Safety in Numbers
Despite the U.S. pullout, a Trans-Pacific trade partnership still has legs.
by jeffrey j. schott
jeffrey schott is a senior fellow at the Peterson Institute for International Economics and the co-editor of Trans-Pacific Partnership: An Assessment.
Published July XX, 2018
On his third day in office, President Donald Trump fulfilled a major campaign promise and pulled the United States out of the Trans-Pacific Partnership, a comprehensive accord covering trade and investment in goods and services signed in February 2016 by 12 Asia-Pacific nations. Trump’s action seemingly killed the deal because the terms of the TPP required U.S. agreement to participate before the trade pact took effect.
But the TPP would not die. The U.S. withdrawal did not deter U.S. trading partners from advancing the agreement without Uncle Sam. And on the first anniversary of Trump’s withdrawal, the remaining 11 signatories (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) agreed to move forward on their own.
The resulting pact, awkwardly retitled the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), was signed with much fanfare in Chile in March. Now, it awaits ratification by national legislatures. The new accord will take force 60 days after six of the signatories approve it. Mexico was the first to give a thumbs-up in April; Japan is expected to follow this summer. Prospects are good for the pact to be up and running by early 2019.
The CPTPP slightly revises the TPP but is essentially the same wine in a new bottle – most of the original deal is incorporated verbatim. With few exceptions, the liberalization of trade of goods and services that U.S. negotiators had demanded from the other countries remains. The major difference between the old and new pacts is that the 11 countries agreed to suspend the application of about 20 TPP provisions, most of which had been included at U.S. insistence despite opposition by other countries.
One or more of these provisions could be reactivated if the member countries all agree, but doing so would be difficult in contentious areas such as data protection for pharmaceutical patents and rights of private investors to sue for breach of government contracts that were originally included as part of the price of securing U.S. participation. Suspending these provisions compensates in part for the U.S. absence from the deal and smooths the path for ratification in the 11 national legislatures. Importantly, the suspension also creates bargaining chips for the CPTPP members if the Trump administration or its successor reverses course and decides to negotiate U.S. accession to the pact.
Like most negotiated agreements, the CPTPP represents a compromise that, in the end, all the signatories concluded was better than the status quo. The 11 are already expecting to add members, and, not surprisingly, the United States is at the top of the list of countries that the CPTPP signatories would like to join the club. But, in contrast to the original TPP negotiations, U.S. officials would not be able to set the agenda.
If the United States does come back to the table, it is highly unlikely that other signatories would be willing to substantially recast the deal that Trump rejected in January 2017. But the talks could consider new issues or further elaborations of innovative provisions of the CPTPP. And that probably offers the most plausible way for the United States to reengage its Asia-Pacific partners in a comprehensive and mutually beneficial trade accord.
Why did Trump dump the TPP?
During the 2016 election campaign, both Trump and Hillary Clinton repeatedly disparaged the TPP with exaggerated and confused claims about what the pact would do to American firms and workers. Trump branded the TPP as typical of “bad” deals – both bilateral and multilateral – that have led to mounting U.S. deficits in merchandise trade. China, which accounted for almost half of the U.S. global deficit of $740 billion in 2016, was (and remains) the main target of his trade ire. But the CPTPP countries are also offenders by the inappropriate metric applied by the White House. As a group, they ran a surplus on merchandise trade with the United States of about $173 billion, with much of that surplus concentrated in autos and parts.
In Trump’s view, the United States has been ripped off by trade deals that have left the U.S. market much more open than those of other countries – especially in the case of China, but with TPP members as well. He claims past trade deals have devastated U.S. manufacturing.
His diagnosis fixates on jobs rather than output in U.S. manufacturing industries, with a particular focus on the steel and auto industries. U.S. manufacturing output is near record levels, but manufacturers are managing that feat with far fewer workers than a generation ago. Manufacturing jobs now account for only about 8.5 percent of total U.S. nonfarm employment, down from 22 percent in 1980.
What specifically did Trump think was wrong with the TPP? Judging from ongoing U.S. efforts to rewrite the North American Free Trade Agreement, there seem to be a few key provisions of the TPP – and U.S. trade relations with CPTPP participants – that hardened Trump’s opinion.
Most importantly, Trump officials thought that TPP rules of origin for autos – the rules that set criteria for how much content needs to be sourced from TPP members to qualify for preferential tariffs – were less restrictive than those for Nafta and would have allowed China and other non-member countries to enjoy a free ride on TPP benefits. Moreover, Trump’s representatives charged that the TPP did not go far enough in reducing Japanese restrictions on imported autos and dairy products. Trump boasted that he could get better results in bilateral talks, where he could threaten to limit access to the supersized U.S. market if the countries on the other side of the bargaining table didn’t accede to U.S. demands.
Trump’s trade officials claimed that the TPP was unbalanced – the United States had given away too much and gotten little in return. Truth be told, the Trump team got it backward: TPP would have yielded substantial U.S. gains with few U.S. concessions.
The pact would have required few changes in U.S. laws and regulations; its trade and investment obligations were based substantially on existing U.S. standards and practice. The draft of the legislation needed to implement the deal was so short that even a busy member of the U.S. Congress would have had time to read it before voting.
Trade barriers impeding foreign access to the U.S. market were largely unchanged. U.S. tariffs on autos and trucks from Japan would not have been phased out for decades, and import restrictions benefiting U.S. dairy and sugar producers were kept largely intact. The main U.S. concession was to allow Vietnam to sell more clothing and footwear to the U.S. market – a market long ago ceded to lowwage countries.
Truth be told, the Trump team got it backwards: TPP would have yielded substantial U.S. gains with few U.S. concessions.
What would the United States have gotten in return for its minimal concessions? The TPP would have eliminated foreign tariffs on U.S. exports and opened new opportunities for U.S. services firms, including insurance and financial services providers, to gain market share in growing Asian markets. The deal also would have lowered barriers impeding U.S. farm exports (especially beef, pork and dairy products). Ironically, U.S. negotiators pried open agricultural markets, notably in Japan, but farmers from Australia, New Zealand and Canada will now be the main beneficiaries of those trade reforms.
Finally, Trump’s decision damaged U.S. geopolitical interests in East Asia, even as it undermined our trade relationships in the region. Much of the motivation for the Obama administration (but also for Japan, Australia and Vietnam) for tightening economic ties was to counter Chinese influence in a region in which U.S. engagement has guarded the peace for half a century. The Trump administration’s seemingly casual rejection of the TPP, followed soon after by the rejection of the Paris Climate Accord and threats to withdraw from Nafta and the Korea-U.S. free trade agreement, exacerbated concerns that the United States was no longer a reliable partner in an increasingly uncertain world.
Why did the eleven sign the CPTPP?
With U.S. participation, the original TPP promised to substantially increase real income and trade among the 12 countries. Without the United States, the CPTPP still generates significant economic benefits for the participating countries, albeit less than half the gains that would accrue if the United States were in the regional pact. According to Peter Petri and colleagues at the Peterson Institute, the income of the CPTPP countries will be about 1 percent, or about $160 billion, higher than without the trade accord. The big boost comes from CPTPP obligations to implement important but politically contentious domestic economic reforms that will spur productivity growth and enhance the competitiveness of firms and workers. Japanese Prime Minister Shinzo Abe long recognized that TPP would complement structural reforms in the Japanese economy that were critical to the success of the “third arrow” of Abenomics – promoting regulatory reform – which is an important reason that he led the effort to realize the CPTTP after the United States said no thanks.
Second, the economic payoff will grow as more countries join the CPTPP. The pact’s simple accession clause allows other countries to negotiate admission once the deal goes into force. Any country (or separate customs territory like Hong Kong or Taiwan) is eligible to join if it accepts the pact’s obligations, and membership is not limited to the Asia-Pacific region. The entry queue is already forming, with South Korea, Colombia, Taiwan and even Brexit-challenged Britain discussing participation.
Trump’s decision damaged U.S. geopolitical interests in East Asia, even as it undermined our trade relationships in the region.
Third, the TPP provisions modernized global trading rules that were last updated in the 1990s and established new disciplines in areas not covered or inadequately covered by the World Trade Organization agreements. The 11 countries spent a lot of time and effort to update the WTO rulebook and wanted to ensure that the newly crafted rights and obligations would be applied so that they would establish the “gold standard” for future trade accords in the WTO and in other regional initiatives.
Fourth, the CPTPP countries recognized the value of the TPP as part of their strategic response to China’s growing economic influence in the region. Many of the members count China as their leading trade partner and benefit from extensive cross-border investments with Chinese firms. Many already have or are pursuing free trade agreements with China. That’s why the TPP was not about containing China – as often bruited in public debate on both sides of the Pacific – but about helping the TPP countries become more productive and compete more effectively against China. The CPTPP countries recognized that there is safety in numbers and that the regional deal would put them in a better position to respond to Chinese trade and investment challenges in the region.
Will the United States make an about-face?
President Trump hinted that he was open to change during in a speech to business executives at Davos in January 2018, provided the deal was substantially better than the accord negotiated by President Obama. But it was Trump’s decision damaged U.S. geopolitical interests in East Asia, even as it undermined our trade relationships in the region. 32 The Milken Institute Review never clear what “better” meant. And in any event, he subsequently threw ice water on the idea in talks with Prime Minister Abe in April 2018.
But there is growing pressure from business lobbies and farm groups to revisit the issue. Indeed, the discontent with Trump’s approach to trade in general, and the TPP in particular, is already gaining traction for two main reasons.
First, rejecting the TPP will be costly for U.S. interests. Real income stood to grow by $130 billion, largely because of the policy reforms implemented by the other TPP countries. Granted, the loss of $130 billion seems small in a $20 trillion economy, but these losses will be concentrated – and very visible – in a handful of sectors. U.S. beef and pork exporters already are losing sales because existing bilateral FTAs give Australian and Canadian exporters a big advantage in Japan. The TPP would have leveled the playing field for U.S. exporters. And the modest increase in dairy quota for the Canadian market, hammered out in the TPP deal to sweeten the pact’s reception in the United States, now will be shared among U.S. competitors from other member countries.
Second, Trump’s preferred strategy of negotiating bilateral deals instead of regional or multilateral accords has come up empty. To date, bilateral initiatives pursued by U.S. Trade Representative Robert Lighthizer have been unproductive. What country is willing to offer more concessions to the United States and forgo some existing benefits in return for nothing – or less than nothing – as the USTR backs away from trade and investment reforms?
South Korea has been the only country to sign a deal with the Trump administration, adding new protection for U.S. steel and truck producers in return for leaving the existing bilateral FTA virtually intact. But South Korea was in a weak bargaining position with the United States, given North Korean nuclear tests and threats of U.S. abrogation of the Korea-U.S. FTA. These conditions are not easily replicated with other trading partners.
In contrast, talks with Canada and Mexico are on a knife-edge as those countries resist U.S. demands to “rebalance” Nafta. Ironically, the TPP would have supplemented and modernized Nafta, which needs renovation after almost a quarter century without major modification. Dumping the TPP meant going back to Square 1 on Nafta reform. Now U.S., Canadian and Mexican trade officials are trying to resurrect much of the TPP reforms as part of the renegotiation.
But the Nafta talks are struggling because of unconventional U.S. demands to change the rules in ways that would undercut the competitiveness of all three Nafta partners by upending multinational supply chains, reducing U.S. productivity and, most likely, employment.
Clearly, CPTPP countries are not interested in starting over to woo Trump – several leaders of CPTPP countries have said as much. U.S. officials would have to walk back their mutually destructive demands to raise rather than lower barriers to trade and investment between partner countries.
While the CPTPP members would welcome U.S. re-engagement, they probably would not accept substantial changes to provisions of the pact they have recently signed and ratified. Accession negotiations would need to start from the current treaty text. But that doesn’t mean they would not consider U.S. proposals that augmented rather than undermined CPTPP rights and obligations. For example, U.S. accession talks would provide an opportunity to formulate improved rules governing e-commerce, to limit government support for state-owned enterprises, currency manipulation and cybersecurity.
The TPP was not about containing China, but about helping the TPP countries become more productive and compete more effectively against China.
Trump’s decision to dump this agreement (and others) negotiated by the Obama administration should hardly come as a surprise. Indeed, once the TPP became a campaign issue, its fate was sealed.
Unfortunately, the United States is the big loser from Trump’s decision to drop out of the pact, both in terms of lost sales and income in the region with the world’s most dynamic economies and reduced influence in shaping political decisions that affect U.S. security interests. And who is the big winner? China!
Ironically, Trump’s withdrawal from the TPP left a void for China to assert a more pronounced leadership role in the region through deepening trade and investment ties pursuant to China’s Belt and Road Initiative and Chinese participation in the Regional Comprehensive Economic Partnership, which already involves 7 of the 11 CPTPP countries. While China is not writing the rules for 21st century trade, it is underwriting the investment in infrastructure that will strongly influence commercial relations among Asian countries in the decades ahead.
If the United States wants to stand its ground against growing Chinese influence in the region, it needs to stand united with its Asia-Pacific allies in a comprehensive economic partnership – one that reflects U.S. values, and reinforces U.S. strategic alliances and promotes economic prosperity at home and abroad. The best way to do so would be to join the CPTPP.