27 October 2015

Myths and Realities of the Trans-Pacific Partnership

October 26, 2015

The ink was hardly dry on the 12-nation Trans-Pacific Partnership (TPP), the first major multilateral trade agreement in two decades, when the snipers began taking shots at it. The stakes are high, yet a cloud of uncertainty hangs over the fate of TPP.

In the U.S., Republicans in Congress who had been strongly supporting it began to express doubts. Hillary Clinton, who as Secretary of State was its leading advocate as the leading edge of the U.S. “pivot” to Asia which she championed, now as a U.S. Presidential candidate came out against it—in effect, trading her Asia policy for AFL-CIO support. TPP was a major factor in the Canadian elections this week, and the resulting Liberal Party victory may put TPP at risk. Even in Japan Prime Minister Shinzo Abe, who sees TPP as key to his “third arrow” to revive the economy, appointed a committee to address those in Japan who may be negatively impacted by it.

In fact, one of most intriguing and all-but-unnoticed aspects of TPP is that it is in effect, a backdoor entry into a de facto U.S.-Japan free trade agreement. A U.S.-Japan FTA has been discussed since the 1980s as a way to deepen the U.S.-Japan alliance and better balance bilateral trade, but from agriculture to beef and autos, the obstacles always made it seem like a bridge too far.

What’s going on here? TPP is many things. It removes tariffs on 18,000 products, lowers agricultural barriers, opens access to trade in services and limits government favoritism for state-owned enterprises. It addresses drug patents. Two of its chapters are focused on labor and the environment, raising labor standards and even protecting wildlife and curbing overfishing.

Undoubtedly some of the advertised benefits—the Peterson Institute projects that TPP would add 0.4 percent to the U.S. GDP and up to $500 billion to the global economy by 2025—may be exaggerated. But at a time of slow global growth, when global trade is lagging, and the WTO has been unable to complete the Doha Round, this sort of opening for 40 percent of the world economy is a net good. If other major trade accords are completed, such as the U.S.-EU Trans-Atlantic Trade and Investment Partnership (TTIP) and the EU-Japan Free Trade agreement, the majority of the world’s trading nations would see a major expansion of free trade with higher standards and norms. Not exactly the WTO, but these accords would apply high trade standards for over 80 percent of the world trade.

And yet the fate of TPP is up in the air. One problem regarding the politics of free trade accords is that there are always winners and losers, even if the result is a net gain for a nation’s economy. The losers generally know who they are and mobilize in opposition, but who the winners will be tends to be less clear.

In the U.S., part of the problem is that the 2016 presidential election campaign—a.k.a. silly season—is underway, and TPP is a juicy target. But TPP provisions limiting what U.S. tobacco companies can do to promote sales abroad, drug patent protections of only 5–8 years (as opposed to the 12-year standard in the U.S.), and limited mechanisms to address currency manipulation issues is softening support in the U.S. Congress from free-trade Republicans. The U.S. Congress may prove to be the biggest obstacle to TPP. It will have 90 days, once President Obama submits, to decide on TPP in an up-or-down vote. Some fear a vote may be postponed until after the 2016 elections and debated during the lame-duck session—or postponed until 2017, after Obama’s successor takes office.

A U.S. rejection of TPP, which is within the realm of the possible, would thoroughly undermine the so-called U.S. “rebalance” to Asia, both in terms of American credibility in the region and in terms of more deeply integrating the U.S. economy with Asia.

In Canada, TPP is a hot, politically divisive issue over its provisions to liberalize the dairy market. While Conservative leader Stephen Harper praised the deal, the victorious Liberal Party led by Justin Trudeau has been critical of TPP. Its path to ratification in Canada may be a rocky one.

What TPP is Not

But regardless, it is important to keep TPP in perspective and understand what TPP is not. TPP is not a silver bullet that will necessarily boost the U.S.’ role in Asia. The damage of rejection is probably greater than the benefit of its passage. TPP is also not a substitute for a WTO global trade round. But the age of WTO global trade rounds may be over in a world of diffused power.

While there is a geopolitical, or perhaps a geoeconomic, dimension to TPP, its role has been exaggerated. In economic terms, TPP will not reverse long-term trends. Intra-Asian trade and investment is growing faster than trans-Pacific trade and investment. This is unlikely to change. In absolute terms, U.S. trade with and investment in Asia is steadily increasing—a trend that TPP would accelerate. U.S. trade with Asia is $1.3 trillion annually, about 34 percent of total U.S. trade, and U.S. foreign direct investment in Asia is roughly $1 trillion. But in relative terms, it is steadily diminishing. This is simple arithmetic: Asia is growing faster than the U.S. and this is likely to remain the case for the decade ahead. So TPP helps sustain the U.S. as an important economic actor in Asia, but hardly crowds out China, the largest trading partner of all U.S. allies and partners in the region.

Geopolitically, TPP bolsters the U.S.’ posture in the Asia-Pacific, raises the stakes for U.S. foreign policy in Asia, and makes more credible the U.S.’ long-term commitment to the region. To the extent that economics is a factor in the strategic calculus of Asian nations, TPP and the enlargement of the U.S.’ economic role enhance the importance of Asian nations’ bilateral ties to the U.S.

But TPP does not change geography: China, with borders on fourteen nations, will always be a neighbor in the region. While only 12.5 miles separate the U.S. from the Asian mainland in the Russian Far East via the Bering Strait, the U.S. is a Pacific power, not an Asian state. In contrast, its geographic proximity and size will always make China a major concern for other Asians.

TPP would be more significant for the U.S. in the negative: failure to approve TPP would undermine U.S. credibility in the region and give momentum to China’s efforts to create parallel institutions in the region, like the Asian Infrastructure Investment Bank. Chief among the Regional Comprehensive Partnership (RCEP) would be boosted to the region’s major trade accord, one that excludes the U.S.

One of the selling points of TPP in the U.S. is President Obama’s frequent claim that if we don’t pass it, China will write the rules of global trade. This is, at best, half true. No matter what the U.S. does, China has now become the world’s largest trading nation, with more than $4 trillion in annual two-way trade. Clearly, it will play a role in setting global standards. Certainly Obama is correct that absent TPP, China would play a more preponderant role in shaping the regional and global economic order. But in fact, it is a question ofrelative U.S. and Chinese roles, not one of either the U.S. or China writing the rules.

Judging by Chinese official rhetoric on TPP, it is likely that sometime in the coming decade China will join it—assuming all twelve members approve it and it becomes a fact of life. China’s accession to the WTO in the early 1990s was used by Beijing as a lever for its reforms, and TPP would likely play a similar role, aiding Xi Jinping’s efforts to implement difficult market reforms.

But in strategic terms TPP is one important piece in a U.S. trifecta economic strategy to shape the global playing field. If TPP, reflecting 40 percent of the global economy, is complemented by TTIP, where the U.S. and EU represent more than 40 percent of the world economy, and the EU-Japan trade accord is also completed, that shapes the playing field. If that trifecta becomes reality, it will curtail China’s choices and play an outsize role in setting trade and investment standards in the twenty-first century.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center for International Security at the Atlantic Council. He served as a senior counselor to the UnderSecretary of State for Global Affairs from 2001 to 2004 and a member of the US Department of State Policy Planning Staff from 2004 to 2008, and on the National Intelligence Council’s Strategic Futures Group, 2008-12.

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