FTAAP

Joining the TPP: A Path Forward for the UK?

The Financial Times has reported that the UK’s Department of International Trade has begun circulating a proposal for the UK to join the Trans-Pacific Partnership (TPP) trade agreement. There are at least four issues to be addressed:  1) Why would the UK want to join the TPP? 2) Does the TPP even allow the UK to join in the first place?  3) Why would the TPP members want the UK?  4) Is it possible to make a deal happen and when?

Minister Lim: The Importance of Globalisation and Inclusive Growth

Indeed, globalisation is not a panacea for all economic woes nor does it come without costs. While globalisation has lifted hundreds of millions of people out of poverty, and brought immense benefits to consumers, we have to acknowledge the growing discontent. Benefits from globalisation have not been distributed evenly. We also have to recognize the impact of disruptive technologies, which can result in skills becoming obsolete and being displaced.  However, we should not make globalization the scapegoat for slowing growth and unemployment. Closing borders and turning inward is not the answer. Economies are so interdependent nowadays that it would be very difficult to disconnect from the global value-chain. If we do so, our businesses and communities will lose out. Markets will shrink, fewer jobs will be created and consumers will have to bear higher costs and will have fewer choices. We should avoid actions which will only hurt ourselves and lead to retaliatory measures, undoing the good progress that we have achieved so far.

Trump Fallout Reaches Peru—The Future Direction of APEC?

The study will say that FTAAP is an excellent idea that APEC should pursue. The original plan—certainly by the Americans—was to say that the study was nice, but since both pathways were currently in progress and moving ahead nicely, there was no need to push forward with FTAAP at this point.  After all, TPP was finished but in the domestic ratification stage and RCEP remains under negotiation.  Why jump to the next phase while the building blocks are still being built? Now the situation has changed. Trump will not even be present, yet his shadow will loom large because his election has called into question the viability of the TPP pathway to FTAAP.  If the TPP is not going to happen, then RCEP becomes the default path to FTAAP.  

Who Writes the Rules for Trade?

President Obama had an op-ed published in yesterday’s Washington Post with a headline that read, “The TPP would let America, not China, lead the way on global trade.”  This article contains three deeply problematic arguments.

Few people are likely to be more enthusiastic supporters of the Trans-Pacific Partnership (TPP) trade agreement than I am.  The TPP stands as a critically important avenue for unleashing domestic reforms to unlock new sources of economic growth and competitiveness across the region. 

The deal is not perfect, of course, but on balance, it represents an important achievement that should be promoted, approved and implemented as quickly as possible.

To that end, I am delighted to see leaders use whatever arguments might push the ball forward towards ratification.  But three lines of thought contained in the President’s piece are quite troubling.

First, 12 member countries wrote the TPP agreement—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.  The United States, by virtue of its overwhelming economic size and strength within this grouping, had an outsized influence in the negotiations, but it should not forget that the other 11 members also played key roles. 

Many of these partners stepped up to the plate and agreed to take on significantly harder, deeper and more substantial domestic reforms than anything the Americans have agreed to do in the TPP.  The most challenging elements of the agreement for many TPP members came about because the United States insisted on including these provisions.

A negotiation, after all, is a compromise and no country ever gets everything that it wants in an agreement.  The US got most of what it asked for, but not all.

The TPP agreement cannot take effect until the other members agree to continue to participate and to implement the agreement fully.  Unnecessarily antagonizing partners will make it harder for TPP members to convince their own domestic constituents that these reforms are worth doing.

Even if the US wants to argue that it played the critical leadership role in the TPP, it is always worth remembering that members of Congress have repeatedly complained about a lack of sufficient enthusiasm by past trade agreement partners at the implementation phase (see, for example, Korea, Columbia, and Panama).  It is important to keep TPP members motivated across the longer term.

Second, and perhaps more important, bringing China into the equation as the “bad guy” is going to do substantial long-term harm.  This is damaging to the United States, to China, to the TPP and to the global economy. 

The long-term objective is to connect China and the United States together in a trade agreement that meets the high standards that Obama discusses in his article.   Such an outcome will never be met if China is painted from the outset as somehow “outside” the bounds of such behavior. 

This is a particular shame, since there have been many signals in the past few years that many Chinese have begun to realize that TPP membership may be in China’s own interest in the medium term.  China’s economic growth is also faltering.  For China to push through domestic reforms, it too may need to hook to an external agreement like the TPP.

For global trade, it certainly does no good at all for the United States and China to build competing trade blocks.  In an increasingly interconnected world of value or supply chains, this makes even less sense. 

Finally, the President’s characterization of what he seems to term China’s rival trade deal, the Regional Comprehensive Economic Partnership (RCEP), is inaccurate on many levels. 

As I have noted before, one of RCEP’s biggest problems, quite frankly, is that it is not lead by anyone in particular.  The trade ministers from the 16 countries in Asia have said that the agreement must be done this year and have given broad outlines of what it must contain, but no specific country is driving the agenda.  ASEAN is officially in charge and having 10 countries lead is difficult.

RCEP will not, as the President notes, address state-owned enterprises. It will likely not cover worker rights or the environment. 

He also says it will not cover the internet nor will it respect intellectual property rights.  I think this is wrong.  We do not yet know where RCEP will end up, but I can say that officials in the agreement are wrestling hard with these issues.  Of course, if there were more information and more coverage of what is happening in RCEP, we all might know better.

So what arguments could President Obama use instead?  To promote passage of the TPP within the United States and avoid the three mistakes above a future article should say, “The TPP lets America show leadership on trade.” 

The article could highlight the critical role that trade plays in providing jobs, growth and economic opportunities.  Since the piece is intended for an American audience, the statistics should, of course, highlight the connected nature of these jobs for American workers to markets in TPP countries. 

The article should discuss how important it is to keep these markets open in an economic downturn and how Asian economic growth remains a bright spot.  It could highlight the important provisions of the TPP and show how and why these elements matter to Americans.

The TPP is intended to be a building block to further, bigger trade agreements.  It is meant to bring in more countries in the future.  By adding additional members to the TPP, the prospects for more jobs and economic growth in the United States will be brighter.

In addition, some of the parts of the TPP might become elements of larger, global trade arrangements in the future.  They could be part of a future Free Trade Area of the Asia Pacific (FTAAP) within APEC or be transferred to the World Trade Organization (WTO) with more than 160 members.

It would be forward-looking and visionary.  Not defensive, reactionary and setting up long-term problems that need not be stoked.

That would show American leadership on trade.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Fantasizing about a Free Trade Area of the Asia-Pacific (FTAAP)

The diplomatic calendar in Asia gets extremely busy in November.  Over the years, officials have expanded the number of meetings attached to the Leader’s Meeting of APEC.

Last week in Manila, the leaders of APEC economies gathered and wore fancy hand embroidered shirts for this year’s “family photo.” In addition to the various meetings for APEC itself, some of the leaders also met on the sidelines for a review of the Trans-Pacific Partnership (TPP) and the Pacific Alliance (PA).  In between, many of the leaders also held bilateral meetings.  Finally, officials met in Kuala Lumpur over the weekend in a host of meetings associated with ASEAN including the East Asia Summit (EAS). 

These meetings addressed more than just economics.  But in trade, three things stood out.  As APEC chair, the Philippines consistently promoted small and medium enterprises (SME) across the overall agenda.  Small companies form the backbone of most APEC economies and a year of focus on their needs was helpful.  Second, ASEAN leaders celebrated the forthcoming launch of the ASEAN Economic Community (AEC) at the end of the year.  Finally, the APEC Leader’s Declaration highlighted the importance of achieving broad goals of free and open trade and investment.

This commitment reiterates past statements by APEC about the importance of the eventual Free Trade Area of the Asia Pacific (FTAAP).  APEC was launched in 1989 as a non-binding, advisory trade body that currently includes 21 member economies.  Economic benefits from sustained, regional trade liberalization would be enormous.  Member economies now account for 40 percent of the world’s population, 55 percent of the world GDP and 44 percent of world trade.

Starting in 2010, leaders agreed that the plans to get to an FTAAP could take different formats.  APEC would provide “leadership and intellectual input into the process of its development, and [play] a critical role in defining, shaping and addressing the ‘next generation’ trade and investment issues that an FTAAP should contain.”  In 2014, China pushed for a comprehensive study on how a 21 member economy agreement might take place.

Officially, leaders have endorsed several pathways to reach FTAAP.  APEC currently has no ability to negotiate directly, so the institution requires an outside mechanism to reach a deal.  Two of the officially sanctioned pathways to reach the FTAAP are now in play:  the 12 party Trans-Pacific Partnership (TPP) and the 16 party Regional Comprehensive Economic Partnership (RCEP). 

The hope of FTAAP backers has always been to allow both tracks to merge in the end to create an APEC-wide package of commitments.  In general, these hopes are likely to be dashed for several reasons.

Economies that have negotiated a “high quality” agreement in the TPP will prefer everyone to simply sign on.  From the earliest days of the TPP, membership has been opened to all APEC economies.  Not all have chosen to join and many of the remaining APEC economies are not eager to sign onto TPP-level commitments, including opening nearly all goods--and particularly agricultural trade--at (mostly) zero tariffs, new and expanded openings in services and investment markets, new rules on intellectual property protections, opening of government procurement markets, signing up for labor and environmental protection provisions in a trade agreement, and so forth. 

If economies outside the TPP are reluctant to step up to this deal, perhaps RCEP could serve as a better vehicle for moving ahead with trade liberalization inside APEC.  It is not clear how ambitious RCEP might become, but early signs suggest a significant gap in enthusiasm for market opening between the two deals.  For example, on goods trade alone, RCEP may see a “tiered” approach with different percentages of commitments forthcoming from some members to other members.  Services and investment provisions will likely have less opening and fewer protections.  While the negotiating agenda is expanding in RCEP it is unlikely to be as deep or broad. 

Hence, allowing RCEP to become a defacto platform for FTAAP would also require TPP member countries that are outside RCEP (including all of the Americas) to agree to fewer protections and less market opening.  The practical consequences of doing so would be modest, as most firms would likely opt to use the broader, more comprehensive TPP provisions if at all possible, rather than the shallower commitments in RCEP/FTAAP.

Merger of TPP/RCEP also contains some additional problems.  Not all APEC members are included in either agreement.  Four are currently left out of both: Hong Kong, Papua New Guinea, Russia, and Chinese Taipei. 

While some theoretical literature speaks eloquently about “multilateralizing regionalism,” in practice, this is devilishly difficult to do.  RCEP itself can be seen as an attempt to follow exactly this prescription—folding five different ASEAN +1 agreements (with China, South Korea, Japan, India, Australia and New Zealand) into one.  But officials have struggled to even exchange market access offers for one another in goods, despite two years and 10 rounds.  What countries offer to one partner may, or may not, be something they are ready and willing to offer to another. 

Converting RCEP into an FTAAP could contain similar challenges.  The nine excluded partners from RCEP (Canada, Chile, Hong Kong, Mexico, Papua New Guinea, Peru, Russia, Chinese Taipei, and the United States) might have dramatically different ideas about what should/should not be folded into FTAAP.  In addition, whatever commitments RCEP members have made to one another might be altered with the addition of new participants, as RCEP members could be quite uncomfortable making the same offers to a new grouping.

RCEP also contains non-APEC economies (Cambodia, India, Laos and Myanmar). Converting the agreement into FTAAP may mean bringing non-members into APEC or somehow cutting these participants out of the future, larger agreement.  Either option could prove tricky in practice.

In short, it is unlikely that a satisfactory FTAAP agreement can be created by merging RCEP with TPP or by morphing one or the other into a new agreement in the future.  Hence, if APEC wants to create an FTAAP that contains all members or gives all 21 member economies the option of joining, it should start from the beginning with all 21 members. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***