Authors: Peter Drysdale and Shiro Armstrong, East Asia Forum
The 12-member Trans-Pacific Partnership (TPP) agreement was all but concluded last week after five years of negotiations. The deal now faces the challenge of ratification in each of the 12 countries, with all their domestic political obstacles — including a possible election year vote in the US Congress and the Australian Senate.
In this week’s lead Richard Katz reviews the trip wires facing passage of the legislation through the US Congress. The time has passed for correcting any flaws in the TPP settlement, he points out, and Congress will either have to pass this TPP package or none at all. Although its terms have yet to be publicly announced, the question for legislators in all countries is whether the pact’s benefits outweigh its flaws.
‘Looming large over the debate in the US Congress is the immense veto power of assorted well-connected, well-financed special interests. Too many of those who claim to support “free trade” no longer mean a two-way street in which the United States helps promote its own prosperity by promoting that of its partners. Rather, they seek a system in which others open their markets to favoured American business sectors, but the United States is not expected to reciprocate’.
Clearly President Obama wants to steer the TPP through Congress as early as possible, with the target date being April next year. But there is talk of delay because of next year’s presidential elections, in which Hillary Clinton, who’s done a U-turn against the TPP, is still the likely Democrat contender. One option is to try to engineer passage through the ‘lame duck’ session of US Congress next December after the election. United States Trade Representative (USTR) Michael Froman is said to have given credence to that tactic in the past few days.
Australia’s Trade and Investment Minister, Andrew Robb, stared down the USTR and the US pharmaceutical lobby on restricting data protections on biologics — medicines made from living cells and organisms — to five years instead of the 12 that the United States wanted and that will make it easier to pass the Australian Senate. It is difficult to justify extending monopoly protections for intellectual property that would cost Australian consumers and inhibit further innovation, as most of the evidence suggests. If Australia was to change its patent laws, copyright and intellectual property protections more generally, that should be done through domestic debate and agreement.
In situations where there is political consensus in most countries on opening up to trade, but where narrow interests block broader benefits to an economy, the TPP made some real gains. Australian, New Zealand and other producers will have better access to Japanese agricultural markets, beyond that achieved in the bilateral economic partnership agreement last year. The US sugar market was never in play but a small import quota has doubled and access increased in other important areas in manufacturing and services.
While market access issues were among the most contentious in the negotiations, the biggest gains will come from the new rules and standards that promote commerce in the 21st century. Making sure data flows freely, markets are more contestable and improved transparency are all worthy goals: we will know more about that achievement when details of the agreement are made public. If it turns out that the outcome has been defined largely by business interests at the cost of consumers, ratification and further opening up to international competition will be tougher.
The TPP is not the end goal but should be seen as a step forward to economic integration, lifting incomes and creating jobs. There are still many other markets that would benefit from exposure to international competition, both inside the TPP and beyond it. And the TPP creates some problems that will need to be addressed.
The main economic benefit for Vietnam, for example, derives from more access to the US clothing and textiles market — an important export market for Vietnam and one where the benefits appear so large as to swamp any costs associated with signing up to new rules that seem more suited to advanced economies. But that market access requires materials and inputs to be sourced from within TPP countries. Not China, Indonesia, India or any other non-TPP country. This problem affects not just textiles but all trade that discriminates between trading partners. Diverting trade away from non-members towards members means that trade is simply being shifted around instead of new opportunities created.
The calculation for countries like China and Europe left out of the TPP is not the same as it is for Vietnam. While China and other developing countries aspire to high environmental standards and better institutions, with reformers pushing hard for more transparency and diluting the influence of state-owned enterprises, none of these issues can be resolved simply by an international agreement mandating it. They require the hard yards of reform, just as China’s 15-year long march to WTO accession in 2001 shows. The reformers in China can align some of their domestic reform priorities to the TPP to act as a catalyst but this will take time.
Both Asia and TPP countries cannot ignore the established trade and economic weight of China. There’s no major business anywhere in the region, including Japan, that does not have to factor China in. With China out of the TPP for the foreseeable future, the incentive to ramp up Asian economic ties will be more powerful.
The ASEAN plus six countries are parties to the negotiation of the Regional Comprehensive Economic Partnership (RCEP), which has yet to receive the attention that the TPP has but could still be more important economically. It builds off ASEAN’s agreements with China, Japan, South Korea, India, Australia and New Zealand, and it accounts for a much greater share of Asia’s economic interests than the TPP, incorporating the most dynamic elements in the global economy.
Getting RCEP right so that it dilutes trade diverted by the TPP and other agreements and helps India, China, Indonesia and others in Asia advance their domestic reforms and openness, is now the top priority. And hopefully East Asian arrangements will be open to US participation sooner than the TPP is likely to be open to China’s.
All preferential trade and economic arrangements have the potential to enhance (through making markets more contestable) or damage (through redistributing business to higher-cost preferred sources of supply) the world economy. The TPP is no different and includes positive and negative economic features. It’s the balance of benefits and costs that count and that depends on the detail. The redistribution of business is what buys political favours, not only within the participating countries, but also in international political dealings. They are agreements that affect who’s left out as well as who is in the ring.
But what we already know about the TPP is that this is more than anything else a very big deal for the United States and Japan — as Robert Manning says, it serves as a surrogate bilateral free trade deal that shifts the partnership to a new level. We also know that if the deal were to fail Congressional passage or fall over for other reasons, that it would be a major disaster for US alliance relations with Japan and in Asia and the Pacific more broadly.
Peter Drysdale and Shiro Armstrong are editors of the East Asia Forum.