What now for the TPP?

Three potential directions for the Asia–Pacific region

Text by Tom Elliott

To the dismay of Japan Prime Minister Shinzo Abe, and other leaders of Asia–Pacific countries, US President Donald Trump has taken his country out of the Trans-Pacific Partnership (TPP). The new American president has declared a preference for bilateral trade deals over multilateral, and is simultaneously looking to weaken the North American Free Trade Agreement.

China appears ready to fill the vacuum left by the US. At the World Economic Forum at Davos in January, President Xi Jinping spoke of his country’s commitment to globalisation, and willingness to champion its cause. But China’s credentials as a rules-based trading partner — that is open to foreign capital, goods and services — are a little thin. Beijing has a policy of economic nationalism rather than liberal free trade. It uses trade policy to help get its way on political issues, and it will struggle to be taken seriously as a member — let alone the leader — of a regional free trade bloc willing to treat trading partners as equals.

Yet despite its poor record in signing up to multilateral agreements, and accepting international jurisdiction on issues affecting its interests, China may well succeed in filling the vacuum left by the US. Such is the desire for a regional free trade agreement by many TPP members.

The irony is that the TPP had been designed by Washington to create a counter to growing Chinese influence in the Pacific region. The US had indicated that China might, one day, be invited to join the TPP. But it did not want China in from the start, and able to influence the rules of the agreement. The TPP was a part of the Obama administration’s “Asia-pivot”, designed to help the US maintain influence in the region.

Additionally, the US and other TPP countries feared that provisions China disliked — such as on copyright protection and labour rights — would be watered down or removed. By pulling out of the TPP, Trump has sent a message of disinterest to America’s regional allies that will not be lost on China.

The question that now needs to be asked is, How can other TPP members respond?

The first option is to carry on with China.

Australia, New Zealand and many other Asia–Pacific economies still hanker for a regional trade deal that includes a major economy. With all TPP member states having finalised the provisions — though TPP is not yet law — there is a view among some that China can be “slotted in” to the place the US has left vacant.

Australian Prime Minister Malcolm Turnbull has already expressed interest in China joining in place of the US. The problem is that China would be asked to accept laws that it had no hand in writing, and so is unlikely to accept such an arrangement.

Instead, the existing TPP members would have to agree to a watered-down version. Out would go provisions on copyright and labour laws, which China has traditionally had problems with; and, instead, the TPP would limit itself to market access and tariffs.

This would still take many years to complete, and negotiations would be tough. But a reduced TPP, dominated by China, may well emerge.

The second option is bilateral deals.

Japan is unwilling to continue with the TPP without the US. There is speculation that Abe will discuss a Japan–US bilateral trade deal with Trump on his forthcoming visit to Washington.

Australia already has a bilateral trade deal with the US, and other TPP members may follow Japan if Trump turns out to offer good terms of trade.

However, trade experts see bilateral trade deals as inferior to multilateral deals. They lead to a decrease in trade with neighbours outside of the agreement, tend to involve large economies and exclude small ones, and decrease the inclination of countries to sign up to broader multilateral agreements.

A Japan–US bilateral trade deal negotiation will have its own risks. It would specifically challenge Trump, who needs to show that he can do “smart deals”, while at the same time talk tough on trade with a rival economy that American populist politicians believe has been a “trade cheat” for decades.

The third option is to wait for RCEP and, one day, FTAAP.

The Regional Comprehensive Economic Partnership (RCEP) has long been an Asia-biased alternative to the TPP favoured by China.

It includes the ASEAN group, India and China, but not countries in the Americas. However, it has been regarded as the second-best choice by those countries who were in the TPP negotiations, given the slow pace of work on RCEP and the likely dominance of China.

China may decide to push for completion of RCEP, rather than be included in the TPP, since it has played a major role in the RCEP from the outset.

Finally, China has long held the view that one day the RCEP and TPP will merge, to create a substantial trading bloc that will include the US. It calls this the Free Trade Area of the Asia Pacific (FTAAP). This is currently a distant dream, but it may yet happen if, or when, the political pendulum swings back towards free trade in Washington.  •