Trading with Trump: The Future of TPP

Gary Clyde Hufbauer
Reginald Jones Senior Fellow, Peterson Institute for International Economics

During his campaign, President-elect Donald Trump repeatedly slammed the Trans-Pacific Partnership (TPP) as a “bad deal” that would harm U.S. workers and export jobs to Asia. He has promised to renegotiate the agreement, or more likely, back out altogether. Assuming that Trump follows through with his campaign promises, The Cipher Brief asked Gary Hufbauer, Senior Fellow at the Peterson Institute for Economics, what trade in the Asia-Pacific region might look like with the probable American retrenchment under a Trump presidency.

The Cipher Brief: Looking at the Trans-Pacific Partnership (TPP) and global trade, where are we after Trump’s election?

Gary Hufbauer: My view is that U.S. participation is dead for this administration. But a more optimistic view is that maybe, after 2018, there might be some changes in TPP or changes in the thinking of the Trump administration that would lead to the acceptance of TPP. In the meantime, my expectation is that other countries, especially Japan, will ratify the TPP and will apply it amongst other partners who also ratify the agreement. If everyone except the U.S. ratifies TPP, then the U.S. won’t get the benefits, but all the other countries will realize the benefits of trade amongst themselves.

I think that’s a plausible scenario, and if that happens in the next couple years, then times might change and the U.S. might sign on to TPP, or it might sign on with some specific members of the TPP, specifically Japan. Japan is the biggest TPP partner that we don’t have a major trade agreement with (the other three are Vietnam, Malaysia, and Brunei).

Of course, we could see various formulations here. Trump has said he likes bilateral agreements, not regional agreements. Maybe there’s something there that could work out. But from the U.S. standpoint, the TPP is, at best, on hold. However, important congressmen have not given up on it, both in the House and Senate, so there will be continued interest, particularly if the other countries ratify the agreement, which I think they will.

TCB: On China, do you think the criticism of Trump’s policy in Asia – TPP specifically – that it will drive Asia-Pacific allies toward China-dominated agreements, like the Regional Comprehensive Economic Partnership (RCEP), is valid?

GH: Yes, in a big way. This is a diplomatic and geopolitical gift to China. Whether China will be able to grasp it remains to be seen, because in order to take advantage of the U.S. essentially withdrawing from the theater, at least for the time being, they have to be willing to make concessions to their Asian trading partners; concessions on agricultural exports, intellectual property, investment, and so forth. All the kind of concessions that America has asked of China without any success. If Beijing is not willing to do that, then the economic strand of China’s geopolitical diplomacy really comes down to the One Belt One Road – or Silk Road – initiatives, the Asian Infrastructure Investment Bank (AIIB), the BRICS Bank (New Development Bank), etc. In other words, funding projects in neighboring countries as a way of cementing relationships. And that could very well be what happens.

To agree on the trade-focused agenda, as exemplified by TPP, that’s so much deeper than what the RCEP is presently talking about. I would count RCEP as a big success if they have some gradual reduction of tariffs amongst the member countries over a fairly long period of time – 15 or 20 years. But having a deeper agreement within RCEP on, for example, data flows, I don’t think that’s going to happen because China itself is putting out more restrictions on data flows with a law that is coming out as we speak. Similarly, on State-Owned Enterprises (SOE), both China and many other RCEP countries rely heavily on SOEs, so they are unlikely to agree on restrictions there either. In reality, I’d expect RCEP to focus only on reducing tariffs over a long period of time. That’s the level of ambition they seem willing to reach.

There is also a very big potential agreement, which is the China-Japan-Korea free trade agreement. That has been talked about for at least 15 years, and it may be making some small progress. I would still have the same reservations about it, however, because of the diplomatic, political, and economic rivalries between the three parties.

TCB: Going back to American trade policy in the region. As you said, Trump has talked a lot about negotiating bilateral agreements over multilateral free trade agreements and utilizing tougher tactics to “win” more from trade deals. Is there any way you can see that this would provide economic benefit to the U.S., trying to renegotiate deals like the TPP or NAFTA?

GH: I think it’s going to be hard. The typical way trade negotiations go is that each negotiator tries to get as much new export market access for its products or firms as it gives additional import access.  They try to achieve a rough equivalence in market value. That’s generally the goal and that’s how the agreements are sold at home by the negotiators. They tell their firms and constituents that they can now get all these additional exports – and tend not to talk too much about the additional imports of course. That’s how negotiations have been held ever since the Second World War.

Trump has a different view. He wants the U.S. to get much better access to foreign markets than we give to foreign countries in our own market. That sounds great, I guess, if you’re sitting in Washington. It doesn’t sound so great if you’re sitting in Mexico City or Beijing, because the negotiators in those countries will have to explain to their constituents why they gave so much away for so little. Now, they could argue that they at least prevented America from cutting off access to the U.S. market, which might go part of the way, but this is really a different game. It’s especially a different game with China, because China has a $300 billion-plus trade surplus with the United States, and from a Chinese standpoint, opening up the Chinese market to $300 billion worth of U.S. exports would be a huge shock to Chinese firms. That’s why I think these negotiations, as conceived by the Trump team, are really going to be a very hard sell.

TCB: Worst and best-case scenarios?

GH: My central scenario would be that things don’t get any worse, that we just kind of jog along on trade relations between countries, and we don’t put up major barriers. Many countries put up small barriers to trade regularly but this is what I call “micro-protection.” There were about 600 episodes of micro-protection this year, hopefully that doesn’t accelerate to something like 2,000. Hopefully this micro-protection will not accelerate, and no one will start any really big trade wars. This would be my simple scenario, where rhetoric does not lead to a larger dysfunction, and it’s hard for me to get any more optimistic than that.

Now, we could also slide into a scenario which is more pessimistic. This is a scenario in which Trump negotiates for a good period of time, say six months or a year, doesn’t see the progress that he wants and that he promised in the campaign, and then starts putting up barriers. He doesn’t get the export progress he wants, so then he turns to the import side and uses the vast armory of laws that he has at his disposal to start restricting U.S. imports. That would be a very bad scenario, because I think there would be a lot of retaliation from abroad, and trade might even decline. Global trade is not growing very fast right now, it’s only growing at the rate of GDP worldwide, but it could certainly grow slower or decline. That is the worst-case scenario. 

The Author is Gary Clyde Hufbauer

Gary Clyde Hufbauer, Reginald Jones Senior Fellow since 1992, was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations, and the Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University. He served as deputy assistant secretary for international trade and investment policy and director of international tax staff at the U.S. Treasury.

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