Without Partnership

6 june 2017

What Does the Cancelation of the TTP Mean for the Future World Trade?

Dmitry Novikov is a research fellow, Center for Comprehensive European and International Studies at the National Research University Higher School of Economics, Russia.

Resume: The anticipated transition of the U.S. Republican administration towards bilateral free trade area agreements may become an even more effective strategy for geoeconomic consolidation of Asian allies around Washington.

The decision of the new U.S. Republican administration to give up one of the most ambitious trade and economic projects—Trans-Pacific Partnership (TPP)—signified a shift in Washington’s Asian policy. For the American allies and competitors in the Asia-Pacific region this means uncertainty and new risks. Yet this may be a move intended to change the look of the policy, leaving its essence intact.

THE COSTS

The United States’ secession from the Trans-Pacific Partnership—President Trump signed the relevant executive order on January 23, 2017, just three days after his inauguration—will have both regional and global consequences, and its scale is hard to assess at this point. The TPP was a key element of the United States’ pivot to Asia and was presented in the last year of Barack Obama’s presidency (after signature in October 2015) as the biggest foreign policy success of the Democratic administration. Globally, the TPP, along with the Transatlantic Trade and Investment Partnership (TTIP), was part of a comprehensive strategy to change the international economic order. 

The authors meant the new structures to replace the global economy that could no longer meet Washington’s interests. The abortive attempt to renovate international trade rules through the WTO, undertaken as part of the Doha Round in the middle of the 2000s, exposed the need for alternative ways to develop global economic regulatory institutions. The creation of bilateral free trade areas, which boomed in the Asia-Pacific region in the 2000s, was one of them. The reform of the post-Cold War order assumed special importance for Washington after the economic crisis of 2007-2009, which accelerated the realignment of power in the world and “highlighted” the strengthening of China. The U.S.’s relative failure and the emergence of new centers of power showed that if the current rules of the game based on the WTO and other Bretton Woods institutions continued, the United States would not just stop being the main beneficiary of globalization but could actually end up among losers (at least politically if not economically). The TTP and TTIP projects were launched as an attempt to renovate these rules to make them more beneficial for the American interests. 

The TTP was an important instrument of the Obama administration’s Asian policy as it met the regional demand for institutions, on the one hand, and strengthened the architecture of opposition to rising China, on the other. Interestingly, initially presented as an open format for engaging with Beijing and softly imposing new rules of the game upon it, the project became outright anti-Chinese as tensions grew between Washington and Beijing. In a number of public statements, but primarily in his article in The Washington Post published in May, Obama made it quite clear that the TPP was designed to ensure that the rules of international trade were not written by Beijing (or anywhere else but Washington, for that matter).

However, practical implementation of this policy was not very successful. The Obama administration signed the TPP agreement (while failing to get it ratified) but did not succeed in selling it to the domestic audience. Critics say that the final text of the agreement brimmed with unnecessary concessions. Judging from numerous leaks on both sides of the Atlantic, the talks on the TTIP got finally stalled in the last year of Obama’s presidency. Europeans delayed the talks with the outgoing U.S. administration, waiting for a new one, hoping it would have the possibilities and political resources to ensure the ratification of the document.   

The advocates of both projects pinned their hopes on Hillary Clinton, who was one of their initiators and essentially a consensus candidate from the political and bureaucratic establishment. It was generally believed that despite her criticism of the TPP agreement, its implementation would get back on the agenda after the elections. The United States’ allies in Asia did not hide their expectations that a new Democratic administration would get the agreement ratified, probably after token corrections, and the mega project put together for almost a decade would finally get going. 

But Donald Trump, who won the presidency, is apparently planning to revert U.S. efforts to transform international trade and already messing up the U.S. policy in Asia by making statements and decisions that disorient both his allies and competitors. Washington’s secession from a major and almost completed deal (which only recently seemed well secured) is reminiscent of the United States’ no less unexpected refusal to participate in the League of Nations in 1919 and raises concern, especially in the Asia-Pacific region, about the “only superpower’s” possible return to the policy of isolationism, albeit more limited than it was in the first half of the 20th century. However as internal political struggle gains momentum, the withdrawal from the TPP may be a momentary rather than strategic move, and the decision itself may not be as irreversible as it is presented by the new U.S. administration.

THE ORIGINS OF TRADE EGOISM

The unpredictability of the Trump administration’s policy, as borne out by the secession from an ambitious project initiated by the previous cabinet, reflects to a certain extent its unpreparedness to accept a new role of domestic political changes in international relations. The consensus maintained by the American and Western elites in general for the past quarter of a century about the U.S.’s role and place in the world ensured firm continuity of the American foreign policy. The Obama team advanced the TPP proposed by the previous Republican administration which, in turn, had taken over the Clinton administration’s institutional initiatives in the region.    

TPP supporters hoped that foreign-policy continuity would keep the project going. New Zealand Prime Minister John Key’s suggestion, made jokingly at the latest APEC summit, to rename the TPP into a Trump-Pacific Partnership appears to be quite noteworthy. Apparently, U.S. partners expected greater flexibility from the new American administration and hoped to see its final decision after the inauguration.   

Trump’s statement that secession from the TPP was one of the priority tasks his administration would pursue during its first 100 days, followed by its hasty implementation three days after the inauguration, shocked the project’s supporters in the U.S. and other states concerned even though Trump had announced his views a long time ago. The main problem is not so much the demolition of this ambitious project as the growing uncertainty about the U.S. strategy in Asia. The rejection of the TPP clearly signified a deviation from the previous policy, making it unclear what its replacement would be like. Neither Trump himself nor his advisers have so far offered a clear action plan, except for the general criticism of their predecessors and several unexpected anti-Chinese moves which provided some insight into the emotional background rather than the essence of Washington’s actions in the Asia-Pacific region. The expert community is disoriented and blames “extravagant” decisions of the new team on Trump’s inexperience and impetuosity multiplied by his vulnerability and therefore his increased sensitivity to domestic political issues.  

At first glance, the withdrawal from the TPP looks like an accidental result of political circumstances in the U.S. Faced with populism accusations spread by mass media, Trump had to realize at least one of his key election promises quickly and effectively. In this respect, the secession from the TPP as a symbolic move completing the first 100 days of his presidency is tactically faultless: even in the absence of visible success the administration will have something to show its voters. In fact, withdrawing the signature from the unratified agreement will take no more than just a couple of hours. When making the decision, Trump apparently remembered that neither the Democrats nor the Republicans had fully supported the agreement, precipitating debates the Obama administration failed to win. So Trump’s decision to “bury” the TPP could hardly meet serious organized resistance as in the case of the Guantanamo base, the inability to close which stigmatized Obama as a weak and indecisive leader.

However, an in-depth look at Trump’s political and economic program suggests that the withdrawal from the TPP has more substantial reasons. Trump and his supporters in many ways get close with those representatives of the political mainstream (including Obama) who think that further globalization in its present form will weaken the U.S.’s positions. But instead of managing these costly processes in a way that would benefit Washington, Trump prefers to fence himself off from them.

This approach finds support within the system and falls on the fertile soil of traditional isolationism characteristic of “single-story America,” especially its patriarchal Midwestern states which largely secured Trump’s victory. Unlike coastal states, traditionally oriented towards trade and finance (most of which, with the exception of Florida and the South, voted for Clinton), inland America benefits from globalization much less but feels its effects much stronger. Building a wall on the Mexican border and withdrawing from a major multilateral agreement are parts of one ideological program, which essentially boils down to the “let’s defend ourselves from globalization” stance. This explains not only sporadic emotional attacks on the TPP but also the systemic rejection of global and regional multilateral agreements as such: during his presidential campaign Trump also criticized NAFTA and the WTO as inefficient. 

The TPP does not fit into Trump’s economic program inspired by Reaganomics and incorporating some of the Middle America phobias. Trumponomics will apparently combine classical Republican recipes (tax cuts for business, deregulation, small government but a bigger public debt), invented in the Reagan era, with some measures which today’s mainstream considers extreme and which Trump presents as his personal groundbreaking initiatives. The latter also include his promises to pursue a policy of very strong protectionism—during his presidential campaign Trump promised steep trade tariffs, including a 35-percent tariff for Mexican goods and a 45-percent tariff for imports from China. Many Americans view this as a nostalgic glitter of the “Gilded Age,” a period of rapid economic growth in the United States in the late 19th century and at the beginning of the 20th century, which became possible largely due to harsh protectionist measures. At that time the Republican Party was the bulwark of protectionism. No wonder Trump is often compared with another eccentric president—Theodore Roosevelt.   

In reality, Trump has very limited possibilities to implement the promised protectionist measures. Inside the country, the main obstacle is the Congress. Without its consent, a president can change trade tariffs by no more than 15 percent and only temporarily. Outside the country, pressure will come from the WTO (the Congress’ approval is also needed for secession from this organization). So, Trump’s protectionism will most likely be based mainly on higher non-tariff barriers, specific bans (sometimes in the form of economic sanctions), and tax and investment incentives to encourage the transfer of production facilities to the United States. The TPP, which was designed to regulate and lower non-tariff trade barriers and limit non-market stimuli for domestic manufacturers, simply did not fit into this model and in fact was in stark contradiction to it.   

Theoretically, protectionist measures proposed by Trump are not at variance with the practical tasks set by the Obama administration as TPP priorities: export stimulation, creation of new jobs, and higher competitiveness of the American economy.  On the contrary, professional economists who spoke critically of this project, including Nobel Prize winner Joseph Stiglitz, rightfully pointed to the extremely uneven distribution of benefits from the TPP: major transnational corporations would reap most gains, while the impact on the American labor market will be controversial and may actually increase, rather than reduce, unemployment. It will also entail negative changes in the structure of foreign trade: if export grows as expected, the agreement will cause a trade deficit in the U.S. So Trump rejects a doubtful and costly economic stimulus, opting instead for simple and time-tested measures. 

Domestic institutional mechanisms designed to ensure the continuity of policy failed in the case of the TPP too. Given Trump’s strained relationships with the partisan political establishment, the Republican dominance in both houses of U.S. Congress did not make the political construction stronger. On the one hand, the president and the Republican mainstream have opposing views on foreign trade (and many other issues for that matter): the bulk of the Grand Old Party continues to gravitate towards free trade and opposes Trump’s protectionist rhetoric. During the presidential campaign in 2012, the Republicans, represented by traditional right and center-right candidates, criticized Obama for lacking vigor in defending trade liberalization in the world, including the Asia-Pacific region, claiming the efforts the Democratic administration was taking were insufficient.    

However even the advocates of free trade have doubts about the TPP. The Republicans have always been wary of big multilateral agreements. Over the last several decades all major global and regional deals involving the United States, such as GATT, WTO, and NAFTA, were made by Democratic administrations (which, however, did not prevent many Republicans from voting for them). Another important factor is the a-priori rejection by the conservative part of the Republicans of Obama’s initiatives as such, including the TPP. Although some of the Republican candidates running for presidency in 2016, including Jeb Bush and Marco Rubio, supported the project, it was still criticized by such influential figures as House Speaker Paul Ryan and far-right Senator and Tea Party activist Ted Cruz. Public opinion polls indicate a split over the TPP among Republican voters: although most of them do not trust the TPP, its supporters are only 5-6 percent behind.

If a more traditional candidate had won, these disagreements would hardly have made any difference as even the staunchest of its opponents criticized the agreement rather than the concept of mega-regional deals as such. In that case, a withdrawal from the TPP should have been interpreted as an attempt to reset the initiative and rid the project of any association (undesirable for part, including the Democratic one, of the establishment) with relatively unpopular Obama. But as a representative of another, largely counter-elite, movement, Trump apparently wants to use inter- and inner-party contradictions in order to undermine and reformat certain aspects of the domestic and foreign policy (while not breaking the working relationship with the traditional establishment). The abandonment of the TPP is obviously a step (perhaps intuitive to a certain extent) that should lead to a major overhaul of the U.S. approach towards the development of global and Pacific economic order. 

However, it remains to be seen whether the Trump administration, which has no strong political base, will be able to transform a set of intuitive intentions into a coherent strategy. As far as the secession from the TPP is concerned, it will depend on two factors. The first one is whether Trump’s economic program will be successful and sustainable enough, because any failure may prompt the Republican government to give up its key declared principles, thus clearing the way for multilateral mega deals. The second one is whether the new administration will offer any alternative to the policy that has been carried out over the last decade. In this respect, the new government has narrow leeway determined by the challenges to the U.S. interests in the region, which may force the Americans to revive the mega regional deal.

THE NEW OLD POLICY

The main problem with the TPP is that the decision to give it up runs counter to Trump’s foreign policy program, which proclaims opposition to China one of the priority goals. Its implementation will require more vigorous efforts to contain China, which can hardly be possible without economic measures. Meanwhile, many of the U.S.’s allies in the Asia-Pacific region become more and more economically dependent on Beijing, which objectively dilutes the American leadership in the regional system of alliances. 

The TPP would dampen this trend and strengthen institutional, trade and economic ties between the U.S. and its allies and partners. Its main geoeconomic result would be greater American investments in the participating countries (primarily emerging export-oriented economies) and their growing exports to the U.S. It is important to note that the configuration that had emerged by the time of signature did not envision, even hypothetically, China’s participation in the project (at least in the years to come). This means that a readjustment of regional production chains would have taken a toll on Beijing and slowly loosened U.S.-Chinese economic ties. By rejecting the TPP, Trump rejects the instrument that is needed for implementing his own policy.   

What is also important is that the curtailment of the TPP creates a regulatory vacuum in the Asia-Pacific region where demand for institutions remains quite high. Their shortage is one of the main problems hindering development and increasing political risks. Any claim of leadership in the region would be closely linked to the ability to lead and carry out institutional development and shape up a positive agenda for economic ties. By giving up the TPP and offering nothing instead, Washington has not only badly damaged its own reputation but also cut off one of the main pillars of its Asian policy pursued over the last several years.   

Beijing is already trying to make use of this situation and fill the vacuum with its own projects. At the APEC summit in Peru China was actively advancing its idea of a pan-regional free trade area bypassing interim blocs and alliances. Interestingly, amid general uncertainty, mass media commended these initiatives as nearly sensational even though they offered nothing new: China has been consistently pushing this concept since 2014 although it is essentially a mirror image of the American proposals put forth in 2006.   

The Regional Comprehensive Economic Partnership (RCEP), created in 2013 as an ASEAN-based alternative to the TPP and supported by China, has a much bigger potential. Although negotiations between the participants have slowed down, RCEP will remain the only functioning multilateral format for discussing new rules of regional trade when the TPP is finally abandoned.  

The fact that China has limited possibilities for regulatory expansion plays into America’s hands. The low quality of economic institutions in China, lack of interest among Chinese businesses and state-run enterprises in raising economic performance standards, and the absence of experience in implementing major international institutional projects prompt Beijing to continue to focus on financial injections into neighboring countries. International institutions created by China, primarily the Asian Infrastructure Investment Bank, act as institutional umbrellas for accumulating investments in areas beneficial for Beijing but do not generate new rules. RCEP largely pursues the same goal—negotiations conducted within its framework have little relation to nontariff regulation but focus instead on reducing tariff restrictions and building an institutional environment for major infrastructure projects in Southeast Asia. Chinese projects may weaken the U.S. positions in the Asia-Pacific region and tighten the link between the Asian and Chinese economies, but they will not fill up the regulatory and institutional vacuum in the region, let alone globally.

The Trump administration still has room for maneuver in combining the domestic political and economic agenda with regional tasks. In fact, Trump has already outlined the American trade policy in Asia: when announcing the withdrawal from the TPP, he mentioned bilateral free trade areas where the United States can have stronger negotiation positions and press ahead with its economic demands more effectively. In this case, the TPP may be useful as the basis readily available for talks. The United States and eleven countries in the region have already coordinated their positions on trade rules which may provide the basis for bilateral renegotiation. The fact that the TPP offers individual terms to a majority of the participants makes selective transformation of the multilateral agreement into bilateral formats much easier.

Bilateral adjustments in trade rules are preferable, because this format is much more flexible. It will be easier for the Republican administration to combine bilateral trade agreements with its protectionist inclinations and decisive protection of national economic interests. The Trump administration will most likely try to shift the focus in such agreements towards renovating trade regulation standards, thus making them less conducive to trade liberalization, at least with regard to tariff barriers. This will make negotiations much more difficult, especially with Japan, agreements with which can have the most valuable economic effect for the U.S. It is quite possible that a transition from the multilateral format to the bilateral one was discussed during Trump’s meeting with Japanese Prime Minister Shinzo Abe in November 2016 before the U.S. administration abandoned the TPP. Washington may as well use the confusion among its Asian allies, largely caused by U.S. actions, as the fear of remaining face to face with China will force them to make concessions, including economic ones.   

In the long run this approach may expand the legal framework for a transition to a more or less uniform format that will encompass bilateral free trade area agreements (similarly to the TPP). This transition will be easier if the remaining eleven TPP participants create a multilateral free trade area without the United States. This scenario, where Japan will play a leading role, should not be ruled out.  

However, the main problem with this format is that bilateral free trade area agreements, even if the U.S. signs them with all the eleven TPP partners (which is unlikely), will not produce uniform norms and will have to offer individual terms to each pair of partners. Although the expansion of bilateral free trade area agreements (primarily to Japan but possibly to other close American allies as well, including the Philippines which is not party to the project) may contain China economically, the main purpose of long-term development in the Asia-Pacific region—creation of a uniform institutional environment for the regional economy—will not be achieved. Moreover, a failure to expand bilateral agreements (which is quite possible, given the technical and political complexity of such talks) and further strengthening of China’s role in the region, above all through RCEP, may encourage Washington to shift competition from the economic and institutional field to the military one, including a revision of relations with Taiwan as Trump has already suggested.  

This may lead Washington to revive the multilateral trade deal during a new political cycle in four to eight years’ time or even under the incumbent administration which may recall Mitt Romney’s idea, put forth during the elections of 2012, to create “a Reagan Economic Zone,” a Republican alternative to Obama’s TPP but based on the same principles.  

This situation creates new risks for Russia due to greater regional uncertainty, but also new possibilities. A formal failure of the TPP and lesser institutional pressure from the U.S. on Russia and China should not lead them to relax their efforts in advancing their own projects. On the contrary, the anticipated transition of the U.S. Republican administration towards bilateral free trade area agreements may become an even more effective strategy for geoeconomic consolidation of Asian allies around Washington, creating tighter, albeit not uniform, economic and institutional links much more beneficial for the Americans. The next U.S. administration may use bilateral trade and economic agreements as the basis for a new multilateral format in four or eight years from now.  

Under these circumstances, major initiatives such as a comprehensive Eurasian partnership, aimed at combining Russia’s experience of exporting technical norms with China’s economic possibilities, would be the best strategy. Such partnership may become yet another alternative format for producing international trade and economic standards and meeting institutional demand in the region.

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