President Donald Trump’s executive order withdrawing the United States signature from the Trans Pacific Partnership agreement signed the death warrant of that multinational trade deal in its present form.
Even so, there are options for the TPP that may allow it to thrive in light of Trump’s unilateral abrogation.
First, the remaining eleven member states can put the agreement into hibernation, wait for the 2020 US presidential election and hope that a more trade-oriented president succeeds Trump. Alternatively, domestic circumstances or external events might force Trump to rescind his decision.
Second, the members could re-draw an agreement that is less US-centric. Many of the provisions demanded by the US could be dropped in exchange for increased preferences for the interests of previously junior TPP partners.
Third, the partners could look to fill the void left by the US with another large market economy. The one that springs to mind is China.
China is party to the Asean-China Free Trade Agreement. ACFTA is a regional free trade area that is the largest in population and third largest in trade volume and nominal GDP.
Some of the ACFTA signatories are also parties to the TPP (Brunei, Malaysia, Singapore, Vietnam). This agreement is considered to be a “true” free trade agreement because it reduces tariffs across 7,881 product categories to zero per cent, with the result being that tariffs on Asean goods sold to China fell to 0.1 per cent and those of China sold in Aean to 0.1 per cent in the year the agreement went into force (2010).
The non-US TPP members could negotiate an agreement with ACTFA as one course of action. That may be difficult given that the TPP is not a “genuine” free trade agreement as much as it is an investor guarantee agreement in which market regulations are altered to attract foreign investors and these are protected from legal liability in the event of disputes with the host state.
Yet it is possible to reconcile the two types of deal. China has already signalled its intentions in this regard. It has proposed the creation of a Regional Comprehensive Economic Partnership (RCEP) along the lines mentioned above and has received support for the proposal from other ACFTA members.
Another option might be to invite China to join the TPP. It has the second largest market in the world and an economy that grows at a sustained and rapid pace. It is making the transition from export platform to a mixed domestic mass consumption/value-added export economy. It values international commerce, with Chinese President Xi using this year’s Davos Forum to preach the virtues of free trade as a facilitator of international understanding and exchange.
The US opposed consideration of China’s inclusion in the TPP because it saw the latter as the economic equivalent of the military “pivot to Asia” announced by the Obama administration. That is, it was seen as part of a new Containment Policy in the Asia-Pacific.
With the US gone, China has an opening and the remaining TPP members have an opportunity. The TPP will be renegotiated, but the non-negotiable provisions insisted by the US can be dropped in the effort to entice China’s interest. In turn, China might have to agree to a tariff reduction regime that is more targeted in nature and phased in over a longer period of time than that seen in ACFTA.
This is a potentially win-win proposition because key TPP provisions demanded by the US were those that were most resisted by domestic audiences in several member countries. Removing them not only allows the agreement to be free of those constraints but also diffuses a source of domestic opposition in countries where such things matter.
Small TPP states should be carefully about negotiating bilateral trade deals with the US. History shows that large asymmetries in market size favour the larger over the smaller partner in bilateral trade agreements. This is due to economies of scale, market dominance, and economic and geopolitical influence derived from market size advantages.
The recent track record of bilateral deals between the US and smaller states reinforces this fact. The majority benefits accrued to US-based companies and industries while the opportunities offered to partner states were limited to specific export markets with little flow-on, trickle down or developmental effects in their broader economies.
With the Trump administration set to reconsider the tripartite North American Free Trade Agreement with Canada and Mexico, it is clear that honouring commitments and maintaining continuity in trade policy is currently not on the US agenda.
The new US attitude to trade is part of a larger phenomenon. The neo-isolationist protectionism embedded in the “America First” approach adopted by the Trump administration has ended, however temporarily, over 50 years of bipartisan consensus in the US political elite on the merits of international engagement. Instead, US trade and security partners will be asked to do more, pay more and offer more concessions in order to be granted US favour.
Re-orientation of TPP provides a means of compensating for and benefiting from the US retreat from its international commitments. For some member states, it uncouples security from trade, thereby limiting dependence on the US as a patron. From a smaller nation perspective, that is a good thing.
Source: The New Zealand Herald