was more prag­matic and re­al­is­tic: to use the trade ac­cord to help each coun­try to “com­pete” more ef­fec­tively against China.

In large mea­sure, that is why the 11 re­main­ing

TPP sig­na­to­ries went for­ward with their re­gional

FTA de­spite the US with­drawal. They rec­og­nized that the deal still gen­er­ated im­por­tant in­come gains for each coun­try, al­though much less than with US par­tic­i­pa­tion, and that its trad­ing rules es­tab­lished high-stan­dard prece­dents for prospec­tive re­gional and mul­ti­lat­eral agree­ments. Given the lack of progress in WTO ini­tia­tives in re­cent years, the Asi­apa­cific talks have been the prin­ci­pal plat­form for up­dat­ing the world trade rule­book. Per­haps most im­por­tant, it com­ple­mented and re­in­forced do­mes­tic eco­nomic re­forms, pro­vid­ing im­pe­tus to in­no­va­tion and pro­duc­tiv­ity growth essen­tial for each econ­omy to keep pace with China and other part­ners in the dy­namic and com­pet­i­tive Asia-pa­cific re­gion.

Un­like the TPP, which re­quired rat­i­fi­ca­tion by the US and Ja­pan be­fore it could en­ter into force, the CPTPP “goes live” 60 days after six of the 11 mem­bers rat­ify the deal. Mex­ico al­ready has done so and progress on Cana­dian leg­is­la­tion has ac­cel­er­ated since Trump’s at­tack on Canada at the G-7 sum­mit in early June. Clearly, the CPTPP has be­come part of “Plan B” for Mex­ico and Canada in case Trump also dumps the North Amer­i­can Free Trade Agree­ment (NAFTA). Ja­pan, Aus­tralia, New Zealand and Sin­ga­pore also ex­pect to com­plete do­mes­tic ap­proval of the CPTPP this year, so CPTPP re­forms very likely will be im­ple­mented by early 2019 (for those coun­tries hav­ing al­ready rat­i­fied the pact).

Will the other CPTPP coun­tries quickly fol­low suit? Once the pact is im­ple­mented, other sig­na­to­ries will face in­creas­ing pres­sure to do so in order to re­ceive the CPTPP trade pref­er­ences. Sim­ply put, they can’t af­ford to stay out. Only Malaysia has voiced ma­jor con­cerns about the trade pact. Newly elected Malaysian Prime Min­is­ter Ma­hathir Mohamad, hark­ing back to his plan for an East Asian Eco­nomic Cau­cus (EAEC) put for­ward in the 1980s dur­ing his pre­vi­ous pe­riod as prime min­is­ter, sug­gested that CPTPP re­vi­sions were needed to pro­vide poorer mem­bers with spe­cial ben­e­fits to help them com­pete.

To­day, the clos­est anal­ogy to the EAEC is the Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship (RCEP), the on­go­ing ne­go­ti­a­tions among the 10 mem­bers of the As­so­ci­a­tion of South­east Asian Na­tions and their six FTA part­ners. The CPTPP and RCEP are com­ple­men­tary ar­range­ments, al­though the RCEP is less ju­ridi­cal and seeks more lim­ited and in­cre­men­tal re­forms. Those coun­tries that want to use trade pacts to pro­pel eco­nomic re­form join both. Seven of the 16 RCEP coun­tries are also sig­na­to­ries to the CPTPP (see Ta­ble 1 overleaf) and others such as In­done­sia and Thai­land are con­sid­er­ing join­ing.

Ma­hathir’s throw­back pro­posal is ill-suited to glob­al­ized mar­kets of the 21st cen­tury and un­likely to gar­ner sup­port by any of the other coun­tries. The poor­est CPTPP econ­omy, Viet­nam, knows its suc­cess in at­tract­ing for­eign investment de­pends im­por­tantly on the eco­nomic re­forms the pact re­quires. Malaysia would likely lose trade and investment to Viet­nam if it de­lays rat­i­fi­ca­tion. Ma­hathir’s al­ter­na­tives are to rely on RCEP and slow-walk re­form, or to deal bi­lat­er­ally with China and the US — good luck with that! Seen in this light, Malaysia will likely con­clude, al­beit grudg­ingly, that it needs to im­ple­ment the CPTPP along with the other 10 CPTPP sig­na­to­ries.

Ex­pand­ing CPTPP Mem­ber­ship

By early 2019, the CPTPP will be open to new mem­bers. Those coun­tries will have to ac­cept ex­ist­ing CPTPP pro­vi­sions and then ne­go­ti­ate their

trade lib­er­al­iza­tion com­mit­ments in a process com­pa­ra­ble to WTO ac­ces­sion.

There al­ready is a grow­ing queue of coun­tries con­sid­er­ing ac­ces­sion once the CPTPP en­ters into force. Al­though it is called a Trans-pa­cific pact, the CPTPP is in fact open to all coun­tries and sep­a­rate cus­toms ter­ri­to­ries. Colom­bia al­ready for­mally no­ti­fied its in­tent; South Korea, Tai­wan, Thai­land and the United King­dom also are in­ter­ested. In­deed, the UK could be­gin ne­go­ti­at­ing ac­ces­sion in 2019 that would take ef­fect after the Brexit tran­si­tion pe­riod—and its gov­ern­ment al­ready has hired a knowl­edge­able New Zealan­der, and for­mer

TPP ne­go­tia­tor, to lead the talks. Imag­ine the pos­si­bil­i­ties for man­ag­ing Brexit if the Euro­pean Union adopted a sim­i­lar ap­proach to­ward ac­ces­sion to the CPTPP!

With ex­pand­ing mem­ber­ship, the CPTPP could soon be­come the world’s most im­por­tant driver of trade re­form.

The CPTPP: A Place for the US … and China?

Why did the US leave the TPP, and will it re­turn to the CPTPP? Trump dumped TPP to put paid to a cam­paign prom­ise to re­vise or re­voke “bad” trade deals that he re­gards as re­spon­si­ble for the large US mer­chan­dise trade deficit. He and his cabi­net ar­gue that US ne­go­tia­tors paid too much and got too lit­tle in re­turn, even though the TPP would have re­quired few changes in US law and prac­tice. Their cri­tique seems to fo­cus pri­mar­ily on TPP rules on auto con­tent that are even less re­stric­tive than those in NAFTA—AND Trump is try­ing to re­write NAFTA’S au­to­mo­bile rules of ori­gin to force auto com­pa­nies to move more of their pro­duc­tion of auto parts and fi­nal as­sem­bly of cars and trucks back to US plants.

Ironically, the US stands to be the big­gest loser from Trump’s ill-con­sid­ered with­drawal from the

TPP. In­stead of gain­ing more than US$130 bil­lion in real in­come from TPP re­forms, the US econ­omy is likely to suf­fer small losses as US firms lose sales to

com­peti­tors ben­e­fit­ing from CPTPP tar­iff pref­er­ences. And it is also los­ing the pre­dom­i­nant in­flu­ence US of­fi­cials have had through­out the post­war era in writ­ing the rules for the in­ter­na­tional eco­nomic sys­tem based on Amer­i­can val­ues and pri­or­i­ties. Leav­ing the TPP means not be­ing at the ne­go­ti­at­ing ta­ble as the trad­ing rules evolve in the CPTPP and are ap­plied to e-com­merce, sup­port for state-owned en­ter­prises (SOES) and cross-bor­der investment.

To be sure, the CPTPP coun­tries have kept the door open for the US to join. But such a US pol­icy re­ver­sal is un­likely in the near term, given Trump’s dis­mis­sive at­ti­tude to­ward re­gional and mul­ti­lat­eral trade pacts. At times, Trump has tweeted that he would re­con­sider if the re­vised deal were sub­stan­tially bet­ter. But what that re­ally means is that he wants other coun­tries to open their mar­kets more to US ex­porters, and ac­cept fewer US con­ces­sions, than pro­vided in the orig­i­nal TPP. That deal is not on of­fer; in­deed, it would not pass muster in po­lit­i­cal de­bates in the Ja­panese Diet or other leg­is­la­tures.

But if US of­fi­cials changed course and asked

CPTPP coun­tries to aug­ment the deal (i.e. adding new pro­vi­sions on e-com­merce or dis­ci­plines on sup­port for SOES) in­stead of re­vis­ing ex­ist­ing pro­vi­sions, there could be a vi­able path­way for US par­tic­i­pa­tion. Such an en­hanced deal could re­sult from ne­go­ti­a­tions on US ac­ces­sion to the CPTPP or the for­mu­la­tion of a new, broader pact—draw­ing heav­ily on TPP/CPTPP prece­dents—that could in­clude the US, China, and other Asia-pa­cific na­tions. Such a prospect seems re­mote at a time of ris­ing Us-china trade ten­sions. But a new re­gional ini­tia­tive, based on stud­ies co-chaired by the US and China in the Asia-pa­cific Eco­nomic Co­op­er­a­tion (APEC) fo­rum, could yet emerge as the two eco­nomic su­per­pow­ers search for ways to cir­cum­vent their cur­rent trade con­flicts. Per­haps the CPTPP may yet be­come the long-sought path­way for Asia-pa­cific eco­nomic in­te­gra­tion!

Trump’s exit opened the door for China to as­sert a more pro­nounced leadership role in the re­gion and to deepen its bi­lat­eral ties with the other TPP coun­tries. As Ta­ble 1 shows, China al­ready trades more with each of the CPTPP coun­tries than the US, ex­cept for NAFTA part­ners Canada and Mex­ico. To­gether, the mer­chan­dise trade of the 11 coun­tries with China ex­ceeded US$860 bil­lion in 2017 and rep­re­sented al­most 20 per­cent of their to­tal mer­chan­dise trade. China has or is con­duct­ing or plan­ning to ne­go­ti­ate trade pacts with each CPTPP mem­ber, ex­cept Mex­ico. And it also is ne­go­ti­at­ing up­grades to those pacts al­ready in force.

Would China take the next step and ask to join the CPTPP? Chi­nese of­fi­cials have been study­ing the TPP for sev­eral years to as­sess how its pro­vi­sions would fit with their planned eco­nomic re­forms and de­vel­op­ment strate­gies. In many ar­eas, China could com­ply with CPTPP re­quire­ments; but chap­ters on in­tel­lec­tual prop­erty rights, la­bor, and SOES cross red lines for Chi­nese pol­i­cy­mak­ers. The CPTPP would have to be trimmed to ac­com­mo­date Chi­nese par­tic­i­pa­tion, a prospect as un­likely as Trump’s re­ver­sal of his de­ci­sion to with­draw from the TPP.

For the next few years, CPTPP mem­ber­ship will thus likely grow with­out the US or China. But that might be a good thing. As Trump breaks WTO rules with his pro­tec­tion­ist poli­cies, and China skirts WTO rules with its high-tech ini­tia­tives, we need the CPTPP mem­bers to con­tinue work­ing to re­in­force the rules­based world trad­ing sys­tem.

Jef­frey J. Schott is a se­nior fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics in Wash­ing­ton, and co-au­thor and co-edi­tor of Tran­spa­cific Part­ner­ship: An As­sess­ment (2016).

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