President Donald Trump has consistently moved to dismantle Barack Obama’s legacy policies, and the Trans-Pacific Partnership (TPP), a regional trade agreement originally between 12 countries, is no exception. Soon after he came into office, Trump formally withdrew the U.S. from TPP, a sweeping accord encompassing Pacific-Rim nations that together accounted for about 40 percent of global economic output and a third of world trade.
As the U.S. dropped the ball, Japan picked it up and is now running with it, trying to revive the deal, or at least keep it on life support for the time being.
“Japan is the biggest economy remaining in TPP,” Bruce Andrews, managing director of Rock Creek Global Advisors and former deputy secretary of the Department of Commerce, told The Diplomat. “It is a key player. It recognizes the value of market opening and the importance of high standards and rules of the road in a rapidly growing Asia-Pacific region.”
In a clear rebuke to Trump’s “America first” rhetoric, the remaining countries in TPP, referred to as the TPP 11 — Japan, Singapore, Malaysia, Vietnam, Brunei, New Zealand, Australia, Canada, Mexico, Peru and Chile — announced at the Asia-Pacific Economic Cooperation (APEC) meeting in November their commitment to resurrecting the trade agreement without the U.S. (All 11 TPP signatories are members of APEC.)
While ministers did not reach a final agreement on the deal at the meeting, they did agree on core principles of high standards for labor and environmental protection and abandonment of U.S.-backed intellectual property provisions. The reborn agreement is now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
In particular, Canada, which is in the midst of trying to renegotiate NAFTA with the U.S., had been reluctant to commit to a quick timeline for revamping TPP. New Zealand, Malaysia and Peru also expressed reservations about moving too fast.
Still, the 11 remaining TPP members appear motivated to salvage the deal, which took over a decade to hammer out and would’ve struck down some 18,000 tariffs. TPP also includes unprecedented environmental, labor and intellectual property protections and is widely seen as a vital counterweight to Chinese economic dominance.
The remaining 11 members now account for about one-sixth of world trade. TPP talks may be concluded as early as next year as negotiators now focus on remaining sticking points such as a dispute over state-owned enterprises related to Malaysia and a disagreement over coal that affects Brunei. They must also figure out how the deal can be rejiggered to reflect America’s absence. So far, that has involved suspending about 20 provisions to avoid renegotiating them and potentially entice the United States into rejoining the agreement down the line.
“There is a view that it’s sufficiently worthwhile that it should be kept alive,” Joshua Meltzer, a senior fellow in the Global Economy and Development program at the Brookings Institution, told The Diplomat.
“This is a major step forward for trade in the Asia-Pacific region, with high-standard rules agreed upon in such areas as digital trade, state-owned enterprises, labor and the environment. Next steps include hammering out the details of the agreement, resolving any outstanding issues and initiating their respective domestic procedures to put the agreement into effect,” said Wendy Cutler, vice president of the Asia Society Policy Institute, who noted that South Korea, the Philippines and Thailand have expressed an interest in eventually joining the deal.
TPP Minus the U.S.
Trump pulled out of TPP over concerns that it would erode U.S. manufacturing jobs and increase trade deficits. But American businesses now worry that they’ll be shut out of one of the fastest-growing regions in the world while competitors step in to fill the void.
Still, the U.S. withdrawal from TPP is not being taken lightly. The TPP 11 can still forge ahead without the U.S., but the agreement came together primarily because countries wanted access to the lucrative U.S. market, so Trump’s pullout has created political headaches for the TPP 11 with their home constituencies.
Even with the U.S. out of the picture, though, Japan — the second-largest economy in the accord — is still a big attraction for TPP countries, particularly emerging nations like Vietnam.
“A lot of the benefit of TPP was helping smaller countries get access to the Japanese market, which has been closed historically, in exchange for adopting a high-standard set of rules,” Michael Froman, who served as the U.S. trade representative under Obama and is now at the Council on Foreign Relations, told The Diplomat.
In the talks leading up to APEC, the focus was on provisions the U.S. pushed through that the remaining countries might want to review or rework. With the U.S. out of the trade deal, countries such as Vietnam and Malaysia, for instance, might want weaker rules on labor and environmental protections than what was agreed to as part of the original TPP.
“There’s a discussion going on about which obligations should be frozen — not renegotiated — and put to the side unless and until the U.S. comes back to the table,” said Froman. “The key will be to avoid reopening the negotiation, minimizing the number of obligations that fall into that category, avoiding the notion of weakening TPP. There’s a lot at stake for all these countries in moving forward with a high-standard agreement and sending a positive signal to the global stage.”
While smaller, developing countries might want to water down some of the U.S.-imposed regulations, experts think the version that will go into effect once the TPP 11 commit will be very close to the original agreement.
For instance, in the days before APEC, renegotiation was avoided when New Zealand figured out a way to uphold its restrictions on foreign buyers of homes to try to manage its housing market without violating TPP.
“There’s a very strong chance the TPP 11 countries will agree to move forward to implement the agreement substantially into action,” Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, told The Diplomat. “There will be some provisions suspended, particularly those that were basically demanded by the U.S. and acquiesced by the other 11 countries, but, in most respects, you will see the agreement largely intact moving forward.”
Schott believes it’s highly likely the TPP 11 will move forward with implementation in 2018, and that the agreement will likely be in force in 2019.
The TPP 11 will also probably leave an opening for the U.S. to rejoin at a later date — say, under a new presidential administration — should it choose to do so.
“They’re leaving a light on in the back if and when U.S. policy changes,” said Schott. “I suspect it would mean they would be willing to consider some renegotiation of the TPP to encourage U.S. re-entry.”
The TPP would effectively cut out tariffs over the long run, according to a World Bank report: “Although both tariffs and restrictions … between many TPP members are already low by historical and international comparison, the currently negotiated TPP would over time eliminate nearly all of tariffs among its members, including very high ones such as the 350 percent tariff on U.S. tobacco imports.” TPP would also “lower trade barriers associated with sizeable non-tariff measures in many member countries.”
The report cites a model that predicts that by 2030, TPP will raise the GDP of member countries by up to 10 percent. “This would be an important counterweight to the trade slowdown underway since 2011. At current 2011-14 trends, member countries’ trade would fall 25 percent below pre-crisis trend by 2030.”
Smaller TPP countries have a lot of advantages in the trade agreement. “The largest gains in GDP are expected in smaller, open member economies, such as Vietnam and Malaysia (10 percent and 8 percent, respectively),” the report states. “Both countries would benefit from lower tariffs and [non-tariff measures] in large export markets and at home and from stronger positions in regional supply chains through deeper integration.”
NAFTA members — the U.S., Canada and Mexico — all of whom are also part of TPP, would experience more modest growth of about 0.6 percent of GDP because existing barriers to their trade are already low, the World Bank notes.
Gains may be uneven from country to country, but many economists agree that the overall effect on growth is positive.
TPP is a landmark agreement for its reach beyond economics. It establishes the highest labor standards of any trade agreement in history.
“TPP will result in the largest expansion of fully enforceable labor rights in history, including renegotiating NAFTA and bringing hundreds of millions of additional people under [International Labor Organization] standards,” the U.S. Trade Representative office said at the time it was promoting TPP.
TPP also includes the most stringent environmental protections of any trade agreement before it, in addition to championing conservation and energy-efficiency efforts.
Preserving a single, global digital marketplace is another priority of TPP. The agreement encourages e-commerce and an open internet. “TPP does this by preserving free international movement of data, ensuring that individuals, small businesses, and families in all TPP countries can take advantage of online shopping, communicate efficiently at low cost, and access, move, and store data freely,” according to the U.S. Trade Representative.
Addressing market inequities caused by state-owned enterprises is another key part of TPP. This provision seeks to ensure that state-owned enterprises compete on a commercial basis.
The agreement also includes provisions to promote sustainable development and inclusive economic growth, reduce poverty, increase food security and combat child and forced labor.
What do all of these provisions have in common? They are a reflection of U.S. values and standards. That is why TPP was a cornerstone of Obama’s Asia pivot, which sought to realign American economic and military resources toward one of the world’s fastest-growing markets — one that is home to 60 percent of the global economy. Politically, the deal was considered a geostrategic tool to blunt Chinese hegemony and establish rules of the road for Asian businesses that meet American, not Chinese, standards.
China Steps Up
China was excluded from TPP, and it reacted by offering its own trade agreement, the Regional Comprehensive Economic Partnership (RCEP).
China’s alternative to TPP is more of a traditional trade agreement. RCEP, which is moving slowly through negotiations, does not push for political reforms that would be a tough sell in some member countries, unlike TPP, which seeks to improve transparency, working conditions and the environment, in addition to basic trade issues.
As the Trump administration increases the stakes and retreats further from the global stage, China is among the countries angling to fill the vacuum. Beijing is trying to refashion itself as a leader in free trade and climate change after the U.S. withdrew from both TPP and the Paris climate agreement.
Trump is supposedly focusing on bilateral, instead of regional, trade agreements, but experts say his strategy to negotiate one on one with governments is less effective than multilateral frameworks, which create clear, universal rules for businesses to follow and raise the bar for all players involved. When there’s only one other player, countries are less likely to make tough concessions in trade talks, but those sacrifices are easier to make when the reward is a deal that opens up access to multiple markets.
“We’ve been the leader since World War II in opening up markets around the world,” said Andrews of Rock Creek Global Advisors. “We’re walking away from the key leadership role we’re playing. The Chinese have stepped in on the trade front. The irony is that [Chinese President] Xi Jinping is claiming to be the leader on free trade and the environment.”
Trump has not publicized a U.S. strategy for Asia. Despite his high-profile visit to the region in November, there has been no articulation, or even hints, of how he sees the role of the U.S. in the Asia-Pacific.
“China has a coherent regional strategy that it’s executing on, between the One Belt One Road Initiative, the Silk Road Fund, the Asian Infrastructure Development Bank, forays into the South China Sea and RCEP,” said Froman. “China is working to draw countries closer to it. The question is: Will the U.S. have a regional strategy, and will we be able to execute on it?”
The U.S. is already feeling the effects of TPP withdrawal, particularly in the agricultural sector. U.S. beef exports have been on the rise, and Japan has reacted by enacting an emergency tariff of 50 percent on frozen beef now that the U.S. is no longer part of TPP.
“There’s risk of other lost sales if we disrupt existing trade relationships in North America and in the Pacific Basin, with the risk that barriers would increase significantly on U.S. exports,” said Schott.
The U.S. not honoring the commitments it has made during the lengthy TPP talks could also make foreign governments wary of working with Washington. “Around the world, it means government officials are thinking twice about cutting deals with the U.S.,” said Schott. “What’s the value of going through the effort and facing political challenges at home for pursuing agreements when the U.S. may abruptly turn around and withdraw? So, the TPP precedent and the Paris precedent are weighing heavily on foreign officials when they think about agreements with the U.S.”
About the Author
Aileen Torres-Bennett is a contributing writer for The Washington Diplomat.