Are there real dangers in the Trans Pacific Partnership idea?

Author: Peter Drysdale, Editor, EAF

The idea of a Trans Pacific Partnership (TPP) trade deal, at least among the nine Asia Pacific countries that are currently signed up for the negotiations, has been hyped up over the last year as the Obama administration declared it to be the way forward on a new American engagement with Asia.

The TPP initiative — which includes Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia, Vietnam and the United States — now tops Washington’s trade agenda barring the unfinished business of FTAs with Korea, Colombia and Panama. Singapore and Australia have long been important American trade partners, but as a group the TPP is no heavyweight. Its merchandise trade with the United States last year was US$170.9 billion, while total American exports and imports combined were US$3.2 trillion. The TPP, in other words, accounted for just 5.3 per cent of America’s trade, and none of the putative partners is in the top 10 of US export markets. If Japan joined in, the total trade involved rises to US$351.8 billion and 11 per cent of America’s total trade. But most of the growth in Asian and world trade is outside that group — in China, India and Brazil.

Where did the TPP idea come from and what does it aim to achieve?

Its original advocates saw TPP as an opportunity to transform a relatively trivial arrangement (the so called P-4 between Singapore, New Zealand, Chile and Brunei) into a trans-Pacific free trade zone. Its benefits were seen to derive from making it a comprehensive deal (covering all goods and services) that was inclusive, both in terms of being open to membership by others and one that would sit comfortably alongside other initiatives in the region. New Zealand saw the P-4 as a way of engaging with the US (with which it has no FTA). Australia joined in the push.

When President Obama signalled interest, things got serious. The need for tangible progress on Obama’s promise to double US exports to help the fix the economy and a big announcement on TPP at the APEC Meeting in Honolulu in November when US eyes turn to the Asia Pacific region, have raised the stakes and expectations in America.

Openness has brought prosperity, poverty reduction and remarkable modernisation 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 join automatically on to the agreement, subject to their acceptance of, and compliance with, its terms.

The TPP is supposed to weld the Asia Pacific region together. It is supposed to deal with ‘behind-the-border’ regulatory (21st century) issues that other preferential trade agreements don’t deal with. Without careful consideration, design and a manageable framework, it will likely do the reverse, excluding key partners and making it difficult for those excluded to join. And, despite the rhetoric, the only ‘behind-the border’ issues on which US negotiators are mandated to focus are ‘labour laws,’ ‘environmental laws’ and ‘intellectual property rights.’ Those are not priority issues for making markets more contestable and efficient.

As Shiro Armstrong says in this week’s lead essay, ‘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.’ We’ve had a lot of them in the last decade or two but they don’t matter in the same way as this one will if it is forged on the wrong terms.

What are the risks?

The Singapore negotiations made plain a couple of weeks back what should have been clear for all to see before, that the chances of putting together a TPP deal which is open in the way that was earlier envisaged is a low probability outcome, and an even lower probability outcome the more quickly it is stitched together to meet US political imperatives.

As Armstrong argues: ‘a quick agreement with exemptions and exclusions 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 further exclusions, exemptions and protection. It will leave power of veto for economic, political and whatever reasons with individual original signatories.’ A TPP of that kind will essentially be a series of bilateral agreements (in Australia’s case hardly different from what is already in place with the other partners) cobbled together around the United States. There will be little liberalisation of sensitive markets, and certainly no give by the United States on its cosseted agricultural sectors.  If Japan eventually joined in — an outcome that looks less and less likely day by day — some concessions may be forced by America on agriculture. And there will be no easy expansion of the arrangement to encompass the broader region, importantly China and India. It was never likely that the US would give its individual power of veto away in any event.

And yet, with the WTO’s Doha Round still heading towards the rocks, there will be powerful momentum to doing a deal of some kind no matter what. And the structure of the new US Congress means the ‘free trade’ brand is no longer on the nose in Washington, no matter what the label really covers. If there is some kind of agreement on offer however bad, the smaller partners will find it difficult to refuse, not for any good economic reason, but for political reasons.

So what’s the problem? Does it matter if we get yet another pseudo ‘free trade’ agreement, between the US and group of eight partners who in the total scheme of things are pretty insignificant? It would be more significant, of course, if Japan and Korea signed on, however little that improved the quality of the agreement.

It certainly would matter. A rum deal like this would be of little economic consequence but it would be of considerable political consequence. It would drive a wedge down the middle of the Pacific, not only or mainly economically but also politically — between the United States, its partners and China. It would entrench the adversarial political psychology that is developing in US-China relations in a way that would be very difficult to unravel for a long time. That might matter less if the WTO was not also in disarray. It matters a lot, as that prospect grows daily.

Is there any way out? China could do what some of its leading strategists like Zhang Yunling are now calling for: sign up to join the TPP negotiations. That would cause them to pause and think more carefully about where this is all heading. And Australia, an important player in the TPP push, needs to take time for re-inventing the TPP idea so that it will promote trans-Pacific integration not lead us in the opposite direction, consistent with its newly announced trade policy principles.

Peter Drysdale.