Economy

The TPP is Dead. What Happens Next?

Given the likely demise of the TPP, the pressure on India to sign bilateral and regional free-trade deals to counter mega-regional trade pacts has eased.

Outgoing US President Barack Obama presiding over a TPP meeting in 2014. Credit: Reuters

Outgoing US President Barack Obama presiding over a TPP meeting in 2014. Credit: Reuters

On Monday, US president-elect Donald Trump announced that the US would pull out of the Trans-Pacific Partnership (TPP) trade pact on his first day in office – January 20. In a video message outlining his policy plans for his first 100 days in the Oval Office, Trump stated, “I am going to issue a notification of intent to withdraw from TPP, a potential disaster for our country. Instead, we will negotiate fair, bilateral trade deals that bring jobs and industry back on to American shores.”

Outgoing President Barack Obama’s administration was trying hard to seek US congressional ratification for the TPP this year but abandoned its efforts after Trump’s victory. The TPP has faced stiff political opposition, cutting across party lines and ideologies. Both he and Hillary Clinton had expressed their opposition to the pact and vowed to reject it once elected. Trump was very vocal in his opposition to the TPP as well as NAFTA throughout his campaign, whereas Clinton flip-flopped on the question of the US remaining in the pact. While serving as the secretary of state, Clinton had praised the TPP as setting the “gold standard in trade agreements” but reversed her position during the presidential campaign in response to TPP critic Bernie Sander’s tough challenge in the democratic primaries.

Japan is the only TPP member country to have voted to ratify the deal, which took place earlier this month. As per the rules laid out in the TPP, the agreement allows for a two-year ratification period in which at least six original member countries – representing 85% of the combined GDP of the group – should approve the text for the agreement in order for it to be implemented. The US accounts for nearly 60% of the group’s GDP. With the US announcing its withdrawal, the TPP agreement simply cannot enter into force even if all the remaining 11 member countries ratify the agreement.

In simple terms, the TPP, in its present form, is effectively dead.

What is the TPP?

Signed in February 2016, the TPP involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. The idea of a trans-Pacific partnership was initiated by four countries – New Zealand, Singapore, Chile and Brunei – way back in 2002.

Initially, the US was not interested in joining the negotiations but Obama decided to take part in the negotiations in November 2009. Later on, many other countries such as Malaysia, Japan and Vietnam also joined negotiations, while China refrained. Although China officially maintained that it has an “open-minded attitude” towards the TPP, it was not ready to meet the higher standards – particularly when it came to the operations of state-owned enterprises – espoused in the pact.

The agreement is a 4,500-page document, prepared after seven years of negotiations. It is the world’s most ambitious free-trade pact ever to be signed. It is much more than a typical free-trade agreement (FTA) which aims to do much more than reduce import tariffs on agricultural and manufactured goods. The reason being that the average applied tariff rates amongst most TPP member countries are very low so there is little scope for further reduction.

The TPP represents a new generation of 21st-century trade agreements, creating new mechanisms to govern cross-border economic activities with much higher standards than any existing bilateral, regional and multilateral trade agreements have achieved. As analysts have pointed out, the pact is a kind of “economic constitution” governing cross-border trade and investment with a greater emphasis on the removal of regulatory barriers.

The TPP is touted as the “gold standard” of trade and investment agreements because it contains stringent rules on a wide range of issues such as cross-border investments, intellectual property rights (IPRs), state-owned enterprises, government procurement, e-commerce, services liberalisation, regulatory coherence, labour and the environment.

One of the most contentious issues is the incorporation of the investor-state dispute settlement mechanism which would allow foreign investors from TPP member states to bypass domestic courts in host states and sue a host state through international arbitration proceedings.

With the US and Japan in the driving seat, the negotiating agenda of the TPP was drastically reshaped to suit their core interests while other negotiating countries (particularly the developing ones) did the heavy lifting to meet the onerous demands put forward by these two countries.

Concerned over the potential negative effects the pact would have on jobs, the economy and regulatory space, civil society groups and labour unions from both sides of the Pacific launched popular campaigns focused on critiquing the secret nature of the negotiations and sought greater public participation during the negotiation process.

TPP: Obama’s Pivot to Asia-Pacific

For the Obama administration, the TPP was not purely a trade and investment agreement. Obama and his aides foresaw huge strategic value in joining this pact. The TPP was a key component of Obama’s “rebalance” policy towards Asia which rested on three pillars: economy, politics and security. By 2011, the TPP had become the linchpin of the administration’s “pivot to Asia” strategy to contain China’s economic and geopolitical influence in the Asia-Pacific region.

Obama repeatedly emphasised the importance of the US maintaining its leadership role in crafting global trade rules and how the TPP would strengthen the US’s power to set the rules of global trade. In an opinion piece on the pact, published in The Washington Post, Obama stated: “America should write the rules. America should call the shots. Other countries should play by the rules that America and our partners set, and not the other way around. That’s what the TPP gives us the power to do…The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let’s seize this opportunity, pass the Trans-Pacific Partnership and make sure America isn’t holding the bag, but holding the pen.”

TPP (minus one) Pact?

Some trade experts argue that it may be too soon to bury the TPP. Of course, the agreement can possibly survive if the remaining 11 signatory countries drastically modify the rules governing its entry into force. The so-called ‘TPP (minus one) pact’ is theoretically possible. It is also conceivable that countries like Indonesia and Thailand may join the TPP in the future, thereby expanding its membership.

However, one is not sure whether all the remaining member-countries of the TPP would agree to modify the rules governing its entry of force, since only Japan has voted to ratify it. With the lead country pulling out of the pact before the ratification process has been completed, the remaining member-countries (particularly traditional allies of the US) may lack the motivation for ratifying and implementing the pact. For instance, Vietnam has already decided to shelve its plans of ratifying the TPP. In a statement issued on November 17, Vietnamese prime minister Nguyen Xuan Phuc said, “Vietnam has prepared adequate conditions to join the 12-nation TPP. However, as the United States has announced to stop the deal, so Vietnam has not had enough basis to submit TPP participation to the National Assembly.”

Moreover, many member countries would not be keen to pursue a TPP (minus one) pact due since they would not get exclusive access to US markets, the primary reason for which they accepted onerous conditions to join it.

RCEP: The Next Best Hope

In this rapidly evolving scenario, many TPP members (in particular Japan, Australia and New Zealand) who are also members of the proposed Regional Cooperation Economic Partnership (RCEP) will now shift their attention to this pact. These countries may further push for TPP-like provisions at RCEP to maximise the best possible outcome following the imminent demise of the TPP.

It is hard to deny that for many countries in the Asia-Pacific region that have a small domestic market, the export economy remains very important. Such countries would prefer any deal to no deal when it comes to joining a regional economic bloc. Of late, TPP member countries like Peru and Chile have also shown interest in joining the RCEP.

The RCEP is a proposed mega-regional FTA between 16 countries – ten ASEAN countries and their six FTA partners, namely, Australia, China, India, Japan, South Korea and New Zealand. If accomplished, the RCEP would pave the way for the creation of the largest free-trade bloc in the world, covering 45% of the world’s population with a combined GDP of US $22 trillion and accounting for 40% of global trade.

The legally binding RCEP covers a wide range of issues including trade in goods and services, investment, intellectual property rights, competition policy, dispute settlement and economic and technical cooperation. The negotiations were officially launched in November 2012 at the ASEAN Summit in Cambodia and the 16th round of negotiations will be held in Indonesia during December 6-10, 2016.

RCEP: China-led or ASEAN-centric?

Many commentators have described the RCEP as a China-led trade pact. There is no denying that China is an export powerhouse in manufactured goods and has enormous economic clout in this region but it would be erroneous to view the RCEP as a China-led trade pact for three important reasons – the RCEP is an ASEAN-centered FTA as it seeks to harmonise and build on existing FTAs between the ASEAN and its six trading partners. And signing an FTA with ASEAN is the precondition for joining the RCEP negotiations. In other words, the US or any other country can also join RCEP negotiations provided they first agree to an FTA with ASEAN. Finally, Japan has successfully pushed strong rules addressing investment and intellectual property rights into the negotiations, despite opposition from India and other members. Leaked drafts of the RCEP reveal that the TPP’s principles for governing investment, IPRs, services, e-commerce and telecommunications are currently under discussion to be included in the RCEP at the insistence of Japan and South Korea.

Reshaping India’s FTA Strategy

In many important ways, the imminent demise of the TPP has eased the pressure on India – which is not supportive of the RCEP’s ambitious agenda on IPRs, investment and zero tariffs due to the potentially negative impact it could have on local Indian producers and businesses.

For India and many other developing countries, the pressure to sign bilateral and regional FTAs in order to counter other mega-regional trade pacts (such as the TPP) has subsided for the time being. The TPP’s collapse has also weakened the negotiating position of countries like Japan and Australia in RCEP discussions.

In the upcoming round of negotiations set to take place next month, India should forcefully argue that the “gold standard” TPP framework has lost its appeal and popular support; therefore a modest agenda based on including the diverse circumstances of the negotiating countries should be the only one pursued at RCEP negotiations.

In the present context, when world trade is slowing down and protectionist tendencies are rising across the developing world, India should rethink its FTA strategy in the short and medium-term.

At the same time, it is equally important for leading countries like Japan, South Korea, China and Australia to understand that only a modest agenda would be politically feasible under the RCEP globally, public opinion is turning against FTAs. Any attempts to pursue an ambitious agenda may provoke strong political backlash, thereby jeopardising the future of the entire agreement.

What about NAFTA, TTIP and FTAAP?

What will be the fate of America’s other regional FTAs? It remains to be seen whether Trump will renegotiate or withdraw from NAFTA once he takes office.

Since 2013, the US has been negotiating the Transatlantic Trade and Investment Partnership (TTIP) – another ambitious free-trade agreement with the EU. The future of the TTIP has become highly uncertain after Brexit and Trump’s election victory.

To a large extent, the prospects of the Free Trade Agreement of the Asia-Pacific (FTAAP) will depend on how negotiations for the RCEP and other regional FTAs proceed. The idea for the FTAAP was proposed in 2006 by the Asia-Pacific Economic Cooperation (APEC) as a long-term, comprehensive FTA covering the entire Asia-Pacific region, but no concrete steps were taken by APEC members to turn it into a reality.

At the APEC summit held in Beijing in 2014, China revived the idea by proposing a feasibility study but the US and other members did not support it. Given Trump’s stated preference to negotiate bilateral trade deals, attempts to launch negotiations on giant regional FTAs like FTAAP are unlikely to gather support during his presidency.

Kavaljit Singh works with Madhyam, New Delhi, where this piece originally appeared.

  • ashok759

    If India wishes to prosper, become a middle income country, it should shed its diffident, sometimes almost defeatist, approach to global trade. We have missed so many buses in the past, with our neighbours to the east clambering on, one by one. To a large extent extent our attitude is shaped by the high cost nature of the economy, saddled with all manner of legacy costs. The fact that something as clumsy and broad brush as demonetisation could have been resorted to underlines how far our politics has diverged from sensible economics.