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The next chapter for the Trans-Pacific Partnership

The future of trade and cross border commerce in Asia and the Pacific and the US role in Asia’s economy were put in doubt by Donald Trump’s withdrawal of the United States from the Trans-Pacific Partnership (TPP) economic agreement.

The TPP was the economic arm of President Obama’s pivot to Asia. It was also supposed to set the rules and standards of trade in Asia and for the world. It is no surprise then, that some of the remaining 11 members of the TPP are trying to save the agreement even without US participation. A lot of political capital was expended in negotiating the TPP and countries are looking for ways to maintain the momentum of economic integration.

Leading the push for a TPP 11, or TPP minus the United States, are Japan and New Zealand, and to a lesser extent Australia. Can the rest of the grouping that includes Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam forge an agreement out of what remains of the TPP?

If they do, it will be TPP in name only. Without the United States it will have to be a different agreement in structure and character.

The United States accounts for 69 per cent of the combined GDP of the TPP countries. The agreement was largely negotiated as a hub and spokes deal between the US and the other 11 members bilaterally. And now the hub has fallen out the bottom.

For some members of the arrangement, like Vietnam and Malaysia, the biggest selling point was greater US market access at the expense of competitors outside the arrangement. The bargain involved acceptance of US rules and standards (that were more suited to advanced economies) in exchange for preferential access over competitors such as China, India or Bangladesh to the lucrative US market for labour-intensive imports such as textiles.

Even for countries facing not so-stark a bargain, US market access was the economic prize. Entrenching the United States in Asia was the strategic prize. While it’s true that US engagement in Asia was never going to be secured or defined by the TPP but instead by broader US interests, those longstanding US interests in Asia are now also being tested by President Trump.

The technical rule that a minimum of six countries representing 85 per cent of the GDP must ratify the TPP agreement for it to come into force (a rule that made US membership a necessary condition) can be changed. But, as Gary Hawke reminds us in this week’s lead essay, such a change would present the remaining members with ‘another lengthy set of negotiations’. The question, he asks, is whether ‘the cost of such renegotiation [is] worthwhile’. Considering that the ‘group of 11 is not an obviously attractive unit’, Hawke concludes, ‘the negotiating resources would be better deployed elsewhere’.

Some reckon that President Trump might suddenly change his mind or that the next US president will quickly right the TPP wrong and re-enter the agreement. Hawke points out that the chances of this are ‘surely nil’ in the ‘next two years’ at least. ‘Congressional attitudes have to change for the existing TPP draft to have any chance of ratification, and US adherence to an agreement shorn of some US negotiating points is even less likely’. Unsurprisingly,  ‘those governments advocating proceeding with a TPP-11 are also advocating that it should be with the existing text’.

What should the remaining 11 members of the TPP do? Instead of throwing good money after bad, Asian economies and their willing partners across the Pacific and in other open economies that want to protect and lift their living standards need to double down on the global trading system.

President Trump has not followed through on his other campaign threats on trade, such as slapping a 45 per cent tariff on all Chinese imports to the United States or withdrawing from the WTO but Trump’s America still represents the biggest threat to the global trading system. There’s no predicting what Trump might do in the lead up to the midterm US elections if jobs don’t come back to the rust belt, which they most likely will not.

The rules-based open global trading system was created by the United States, which has underwritten it for the past 70 years. The GATT and more recently the WTO underpinned the confidence in countries opening up to international markets and acted a backstop against protectionism with its obligations to bind trade restrictions and to honour the WTO dispute settlement mechanisms. That system has meant that Asian neighbours have built prosperous economic ties even in the absence of close political ties, bolstering political as well as economic security in the region.

If Trump’s America undermines the confidence in the multilateral trading system it will have substantial economic and political consequences, nowhere more so than in Asia.

Asia has powerful incentive to push ahead as a force for openness in the global economy. Instead of a truncated Asia expending energy on trying to save the TPP, the whole region, including the big, dynamic economies of China, India and Indonesia can step up and make credible and ambitious commitments in opening up their economies in defence of open global trade .

The TPP has a role to play as an organ donor, as Shiro Armstrong suggests, where countries and other groupings can take what’s good about the TPP and apply it in other agreements. The progress made in opening up Japanese markets, negotiating cutting-edge agreements on data flows and e-commerce, and putting pressure on countries to lift their game in response to US pressure in the TPP don’t need to go to waste.

Pragmatism, ambition and creativity are needed in response to negative pressure from the United States. No single country can take over the leadership role that the United States has played over the past seven decades, but in Asia a coalition of open economies would have sufficient heft to underwrite the global trading system.

June 26, 2017

Source: East Asia Forum

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