Free Trade in the Pacific

Wooing Back the United States
Michael Lange/laif/Redux

jeffrey schott is a senior fellow at the Peterson Institute for International Economics. The analysis is adapted from an article that appeared in The Mainichi, the English-language website of the Mainichi Shimbun newspaper in Tokyo.

Published August 25, 2021


Most economists agree: when it comes to free trade agreements, bigger is better. The broader the liberalization of trade and investment, and the larger the size of the integrated market, the greater the potential that the pact will raise productivity and spur additional economic growth in its member economies.

No surprise then that one of the first things discussed in January 2019 by the new members of the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPTPP) — heir to the Trans-Pacific Partnership (TPP) after Trump peremptorily took his football and went home — was the procedure for admitting new members. Talks with potential candidates initially were deferred while Brunei, Chile, Malaysia and Peru debated and delayed CPTPP ratification. But after two years patience has worn thin, and Japan and others now have put out the welcome mat for new members.

The Long and Winding Road

One country, the United Kingdom, formally applied for membership in January. And many other economies have expressed interest in joining the club, including Taiwan and South Korea. Indeed, even China has intermittently seemed keen on the prospect. Then, too, the United States may seek to re-engage with CPTPP countries if the original deal can be augmented to pass muster with the Biden administration and a majority in Congress.

For the post-Brexit UK, the process seems straightforward. CPTPP accession would supplement the terms of the recent UK-Japan trade pact and extend trade preferences to those CPTPP members with which the UK does not already have a free trade agreement. But nothing is simple in trade negotiations: the UK must accept both the existing rules and negotiate market-access commitments that determine how rapidly its tariffs and other import restrictions will be phased out. Some CPTPP members will demand specific UK concessions — notably on agriculture — before allowing it to pass go.

CPTPP accession for South Korea also seems easy since the deal is built on the robust foundation of the South Korea-U.S. free trade deal; Seoul accepted most CPTPP obligations long ago. Moreover, South Korea is a party to an agreement called the Regional Comprehensive Economic Partnership, so it already has substantial liberalization commitments to seven of the CPTPP countries, including Japan, that are parties to both pacts. The key question is how much more South Korea will be asked to contribute in terms of tariff cuts and reforms of non-tariff measures affecting trade in industrial and farm goods.

Taiwan has been excluded from most intra-Asian trade pacts for political reasons, threatening the integration of its firms in regional supply chains. Now, CPTPP’s door is technically open to separate “customs territories” as well as to countries, so Taiwan is eligible for membership and has been aligning its laws and regulations to CPTPP requirements. But inviting Taiwan to negotiate accession would likely provoke harsh rebukes and possible trade retaliation by China. With the United States sadly out of the picture, none of the CPTPP countries is likely to be willing to pick this fight with China.

How serious is Chinese interest in the CPTPP? President Xi Jinping publicly stated that China is considering participation. And Chinese experts have been studying the treaty text for years to assess what economic reforms would be required for it to meet CPTPP obligations. These studies reveal that Chinese economic reforms, especially on investment policy, have already narrowed the gap between Chinese practice and CPTPP best practice. But in critical areas such as labor, data flows and data privacy, and support for state-owned enterprises, China still falls far short.

Fundamental changes would thus be required for China to comply with existing CPTPP obligations. More likely, China will defer CPTPP talks in the short run while it implements the aforementioned Regional Comprehensive Economic Partnership and pursues trilateral trade talks with Japan and South Korea.

But what if China asked to join with a lengthy transition period before fulfilling those obligations, or sought to water down the requirements for all CPTPP members during accession negotiations? The current members have committed to maintaining the high standards of the current text, but no one in the CPTPP wants to say “no” to China. 

Chinese accession was not an immediate concern when the United States was in the original accord. U.S. officials clearly said China was not ready to join, so membership was a distant prospect. Indeed, China’s current interest is an important reason why CPTPP needs the United States to rejoin the club.

Japan and the other CPTPP countries need the United States to return, even though it may require negotiating intrusive labor and currency provisions along with additional commitments to economic reform beyond the current CPTPP requirements.
America to the Rescue?

But will the United States reconsider CPTPP? U.S. gains in real income flowing from lower trade barriers would be substantial – on the order of $130 billion in 2030 compared to a scenario in which trade rules are unchanged. Even so, the original pact was never politically popular in the United States. President Obama only carried reluctant Democrats with the argument that the U.S. needed to remain engaged in the Pacific to counteract China’s looming power. And President Biden doesn’t seem eager to go toe to toe with a Congress in which Democrats barely rule. His immediate priorities are blunting the Covid-19 pandemic and strengthening the domestic economy. Trade negotiations are well down the list. 

If U.S. officials do decide to return to the negotiating table, they likely will do so only if the overall deal is renegotiated. That is what Trump did to save face with Nafta, which also was the target of high-octane criticism that delighted his political base. The successor to Nafta was, in fact, augmented with innovations originally designed for the CPTPP (along with a modest dose of protectionism for the U.S. auto industry) and rebranded as the U.S.-Mexico-Canada agreement. Most of Nafta survived intact, and the new deal is now subject to bipartisan acclaim.

Could the Biden administration follow the same script in revisiting the CPTPP and propose negotiations to “build it back better”? Like the Nafta rebuild, the strategy would not require a major renovation and would leave most of the existing pact in place. And free traders like me agree that provisions covering digital trade, currency practices and environmental policies could benefit from updates included in the USMCA.

The Biden team likely would also argue for some brand-new provisions extending the reach of the deal. The most controversial would involve expanding obligations on labor practices and enforcement procedures, putting pressure on Vietnam and Malaysia to accelerate the pace of implementation of labor market reforms in their economies.

Developments in the Asia-Pacific region could provoke a policy reset sooner rather than later. U.S. trade policy needs to counter China’s new trade pacts that discriminate against U.S. interests in the region. Moreover, Chinese pressure against Taiwan has prompted calls in Congress to deepen support for Taiwan. In both cases, U.S. participation in a new Asia-Pacific pact would protect U.S. economic interests and counter growing Chinese influence in the region. China undoubtedly would protest loudly — but less belligerently than if U.S. officials pursued a bilateral free trade agreement with Taiwan.

How should the CPTPP countries proceed? For the remainder of 2021, CPTPP members should move slowly and carefully with current UK accession negotiations since those talks will set precedents for future applicants. Now that the UK has broken the ice, one should expect other countries to come forward soon; my bet is that South Korea and Colombia will head the queue since both have expressed interest in recent years. CPTPP members should leave the door open whether to negotiate individually with each country or to group all applicants together in a joint negotiation — both options are permitted under CPTPP rules.

Light at the End of the Tunnel

Setting a timetable for deliberations would serve two objectives. First, new accession negotiations could accelerate CPTPP ratification debates in the four laggard countries, since none of them would be able to negotiate with prospective new members until they ratify and become full parties to the CPTPP. Second, conducting accession negotiations in 2022 would provide time for U.S. officials to coordinate with their Asia-Pacific allies on a strategy for augmenting the current deal in ways that would be politically acceptable.

Japan and the other CPTPP countries need the United States to return, even though it may require negotiating intrusive labor and currency provisions along with additional commitments to economic reform beyond the current CPTPP requirements. That is a price well worth paying: strong U.S. engagement in the region is needed to manage relationships with the 800-pound dragon astride East Asia.

main topic: Trade