From the Trans-Pacific Partnership to a free trade agreement of the Asia-Pacific?

The Trans-Pacific Partnership (TPP) negotiations are the most significant trade negotiations underway globally. The TPP is currently being negotiated by 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The total gross domestic product of the TPP parties is approximately $27.7 trillion, comprising 40 percent of global GDP and one-third of world trade.  

Income gains to these countries from concluding the TPP are estimated to be over $110 billion per year, and the global benefits are in the order of $295 billion annually. However, the TPP will negatively impact non-participating parts of Asia, particularly China, whose income is expected to reduce by around $35 billion annually by a successful implementation of the TPP. 

Being negotiated in parallel to the TPP is the Regional Comprehensive Economic Partnership (RCEP) among ASEAN, China, Japan, Korea, Australia, New Zealand, and India. Successful conclusion of this agreement is estimated to generate gains for the participants of over $300 billion annually.

Despite these two significant trade liberalizing negotiations, Asia has the most to gain from concluding a broader free trade agreement of the Asia-Pacific (FTAAP). Such an outcome could increase global income by over $1.9 trillion.

This begs the question: why not pursue an FTAAP now?

At the APEC Summit in Beijing last year, leaders reaffirmed their commitments to an FTAAP and agreed to a strategic study on how to achieve it. However, it was also made clear that an FTAAP would build on the TPP and RCEP.

To understand the lack of U.S. enthusiasm for an FTAAP and its pursuit instead of the TPP, one needs to take into account the role of the TPP in responding to competition between the U.S. and China over access to and influence in third markets, and more deeply, over potentially different visions for global governance arrangements.  

Access to overseas markets has been an increasingly important driver of growth for the U.S. and China. China is experiencing significant economic challenges including overcapacity in all key industrial sectors, an oversupply of property, and significant levels of government debt, estimated at 250 percent of GDP. This is also happening at a time when China is trying to rebalance its economy away from investment and towards consumption and services. The slowing Chinese economy and impact these reforms are having on growth create pressure to find additional overseas markets for China’s industrial overcapacity.

In the United States, President Obama has emphasized exports as a key driver of growth. In fact, over the last decade U.S. exports have been the fastest growing sector of GDP. Obama’s export initiative sought to double U.S. exports between 2010 and 2015. Where U.S. and Chinese companies compete, the TPP gives U.S. exporters preferential access to important markets in Asia, and this opportunity will grow as more countries join the TPP.   

Another significant U.S. goal is for the TPP to determine the rules for trade and investment in the Asia Pacific region going forward. Indeed, President Obama has said that without the TPP, China will write the rules for trade and investment in Asia.

The TPP will build and deepen rules that are already in the WTO, such as those on intellectual property, and include new rules that address modern economic developments like supply chains and state-owned enterprises. These rules will help ensure a level playing field for U.S. traders and investors. More significantly, the TPP will reinforce U.S. view on appropriate government-market relations for the region.

Broadly speaking, the TPP reflects the U.S. commitment to markets with a limited role for government in the economy. This U.S. view on the appropriate role of government in the market is also reflected in the World Trade Organization (WTO). The TPP, however, departs from the WTO commitment to multilateralism. The ongoing FTA negotiation between the U.S. and the EU—the world’s two largest economies—is another example of this trend away from multilateralism.

This departure from multilateralism in international trade is a response to the rise of China and the realization that for the first time since the end of World War II, another country has both the economic power to exercise leadership in Asia and a potentially different view on how economies should develop.   

One way of determining what China’s vision for Asia might be is to take China’s current political and economic arrangements as indicators of the type of economic system and values it might want to project internationally. This can broadly be defined as a role for markets but with the government playing a major role managing the most important economic sectors, combined with a single party political system.

If this is the China model and the normative framework for its projection of economic power, the TPP reflects the U.S. counterpoint. The TPP’s disciplines on state-owned enterprises and subsidies limits the role of government in the market; its commitments to an open Internet supports the digital economy and underpins access to information; and its requirements that economic regulation-making be transparent and open to all stakeholders is consistent with democratic governance. Rules such as these bind the TPP parties to the U.S. vision of appropriate forms of economic development, political arrangements, and the role of government in the market.

Seen in these terms, the TPP is an important part of a larger contest between the U.S. and China for markets and leadership in Asia. This is why we should not expect an FTAAP anytime soon, despite its clear economic benefits.