How Trump’s Actions Reshuffle Trade Relations in the Asia-Pacific

By withdrawing the United States from the Trans-Pacific Partnership (TPP), Donald Trump ensured that a cornerstone of the Obama administration would potentially be knocked-out before it even started. Trump’s executive order to pull the US out of the TPP is one decisive example of the geopolitical and economic implications of the new president’s trade policy: Not only does the pullback of the US force the remaining TPP member states to reassess years of trade negotiations, as well as, the challenges that lie ahead. It also reshuffles the geopolitics of trade in the Asia-Pacific and potentially makes room to China to reassert its role in this very region.

What was the TPP about?

After several years of negotiation, twelve countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States of America and Vietnam) signed the TPP on 4 February 2016. The signatory states’ populations add up to a total of 802 million people. The twelve countries would altogether encompass an annual Gross Domestic Product (GDP) amounting to nearly $28 trillion, representing a bit more than 37 percent of global GDP (2015) and 25 percent of world exports ($5.9 trillion). With a GDP of around $18 trillion (2015), the US alone would have represented around 65 percent of the TPP states’ GDP[1]. Yet the TPP agreement was still awaiting its ratification.

The TPP aimed at deepening economic and regulatory ties between its signatories by both, setting new terms for trade and investment, as well as, by reducing tariff and non-tariff trade barriers. The aspired set of common rules and the level of trade liberalization for goods and services of the TPP would have extended beyond WTO-plus commitments of existing FTAs.

Why did Trump order the withdrawal?

Being a major promise of Donald Trump’s election campaign and considering his plans for substantial restrictions on international trade, it comes as little surprise that one of his first actions as US President was to announce the withdrawal of the US from the TPP, leaving the other eleven signatories to rethink options of common trade in the Asia-Pacific anew.

Trump’s decision comes at a moment when the TPP had not yet been approved by the US Congress, where it was facing strong opposition either way: In November 2016, congressional leaders, both Democrats and Republicans, said they would not bring the deal forward, leaving White House officials to admit that the TPP would not pass through at Capitol Hill, where lawmakers already prepared for the much harder stance on global trade coming along with Trump.

Why the TPP was so divisive

The proponent’s arguments…

The TPP was a cornerstone of the Obama administration: By opening up new market access for US exports in the Asia-Pacific, the TPP was promoted to boost economic growth, the job market in the US and to set high-standard rules for trade. By phasing out tariffs placed by other countries on US imports, selling products abroad would have been made easier. Furthermore, one should not forget about the geopolitical dimension: Considering the massive scope of the agreement, one of Obama’s main arguments for the TPP was that it “would let America, not China, lead the way on global trade”.

Indeed, a study by the Peterson Institute for International Economics (PIIE) on the TPP concludes that the US would have been the biggest beneficiary of the TPP in absolute terms. Yet, the agreement would have also generated substantial gains for Japan, Malaysia, and Vietnam as well as solid benefits for other signatories. The study further argues that the TPP would have raised US incomes, but not US employment. A study by the Bertelsmann Stiftung and the ifo Institute Munich showed that a mere elimination of tariffs would not have a decisive impact on per capita incomes as tariffs are already low between OECD members and those countries which already share trade agreements. However, eliminating non-tariff trade barriers could indeed unlock rather sizeable gains among the TPP partners. In both options, one big winner in relative terms would be New Zealand, mainly due to the fact that the country has no bilateral trade agreement with the big TPP partners (Canada, Japan, the US) yet and would hence profit of both the elimination of tariff and non-tariff barriers. Even though in small digits, Mexico on the other hand could lose from the TPP due to preference erosion, so the study concludes: As a NAFTA member, almost 80 percent of its exports go to the US. If other countries enjoy better access to the US market, Mexico faces tougher competition for its own products. Generally, as outlined by GED expert Thieß Petersen, it should be kept in mind that certain basic conditions have to be met in order for free trade to actually lead to an improvement in people’s living conditions.

…and the ones of a toughing opposition

Opponents of the TPP criticized the secretive negotiations and argued the TPP to be mainly a pro-business deal, causing the outsourcing of jobs to low wage countries and an increase in income inequality. Another controversial point was the clause for Investor-state dispute settlement (ISDS), which was highly criticized for multiple reasons, one of them being a system that lacks checks and balances and represents an attack on regulatory sovereignty. Opponents also argued the deal did not protect against currency manipulation. Other points of critique were provisions related to intellectual property, such as copyright provisions judged to be too restrictive and patent protections which were feared to lead to higher costs of medicine especially in poorer TPP countries.

Trade agreements in general but the TPP in particular were also a hot issue during the run-up to the US elections. Hillary Clinton, who once supported the TPP as Secretary of State, became much more critical of the agreement during her election campaign. Bernie Sanders, her rival during the Democrats’ run for Presidential nomination and a determined opponent of the TPP joined a central criticism by claiming the TPP to only protect business interests at the expense of many others. Sanders and fellow “Rustbelt” Democrats hence welcomed the US withdrawal. Trump’s stance on FTAs was clear from the start as he denounced the TPP as “the greatest danger yet”.

What’s next?

US out – China in?

Some TPP countries were quick to respond to Trump’s announcement, albeit in different ways. Whereas the Japanese government expressed hopes to convince Trump to turn around by continuing to seek his “understanding on the strategic and economic importance of the TPP”, the Australian government already commenced to run through alternative solutions: Australian Prime Minister Malcolm Turnbull and Trade Minister Steven Ciobo showed their openness to a TPP “12 minus 1”, but plus one (or even more): There would be “potential” to push for China to join the TPP, additionally Indonesia reportedly expressed its interest in the partnership – both options were however to be seen under the condition that “we’re able to reformulate it [the TPP]”.

However, it remains unsure whether China may join an already predefined club instead of drawing up an FTA on its own conditions. Speaking of Beijing, as Trump’s anti-global trade policy just commenced to show its potential impact, the US withdrawal may represent a chance for China to extend its economic and political influence and to further reassert its own role as a heavyweight in global trade. GED expert Cora Jungbluth has already covered the question whether China will take the lead on free trade in the era of Trump in another blogpost. As far as the TPP is concerned, for the moment it seems like Chinese authorities will maintain a low profile on this issue and instead focus on their own project. According to a spokesperson of the Chinese Foreign Ministry, China will forge ahead with counter proposals to the TPP, the Regional Comprehensive Economic Partnership (RCEP), as well as, with the construction of a Free Trade Area of the Asia Pacific (FTAAP).

The NAFTA challenge and other options ahead

Before Canada and Mexico actually think about what may happen next to the TPP, they may first of all have to deal with Trump’s attempt to renegotiate the North American Free Trade Agreement (NAFTA), a deal Trump once called “the single worst trade deal ever approved in this country”. Plans of amending and renegotiating the TPP may also be impeded by other signatories opting for bilateral trade agreements instead of a renegotiated multilateral one.

Ratification – now a mission impossible by paragraph?

According to the 30^th and final chapter of the TPP agreement, it can only enter into force if it was ratified by at least six of its 12 original (!) members. These would also need to represent 85 percent of the combined GDP of all 12 signatories. This means that if the US, representing around 65 percent of the combined GDP, would fail to ratify the agreement, the remaining countries will not be able to fulfil the 85 percent requirement. Another option is that, in case the agreement is not ratified by all signatories after two years, it may still enter into force 60 days after this period if at least six of the original signatories ratified it. However, these six again would need to account for at least 85 percent of the combined GDP of the original signatories. At current form and without an amendment (which would require to be agreed by all parties), a ratification seems quite impossible after all for the same reasons as stated above.

TPP down – new challenges and options ahead?

In an article for the Washington Post in 2016, Barack Obama asserted that “the Asia-Pacific region will continue its economic integration, with or without the United States.” Not only did his words gain momentum due to the US withdrawal from the TPP, the now accelerating discussions on how to keep the TPP alive without the US, the potential space opened up by the US withdrawal for China to extend its influence as well as Beijing’s own announcement for a stronger push for an FTAAP and the RCEP may prove Obama’s words to not be too wrong after all.

[1] Calculation based on World Bank GDP Data for 2015 http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?year_high_desc=true