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As the TPP Lives On, the US Abdicates Trade Leadership

CPTPP will govern shipments of export cargo and import cargo in international trade.

As the TPP Lives On, the US Abdicates Trade Leadership

When President Trump made good on his campaign promise and withdrew the United States from the Trans-Pacific Partnership (TPP) immediately after his inauguration, the conventional wisdom was that the TPP was dead without US participation. The demise of the agreement was lamented and many obituaries were written for the TPP.

But what a difference a year makes. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which its 11 member states signed last week, has disproved this conventional wisdom. It has shown that in spite of the huge blow dealt by the US withdrawal, the remaining parties were able to act in concert to resurrect the trade agreement and preserve its high level of ambition. They were able to keep tariff liberalization targets intact and take a surgical approach in suspending some of the provisions in the rules area, with the intention of leaving the door open for an American return.

Given the growing unpredictability of US trade policy, it is greatly reassuring to know that US participation is not indispensable for a trade agreement of high ambition to be successfully adopted in the Asia-Pacific region—or any other region for that matter.

As the United States retreats from its traditional role as champion of trade liberalization, the successful conclusion of the CPTPP has illustrated that other countries can and will step in to fill the void and provide trade leadership. Japan cut its teeth on trade leadership with the CPTPP, proving that it’s time to revise the image of Japan as a passive rule taker in the multilateral trading system and a country that defensively negotiates bilateral trade agreements of low ambition because of its own sensitivities with agricultural liberalization. That is no longer Japan’s profile.

Japan picked up the mantle of leadership in the TPP, and subsequent CPTPP, despite the fact that the US withdrawal made two of Japan’s core objectives in the agreement unattainable. Japan had hoped to reach a compromise on long divisive market issues between the US and Japan, and anchor the United States to the regional architecture amidst a regional power shift due to the rise of China. Japan’s decision reflects its desire, and that of the other member states, for the CPTPP to survive because it offers significant opportunities. It helps fight the tide of rising protectionism, it enhances the operation of global supply chains (something that bilateral agreements cannot do), and it helps fill the void left in the region by US disengagement by offering an alternative to China-centric economic integration initiatives.

In order to fully grasp the significance of the CPTPP, it is important to highlight its timing. It comes at a time when there is grave concern over the direction of the two largest economies in the world. China’s appetite for reform has waned and there is apprehension regarding the negative effects of some of its market distorting policies (overcapacity, digital protectionism). The United States is turning inward, relying on unilateral trade remedies and protectionist measures (the imposition of steel and aluminum tariffs on feeble national security grounds). The CPTPP helps member countries hedge against the adverse trends of Chinese mercantilism and US protectionism.

While there will be a cost of exclusion for the Unites States, it is hard to tell as yet whether it will be enough of an incentive for the United States to return to the CPTPP. Recent signals from the Trump administration on potentially rejoining the CPTPP may come from a realization, though not openly acknowledged, that it misread the dynamics of trade diplomacy in the region. After all, it was one thing to ditch the TPP under the assumption that the US exit de facto killed the agreement, it is another to realize that the agreement is very much alive and American export industries will be at a disadvantage in the large Asia-Pacific market. Similarly, it was easy to promise a string of bilateral trade agreements in the region, but the reality is that there aren’t any countries lining up to negotiate one on one with the United States.

While the CPTPP countries have been somewhat encouraged by the comments from President Trump and Treasury Secretary Steve Mnuchin, these “signals” are not compelling or credible, and hence they are not effective. Trump’s comment at the World Economic Forum that he would be interested in the CPTPP if he could get a better deal has fallen flat for the most part. Renegotiating the agreement is not an appealing prospect for the CPTPP countries given the Trump administration’s mantra of reducing bilateral trade deficits, and there is no confidence that the US administration will really follow through on this new interest. The CPTPP members are not waiting for Washington; they are standing by their hard-won agreement and moving forward with the ratification process.

Mireya Solís is co-director and Jennifer Mason is a senior research assistant and project manager at Brookings’ Center for East Asia Policy Studies. This article originally appeared here.

Confusion on US policies that govern shipments of export cargo and import cargo in international trade.

Globalization on the Cheap

In the wake of the first round of NAFTA renegotiation talks and with a possible reopening of the US-Korea Free Trade Agreement on the horizon, the time is ripe to examine how the United States formulates trade policy, negotiates trade agreements, and navigates the difficult choices inherent in these processes.

Mireya Solís addresses these issues in her new book Dilemmas of a Trading Nation: Japan and the United States in the Evolving Asia-Pacific Order. Here we’ve selected a few insights and findings from the book that are particularly significant to the current moment in the US economy and trade policy.

Trade Policy Is About Uncomfortable Tradeoffs

Trade policy has been at the forefront of the US national conversation in recent years, as Americans look toward the future they want and need—economic renewal, a relaunched social compact, and projected international influence. The 2016 presidential campaign and early months of the Trump administration have only intensified this national focus on trade policy.

However, charting a path forward is not easy because the essential goals of trade policy—the search for economic competitiveness and international leadership, the need to secure social legitimacy in the face of a more intrusive trade agenda, and the required dose of political pragmatism to make negotiated trade agreements politically viable—create uncomfortable tradeoffs. For instance:

A decisive executive branch can effectively push aside vested interests and deliver on liberalization, but top-down decision making can come at the cost of inclusive processes of consultation with stakeholders, creating a legitimacy deficit. The issue here is how to balance decisiveness with inclusiveness.

The ratification of negotiated trade agreements may dictate keeping some sensitive sectors off limits or providing subsidies to extend the life of dying sectors, but this will limit the economic gains from liberalization. This illustrates the tension between pragmatism and ambition.

Doubting The Value Of Trade

The unprecedented backlash against trade witnessed during the presidential campaign was years in the making. American trade policy has suffered from an expanding legitimacy problem fueled by three central concerns: how wins and losses from trade liberalization are distributed, the growing reach of trade commitments into domestic regulations, and concerns that only elites have a say in trade policy.

Meanwhile, political and economic polarization in the United States—due to increased gridlock in Washington, the stress from the continued rise of income inequality, the squeezing of the middle class, and the curtailment of social mobility—compounds the trade legitimacy challenge.

In hindsight, we see that the Obama administration pursued the most ambitious trade strategy in a generation—with mega trade agreements across the Pacific and the Atlantic in the midst of this sharpening domestic cleavage. However, it did so while relying on outdated and ineffective solutions to the trade governance dilemmas.

No debate has gained more traction in this country than the one about the distributional effects of globalization: how trade agreements impact wages and employment. In fact, Americans are more skeptical about the impact of trade on jobs than publics in other industrialized nations. A 2014 Pew cross-national survey showed that 50 percent of respondents in the United States believe that trade destroys jobs, whereas the average elsewhere is 19 percent.

We Can’t Blame It All On China

In recent years, the focal point of this discussion has been the so-called China trade shock, the finding by a group of economists that imports from China were responsible for up to one-sixth of the manufacturing jobs lost during the 2000s. However, other data points are important here. The drop in manufacturing employment is a longer-term historical trend that reflects structural change in the American economy. Most of the manufacturing jobs lost in the 2000s resulted from technological change (by one estimate 87 percent), such as automation. And American consumers (especially at lower income levels) have benefitted substantially from access to low-cost products that help reduce the cost of living.

In fact, it is the other finding of the China shock scholarship that is most significant: Displaced American workers face a much more difficult and prolonged period of job transition than we had previously thought. Workers encounter long spells of unemployment, wage losses, and a lack of opportunities in depressed communities. There is a major policy failure here in need of correction. The American solution to the problem of worker adjustment thus far has been the Trade Adjustment Assistance (TAA) program, which by design and execution has been inadequate in addressing the needs of all workers to gain skills and mobility to cope with the faster pace of economic change.

What are the Shortcomings of TAA?

It is only available to trade-impacted workers, so the expanded benefits are off-limits for the vast majority of the unemployed, many of whom lost their jobs due to technological advancements in automation and robotics, which can be expected to continue. In the past, many TAA recipients have opted out of the training requirements, which are important for skill acquisition and reentry into the workforce. Re-employment incentives such as wage insurance are only offered to a subset of displaced workers. The relocation allowances offered are insufficient to facilitate geographical mobility.

In many ways, the United States has pursued globalization on the cheap, without investing in its workforce and social mobility. It ranks in the bottom third of OECD nations in terms of how much it spends on active labor market policies, only above Mexico and Chile. While the United States has doubled its dependence on international trade in the last 40 years (from 15 percent to 30 percent of GDP), its overall public expenditures on the social safety net are lower today than they were in 1975. The United States must relearn, and with great urgency, an old insight of the political economy of trade: Liberalization without a safety net is neither socially nor politically sustainable.

Looking Forward

This is where the United States stands today, so how should we move forward? Solís’s recommendations fall in two broad areas: investments at home in human capital and investments abroad on trade and investment rules.

A skilled and mobile labor force is an imperative investment for the United States.

The United States is in need of a renewed safety net for displaced workers affected by globalization, automation, or macroeconomic shocks. It should be guided by two organizing principles: resilience (fallback programs such as unemployment insurance and affordable health care) and mobility (spring forward programs that emphasize training and reemployment). Skill acquisition and upgrading should be at the heart of this strategy, as this is essential to increase employability, avoid wage erosion, and manage relocations across regions and occupations. In particular, the United States should correct the record of underinvestment in active labor market policies and boost training opportunities through various platforms (for example, community colleges or apprenticeships). A skilled and mobile labor force is an imperative investment for the United States.

The United States lost a critical investment in international economic rules with the decision of President Trump to abandon the Trans-Pacific Partnership Agreement (TPP). The White House has argued that multilateral trade agreements do not offer the best deal for the United States and that bilaterals will yield better outcomes. We should remember, though, that the United States has already tried the route of bilateral negotiations, and its limits are well known. First, one-on-one negotiations take a long time, which puts the United States further behind its competitors as negotiations drag on. Second, they are unlikely to yield better outcomes than multilaterals because they forego the opportunity to open several markets at the same time. Many countries are more willing to make additional concessions if they expect larger payoffs from bigger trade deals involving multiple markets.

Exit from the TPP will be costly for the United States. American producers will be at a disadvantage because they do not enjoy the same preferential market access as their competitors. Beef sales are a case in point. Australian beef is more competitive in the Japanese market than American beef because it faces a lower tariff as a result of the free trade agreement between Japan and Australia. The costs of exclusion for the United States will only increase as other large-scale trade agreements materialize (for example, the EU-Japan free trade agreement is near completion).

In eschewing the TPP, the United States has also ditched a rulebook that it could have used to disseminate disciplines useful in addressing problematic Chinese trade and investment practices, such as asymmetric reciprocity on foreign direct investment and rampant subsidization of state-owned enterprises. The geopolitical fallout from withdrawal will also be significant as trade becomes a wedge issue between the United States and many of its closest partners. It also gives China, which has expanded its engagement in multilateral diplomacy across a wide range of policy arenas including trade, an opportunity to draw a contrast between itself and a retreating United States.

An America First trade policy may well yield an America Last outcome, as the economic and geopolitical costs of self-imposed exclusion from multilateral trade agreements accumulate. But the biggest lesson here is that the renewal of US internationalism will demand repairing the domestic safety net and investing in social mobility.

Jennifer Mason is a senior research assistant and project manager and Mireya Solís is co-director at Brookings’ Center for East Asia Policy Studies. This article was originally published here.