The new trade agree­ment has the same goals as its pre­de­ces­sor – but it’s miss­ing one key mem­ber

Financial Mirror (Cyprus) - - COMMENT - By Phillip Or­chard

The Trans-Pa­cific Part­ner­ship may have life in it yet. On his first day in of­fice, nearly two years ago, U.S. Pres­i­dent Don­ald Trump with­drew from the TPP, ef­fec­tively leav­ing the land­mark trade pact for dead. As it turns out, the agree­ment was only mostly dead.

On De­cem­ber 30, the clum­sily rechris­tened Com­pre­hen­sive and Pro­gres­sive Agree­ment for Trans-Pa­cific Part­ner­ship came into force. The pact re­moves some 98% of tar­iffs across an 11-mem­ber bloc that ac­counts for more than one-tenth of global trade and in­cludes crit­i­cal sup­ply chain and in­vest­ment hubs on three con­ti­nents.

Its re­vival is a re­mark­able diplo­matic feat – un­der­cut­ting nar­ra­tives of the im­pend­ing doom of global free trade. And it il­lus­trates the sense of ur­gency Pa­cific Rim coun­tries are feel­ing to man­age the dis­rup­tions ac­com­pa­ny­ing China’s rise, with or with­out the United States. Thus, the pact is about more than ex­pand­ing trade among mem­ber states; it’s also about coun­ter­ing grow­ing threats to the ex­ist­ing or­der that fu­eled the re­gion’s rise.

The U.S.-led push for the orig­i­nal 12-mem­ber pact and the Ja­pan- and Aus­tralia-led re­vival were both mo­ti­vated by two over­rid­ing ob­jec­tives: to mod­ernise the global trade ar­chi­tec­ture and to pre­vent China from suc­cess­fully op­er­at­ing out­side of that frame­work. Ul­ti­mately, though, its suc­cess will still de­pend on whether the U.S. can be coaxed back into the fold.

The Im­per­a­tive for Re­form

For the last 70 years, the global econ­omy has been driven by what is de­scribed as an open, rules-based trade frame­work. The U.S. cham­pi­oned open trade – throw­ing its weight be­hind agree­ments like the Gen­eral Agree­ment on Tar­iffs and Trade in 1948 and its suc­ces­sor, the World Trade Or­gan­i­sa­tion. These frame­works helped bring an end to the tit-for-tat trade es­ca­la­tions that had con­trib­uted to eco­nomic chaos in the first half of the 20th cen­tury. They also al­lowed the U.S. to ex­port sur­plus in­dus­trial ca­pac­ity it had built up dur­ing World War II, ce­ment U.S. pri­macy and build an al­liance struc­ture whose pros­per­ity stood in stark con­trast to com­mu­nist sys­tems. The doors to ac­ces­sion were thrown wide open to al­lied economies, and the U.S. asked lit­tle in re­turn, hop­ing merely that un­lock­ing growth in war-rav­aged states would re­store sta­bil­ity and di­min­ish the need for di­rect U.S. in­ter­ven­tion.

The trade in­fra­struc­ture de­signed by the U.S. has, by many mea­sures, been a re­sound­ing strate­gic and eco­nomic suc­cess. Since 1948, tar­iffs have dropped by 80% world­wide and trade has dou­bled as a share of the global econ­omy. The Soviet bloc crum­bled, un­able to keep up with western dy­namism and the re­sult­ing growth in mil­i­tary ca­pac­ity. The sys­tem helped “Asian Tigers” like Ja­pan, South Korea and Tai­wan re­cover from mid-cen­tury wars and emerge as high­tech ex­port pow­er­houses. And it po­si­tioned Pa­cific Rim coun­tries from Sin­ga­pore and Malaysia to Mex­ico to play crit­i­cal roles in global sup­ply chains em­a­nat­ing from Asia.

But the sys­tem has in­creas­ingly strug­gled to keep up with its suc­cess and is des­per­ately in need of up­dat­ing. The rapid in­dus­tri­al­i­sa­tion of low-cost ex­porters dis­torted mar­kets and ac­cel­er­ated the loss of la­bor-in­ten­sive man­u­fac­tur­ing jobs in ad­vanced economies. Si­mul­ta­ne­ously, ef­forts to up­date in­fra­struc­ture to han­dle mod­ern sec­tors where ad­vanced economies had com­par­a­tive ad­van­tages – in­clud­ing in­vest­ment, ser­vices, high-tech man­u­fac­tur­ing and the dig­i­tal econ­omy – have re­peat­edly stalled. What­ever the longterm ben­e­fits of free trade, short-term dis­rup­tions in­evitably erode po­lit­i­cal sup­port for open sys­tems. The wide­spread western per­cep­tion that low-cost ex­porters have been en­joy­ing mar­ket ac­cess un­locked by the global sys­tem with­out com­ply­ing with its rules – even stymieing much­needed up­dates – has made free trade syn­ony­mous with un­fair trade.

These strains on the sys­tem are felt most acutely in the stag­na­tion of the WTO. The body’s rules have not been sub­stan­tively up­dated in nearly 25 years, and reach­ing an agree­ment to re­form an or­gan­i­sa­tion with 164 mem­bers would be a her­culean feat. The re­form priorities of de­vel­oped na­tions don’t nec­es­sar­ily align with the in­ter­ests of de­vel­op­ing economies. A num­ber of emerg­ing heavy­weights like In­dia have con­trib­uted to the grid­lock. And even the U.S. is blocking ap­point­ments of new ap­pel­late judges and threat­en­ing to ig­nore WTO rul­ings al­to­gether – which would com­pletely de­fang the in­creas­ingly tooth­less body. But China’s ex­po­nen­tial growth since it joined the group in 2001, along with its ap­par­ent un­will­ing­ness to end its mer­can­tilist trade prac­tices, has done the most to ex­pose how out­dated and in­ef­fec­tive the WTO has be­come.

China: Kept at Bay, or in the Fold?

For western and Pa­cific Rim coun­tries, the pri­or­ity has not been to blunt China’s rise, but rather to con­vince Bei­jing to play by a shared set of rules. Sev­er­ing ties with China would be pro­foundly dis­rup­tive and laden with op­por­tu­nity costs, given the ex­tra­or­di­nary growth of the Chi­nese con­sumer mar­ket. Low-cost Chi­nese ex­ports, mean­while, have sup­pressed inflation in ad­vanced economies and mit­i­gated the pain of wage stag­na­tion that has re­sulted from the loss of la­bor-in­ten­sive man­u­fac­tur­ing jobs.

While China is partly to blame for those losses, au­to­ma­tion and the rise of other low-cost man­u­fac­tur­ers mean those jobs aren’t com­ing back en masse. Thus, ad­vanced economies need ac­cess to Chi­nese con­sumers, ex­ports and in­vest­ment – but they also need to pro­tect them­selves from Chi­nese trade prac­tices that threaten to hob­ble their own firms. The WTO was de­signed to deal with this very dilemma – but it’s no longer up to the task.

What else can be done? One ap­proach is to bring China to heel through uni­lat­eral pres­sure. The Trump ad­min­is­tra­tion’s tar­iffs are the lat­est and most ag­gres­sive ex­am­ple of this ap­proach, but there are lim­its to this strat­egy.

The size of China’s con­sumer mar­ket is giv­ing it the abil­ity to punch back with greater force. It’s also mak­ing it hard for the U.S. to build that which Bei­jing fears most – a united front against China. As U.S. firms cede ground in the Chi­nese mar­ket due to Bei­jing’s re­tal­ia­tory tar­iffs, it opens op­por­tu­ni­ties to firms from other coun­tries, in­cen­tivis­ing them to stay out of the trade war. (A month after the Septem­ber round of U.S. tar­iffs kicked in, for ex­am­ple, Ja­panese ex­ports to China in­creased 9% year on year.)

An­other ap­proach is to build out mul­ti­lat­eral trade in­fra­struc­ture around pacts like CPTPP, ef­fec­tively forc­ing China to choose be­tween iso­la­tion and com­pli­ance. Such agree­ments can func­tion like a WTO pre­mium: ben­e­fits like ex­panded mar­ket ac­cess can be of­fered in re­turn for com­pli­ance with an up­dated set of rules.

The pact con­tains guide­lines on in­vest­ment, intellectual prop­erty, labour and en­vi­ron­men­tal pro­tec­tions, and the role of state-owned en­ter­prises – fea­tures ad­vanced economies would like to in­cor­po­rate in up­dated WTO rules. Fear of miss­ing out on CPTPP’s perks has proved to be a pow­er­ful mo­ti­va­tor for re­form among mem­ber states – and a use­ful tool for gov­ern­ments grap­pling with en­trenched in­ter­ests over cer­tain re­form mea­sures. (Ja­pan, for ex­am­ple, has used the lure of the agree­ment to take on its agri­cul­tural lobby. Malaysia and Viet­nam are us­ing it to dis­man­tle state-owned en­ter­prises.)

Prac­ti­cally, how­ever, the Com­mu­nist Party of China can­not adopt lib­eral eco­nomic re­forms as quickly and com­pre­hen­sively as the West would like with­out risk­ing its hold on power. Bei­jing will chip away at the edges of lib­er­al­i­sa­tion to bet­ter tap into its la­tent dy­namism and keep western mar­kets open to Chi­nese ex­ports. But if forced to choose be­tween open­ing up and re­tain­ing its hold on power, the CPC will al­ways choose the lat­ter. More­over, China has a fun­da­men­tal strate­gic in­ter­est in tilt­ing the mil­i­tary bal­ance of power in the Indo-Pa­cific. It can’t yet up­root the U.S. al­liance struc­ture by force, so Bei­jing’s best bet is to deepen its eco­nomic in­flu­ence in neigh­bour­ing coun­tries suf­fi­ciently to turn them against the U.S. and its al­lies. This re­quires an in­tense cam­paign of eco­nomic state­craft, in­clud­ing tools like state-owned en­ter­prises and banks and in­dus­trial sub­si­dies – which the West blames for dis­tort­ing mar­kets.

Tar­iffs won’t change any of this; threats of iso­la­tion may

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