What Hope for TPP?
President Donald Trump confirmed his intention to abandon American participation in the Trans-Pacific Partnership after signing an executive order on the subject in January. However, this does not necessarily mean that TPP is dead. The United States was the most important partner in the agreement but the deal includes 11 other Asia-Pacific economies, and they are preparing to meet in Vina del Mar, Chile, this month to explore new paths forward. The Cipher Brief spoke with Matthew Goodman, Senior Adviser for Asian Economies at the Center for Strategic and International Studies, to see where TPP 11 might go from here and what the U.S. retreat from TPP will mean for the region.
The Cipher Brief: How has President Trump’s decision not to pursue ratification of the Trans-Pacific Partnership affected the other 11 members, and where do they go from here?
Matthew Goodman: This was not entirely unexpected, but it was still very problematic for the other 11 TPP members, because they undertook this difficult initiative on the understanding that the United States would not only be part of it, but that it would lead and drive it. The U.S. withdrawal raises questions not only about TPP but, more broadly, about what the U.S. role is going to be in Asia-Pacific affairs more broadly.
This is also going to force the other 11 TPP members to consider other arrangements.
TCB: TPP members will gather in Vina del Mar, Chile, for talks on March 14. Where do you think each of those member states stand as these negotiations begin, and what do you make of the inclusion of observer countries like China and South Korea?
MG: This meeting in Chile was really centered on a meeting of the Pacific Alliance countries and the possible expansion of this group of Latin American countries. The TPP 11 meeting is being organized on the margins.
I think there are mixed views among the TPP 11 as to how to take this forward without the United States. Some members, perhaps including Japan and Australia, feel that they should try to either find a way to implement the agreement among the 11 without the U.S. – and with minimal changes to the agreement – or to stall and try to extend the deadline for TPP ratification in the hope that the United States will rejoin the partnership.
Other members are less enthusiastic about continuing at all. Members like Malaysia and Vietnam appear to fall into that group, even though Vietnam is the biggest loser from TPP failing to go forward. Econometric analyses of TPP showed that Vietnam would gain something like an additional 10 percent of GDP once the agreement was fully implemented. That would have come as the result of opening its markets, putting new rules on things like labor and state-owned enterprises into place, and also gaining more access to the United States. This illustrates one problem with continuing the deal without the United States, which that is that countries agreed to certain compromises and commitments on the understanding that the United States would be part of this. Vietnam, in particular, agreed to stricter rules on labor, state-owned enterprises, and a number of other issues, in exchange for open access to U.S. markets for Vietnamese goods. Without those benefits, Vietnam is going to have a difficult time accepting a TPP 11 agreement, even if it could be negotiated.
In addition, there would have to be a technical change to allow the deal to go forward without the United States because the current agreement says that members of the group equaling at least 85 percent of the weight of the agreement have to ratify it for it to go into force, and this requires the United States to be a member. If you take the U.S. out, the deal will have to be renegotiated, but this is certainly not outside the realm of possibility.
TCB: From the U.S. perspective, Trump and his administration claim that a system of new bilateral agreements will do a better job of improving U.S. trade relations than this kind of mega-regional free trade agreement. Do you think that is an effective approach, and will other countries, Japan for example, accept that as a replacement?
MG: I’m very skeptical that some combination of bilateral agreements is going to produce a better result for the United States than TPP. TPP maximized the three big benefits to the United States of this kind of plurilateral agreement.
First, it had significant economic benefits through an array of market-opening measures. Second, it put into place a set of rules and disciplines covering the realities of 21st century trade, which is supply chain-based. So it had a whole series of rules on behind-the-border measures like regulation, the role of the state in the marketplace, intellectual property protection, environmental standards, and rules on the digital marketplace. These will be very difficult to replicate in bilateral agreements. And third, TPP was a very strong statement of U.S. commitment to the Asia-Pacific region, and again, that is going to be very hard to replicate in bilateral agreements.
On top of all that, it’s not going to be easy to negotiate all these agreements. Take Japan for instance. Many people, myself included, said that the TPP was really a bilateral free trade agreement with Japan because we are by far the largest members of the group. Despite that, pulling out of TPP and trying to replace it with a bilateral free trade agreement with Japan is going to be very difficult because old issues are going to have be reopened. Now you’re going to have to renegotiate rules of origin on automobile trade between the United States and Japan, for example, and it seems almost certain that the Trump administration is going to insist on more production of Japanese automobiles in the United States. It also seems clear that Trump is going to insist on some sort of enforceable currency manipulation measures in these bilateral agreements, and that by itself could be a deal breaker for Japan. Finally, on agriculture, I think it’s likely that U.S. agriculture exporters will insist on greater access to the Japanese market than they got on TPP in any bilateral agreement. In a narrow sense, that may make for a better deal, but it will create much more contentious negotiations, and will string this process out. If that gets into sensitive issues for Japan, like rice production, the deal may be impossible to finalize.
For those reasons, not only am I skeptical about whether a series of bilateral agreements is going to be better at enhancing U.S. interests than TPP did, I think it is going to be extremely challenging to achieve these bilateral agreements in the first place.
TCB: What is a possible timeline for the Trump administration to negotiate these upgraded or new bilateral agreements?
Trade negotiations always take longer than expected. The Uruguay Round negotiations, which led to the creation of the World Trade Organization, took almost 10 years to complete; the China WTO accession agreement took years; the free trade agreement between Korea and the United States took almost a decade after a long pause and subsequent renegotiation; TPP itself took more than five years to negotiate. It would be unreasonable to expect that you could get a series of new bilateral free trade agreements done in anything less than several years.
However, I also think it’s possible that the U.S. will come back to something like the TPP in the near future. It’s clearly in the U.S. national interest to be leading high standard multilateral trade negotiations in the Asia-Pacific region, so I think there is a good chance we will get pulled back into this. It probably won’t be called TPP and it may have slightly different content or membership, but in the end there are compelling reasons for the U.S. – and even the Trump Administration – to want to be part of an arrangement like that. There is a decent probability of this happening in the next few years.
TCB: On the strategic aspect of TPP – the economic cornerstone of President Obama’s so-called pivot to Asia – what does walking away from this do to America’s strategic position in the region, and where does this leave rising regional powers like China?
MG: It’s a huge blow to our strategic position in the Asia-Pacific. First and foremost because it so damages our credibility. I could give you other ideas for how we might be able to engage on economic and trade issues in the region, but the problem with all those ideas is that the U.S. will have a very hard time persuading Asian countries to follow it on other initiatives after having pressured them for five years to agree on TPP, only to then walk away. Without that credibility, it’s going to be hard for the U.S. to do anything new and different.
As for China, this is a decidedly mixed outcome. They’ve gained a temporary public relations victory over the United States in terms of leadership in Asian affairs, and I’m sure they are very pleased with that and will continue to take advantage of that, as Chinese President Xi Jinping did with his speech at the World Economic Forum in Davos.
However, the loss of TPP is also a loss for China, because Beijing had started to realize – particularly after Japan joined in 2013 – that TPP could be a useful tool for China to drive its own necessary domestic reforms. The third party plenum reforms announced in the fall of 2013 were quite similar – directionally at least – to what TPP was trying to achieve. I think that many thoughtful people in Beijing realized that TPP could be a useful tool to drive domestic reform, similar to China’s WTO accession process. Taking this tool away is not helpful to Beijing.
Furthermore, I think it’s going to be difficult for China to establish its own credibility as a leader of economic affairs in Asia given its own frankly mercantilist economic policies – tolerance of theft of intellectual property, harassment of foreign investors in China, etc. – and its aggressive military policies in the maritime disputes of the South and East China seas, it’s going to be quite difficult for China to establish itself as a credible leader pushing a positive agenda of economic integration and reform. That doesn’t mean the U.S. can sit back and be complacent, but I do believe it’s going to be harder than people think for China to assert the kind of leadership that others in the region are going to get behind.