Withdrawal From TPP
I’ve been travelling the country this week meeting with both American business leaders and government and trade representatives from several Asian countries. During these discussions, I was asked two key questions, the first being “What does Trump’s withdrawal of the TPP mean to the US?”, and secondly, “Will the 11 other nations work to resurrect the agreement?”
To answer the first question, the action President Trump took on Monday was no real surprise to anyone following both the TPP and the comments Trump made during the election campaign, however many, such as Japanese Prime Minster Abe and Australian Prime Minster Malcom Turnbull, were still holding out hope.
To provide a little prospective, the only two ways the TPP was going to be implemented was if all countries ratified the agreement, or if a minimum of six countires collectively representing 85 percent of more of the combined GDP of the twelve countries. Given the US represents 60.3 percent of the combined GDP, without the US signature, the entire deal dissolves.
So, getting to the question, what does Trump’s withdrawal of the TPP mean to the US? There are two key impacts that will occur, the first being the domestic trade impact. Given the TPP has never gone into effect, the US will see very little impact per se. Of course, there are other trade policies currently being discussed, such as the border tax that could impact trade.
If ratified, the TPP would have come with some very positive impacts to specific US industries including opening additional doors for trade in Asia. Conversely, it would also provide negative impacts to a few other specific industries. The US International Trade Commission report confirmed that there would be an annual increase in GDP of $42.7 billion by 2032 as a direct result of the TPP, however key industries such as manufacturing ($10.8 billion loss in exports annually) and electronic equipment ($3.7 billion loss in annual exports) would be the two most impacted. The big gainers would be the professional services industry ($11.6 billion annual increase in exports) and the agriculture and food industry ($10 billion annual increase in exports). As you can see, there are plusses and minuses when it comes to the impact of US industries via a major multilateral agreement such as the TPP.
However, there is the second impact which is more geopolitical in nature. The TPP was eventually developed and led by the US to write the rules for trade in Asia, while conveniently leaving China and India out of the picture. Unlike many other trade agreements, the TPP also included many social elements, focused on environmental protection and labor laws, two key subjects that are typically forgotten as poorer countries work desperately to grow and export. Those countries that were left out of the original 12 were almost falling over themselves to be added, with India, Korea, Thailand, and even China stating that they wanted to be included sometime in the future. The stage was set for the US to be both the writer of the rules and beneficiary of Asian trade. On Monday the 23rd of January 2017, with one signature, President Trump dissolved the entire deal, leaving a huge void in Asian trade leadership.
The ASEAN community has been working on another regional trade agreement, called the Regional Comprehensive Economic Partnership (RCEP), that includes the 10 ASEAN countries, and six of their major trading partners in Asia, namely Australia, New Zealand, India, China, Korea and Japan. It is now widely believed that China is taking the lead in the agreement, using both their heavy investment in Southeast Asia, and other initiatives such as the One Belt – One Road initiative to provide significant influence over the negotiations, effectively replacing the US as the writer of the rules of Asian trade, while simultaneously moving the US to the side lines.
The second question I’ve been asked a lot recently is “Will the 11 other nations work to resurrect the agreement?” Or, as Japanese Prime Minister Abe, whose country has already ratified the agreement, has said, is there a possibility of “twelve minus one.” Australia’s Prime Minster, Malcolm Turnbull is also pressing ahead to ratify the agreement, to apply additional pressure on Trump. Turnbull stated “It is possible US policy could change over time on this, as it has done on other trade deals.” However, many agree that this may be nothing but wasted energy.
My personal belief is that the TPP will die a natural death now that the US has excluded itself. I have spoken to many Asian government officials both involved directly in the TPP negotiations, and those involved in trade policy, and many believe that their respective countries agreed to terms and conditions at the request of the US; terms that they otherwise would have objected to with a less powerful country leading the agreement. Now that the US has left the agreement, many countries will want to start negotiating from the start, a process that originally took over eight years. Most of these countries have already shifted focus to the RCEP, and with China reaching out with gusto after the US withdrawal of the TPP, with equally lofty promises of trade opportunities and growth, my feeling is the Asian shift to a China has already started, and Japan and Australia will quickly fall in line.
Timothy Barnes is the president of Asia Pacific Consulting, and author of the book A Naked View of the Trans-Pacific Partnership.