TPP needs less haste, more caution

Author: Shiro Armstrong, ANU and Columbia University

The Trans-Pacific Partnership (TPP) aims to be a high quality, 21st Century economic agreement among its nine members. It is also supposed to encourage others to join in. Led by the United States, there is a strong push to deliver TPP this year in time for the APEC meeting in Honolulu in November.

But rushing a quick deal on the TPP should not be at the expense of a good economic agreement. The priority is to progress it on the right terms. The economic and political consequences of getting it wrong are too great.

The sixth round of negotiations for the TPP finished in Singapore recently. The nine negotiating states of Australia, Malaysia, Peru, the United States, Vietnam, Brunei, Chile, New Zealand and Singapore sent 400 officials to discuss reducing trade and investment barriers among potential members, simplifying the rules of origin in their trade agreements, liberalizing services trade and other related issues such as government procurement and intellectual property right protection.

Criticism of the Obama administration’s lack of progress on trade policy, and the desire to see the United States engage more substantially in Asia — a hankering from both Asia and within the United States — has elevated the TPP to fill both those gaps. The need for tangible progress on Obama’s promise to double US exports to help fix the economy and a big announcement on TPP in Honolulu in November when US eyes turn to the Asia Pacific region, both raise the stakes and the expectations in America. Yet the desire for a big announceable above all else at APEC is dangerous.

If the TPP is to make a real difference and do what its proponents reckon it will, the urgency to complete such a complex deal by November may be reckless. The complexity arises partly from the diversity of the nine putative members and the 25 agreements they already have in place with each other. Agreements between two parties that benefit members at the expense of non-members are hard enough. Many agreements in the region either complete by excluding the sectors that would bring the largest benefits from opening up (often agriculture in trade and utilities in services and investment), or fail to progress due to those sensitive sectors. Two Australian examples of this are the Australia-US FTA (AUSFTA) excluding US sugar and dairy while the Australia-Japan FTA is stalled on agriculture. Nine parties trying to reach a deal in haste is likely to result in a lowest common denominator agreement that excludes sensitive areas that should be the main areas of focus in liberalizing.

A quick agreement with exemptions and exclusions without an inclusive framework will mean accession for future members will have to be negotiated separately with each member. That is a laborious and counterproductive process which will likely build layer upon layer of exclusions, exemptions and protection. It will leave power of veto for economic, political and whatever reasons with individual original signatories.

FTAs, or trade liberalization through international negotiation, lack one of the key mechanisms for helping to solve the problem of sensitive sectors — that is, a mechanism for giving voice to the domestic interests who are hurt by import substitution. Any mechanism that levers off ‘offensive’ and ‘defensive’ interests will fail to do this (including WTO process). Such a domestic mechanism was important for unilateral reform in Australia in the 1980s that opened up sensitive sectors.

The risks of a quick deal on the TPP — one that is full of exceptions, allows continued protection of sensitive sectors, and excludes ready accession by others — go well beyond getting just another ineffective trade agreement.

The TPP is supposed to weld the Asia Pacific region together. Without careful consideration, design and a manageable framework, it will do the reverse, excluding key partners and making it difficult for others to join. There is a risk that the TPP will drive divisions that will prevent, and not foster, further economic interdependence in the region. If it serves, as it would under those conditions, to split the region into political camps, it will have dangerous political consequences.

The relationship between Japan and China has shown that economic integration can proceed despite political tensions because the relationship was nested in a robust and broad multilateral framework. The WTO framework has ameliorated political tensions as trade between Japan and China has been conducted under a global rules based system. Traders and investors have maintained confidence in continuing to do business even when political tensions flared up because of the strength of the system. It has meant the economics dominates the politics, and not the other way around. For the same reason, the broader the framework in Asia and the Pacific the better.

What then should the TPP be aiming to achieve?

Its original advocates saw its benefits as deriving from a comprehensive deal that is inclusive, both in terms of being open to membership by others and one that sits comfortably alongside other initiatives in the region.

Openness has brought prosperity, poverty reduction and remarkable modernization of economies in the Asia Pacific. This has come through greater engagement in the global trade and economic system under the WTO trade and open investment regimes. The aim now is to get rid of residual trade barriers on a defined schedule and remove regulatory and institutional behind-the-border barriers to trade in order to reap more benefits from moving towards a single regional economy. It is not to create an inward looking bloc that retains higher barriers to trade against those outside the group on a range of ‘sensitive’ commodities. The aim is to make it easy for others to automatically join on to the agreement, subject to their acceptance of its terms. It is not to create barriers to their accession that have to be negotiated separately with every member.

Why not have automatic sign-on provisions for third party countries, even outside the Asia Pacific region? If TPP members give significant concessions on trade barriers and remove behind-the-border barriers in sensitive sectors, extending membership to others who are prepared to do likewise on the same terms (in respect of phase-in and all other conditions) should be automatic. There is no reason why, for example, Japan, should it succeed in opening up its agriculture to the US and Australia through joining TPP, would want to withhold its concessions from others in South America, Europe or Africa, who were prepared to scrap tariff barriers, and undertake other reforms required of eligibility for TPP membership should they wish to take that step.

If APEC is the vehicle chosen for prosecuting TPP, it would be prudent to frame it as an arrangement that is open to all APEC members and globally, consistently with APEC modalities and success thus far. A big but flawed announceable which undermines the economic and political foundations of trans-Pacific cooperation would benefit no one.

Shiro Armstrong is a research fellow at the Crawford School of Economics and Government at the Australian National University and currently an Australian Government Endeavour Research Fellow and the Gary Saxonhouse Prize Fellow visiting the Center on Japanese Economy and Business at Columbia University. He is co-editor of the East Asia Forum.