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In a recent video message, US president-elect Donald Trump announced certain actions he would take on the first day of his administration. On the Trans-Pacific Partnership, he said: “I am going to issue our notification of intent to withdraw from the Trans-Pacific Partnership (TPP), a potential disaster for our country. Instead, we will negotiate fair bilateral trade deals that bring jobs and industry back on to American shores.”
Though not unexpected, this has raised concerns among many global leaders and policymakers. Taking a close look at Trump’s announcement, it is clear that he is not against negotiating trade deals. He is against the TPP as it exists and wants a “fair bilateral trade deal”. Each party to a trade deal tries to reach a “fair” trade deal, with strong parties such as the US often achieving a result close to what they seek. So obviously, the new US administration’s emphasis on what is fair is different from the current one. Trump’s statement in the current US political situation suggests both the likely direction of change in any trade agreement replacing TPP, and also the shortcomings of the approach if we take his statement in a literal sense—that in future the US will negotiate only “bilateral trade deals”, i.e. each trade agreement with only one other country.
First, the shortcomings. A bilateral trade deal will lose many of the benefits of a 12-member trade deal like TPP, which was negotiated to create TPP-wide opportunities for international value-chain transactions within the TPP’s preferential trade region with 40% of global gross domestic product (GDP) and a quarter of world trade. Bilateral trade deals will fragment that market. In comparison to TPP, they will curb both the opportunities and incentives of participants in the existing deal, and also affect the inclination of potential new members to join the agreement. TPP members were expected to increase from 12 to about 20 in the next few years.
Further, the benefits of agreements among 12 economies on regulatory coherence and good regulatory practices, together with mechanisms that will help address non-tariff measures in export markets, will be eroded with a bilateral deal. A fragmented trade regime is usually more inefficient and disruptive for all countries (including India), than a deal involving several economies. Each TPP partner will need to enter new bilateral trade negotiations with the US, including those with whom the US already has bilateral or trilateral free trade agreements. This is because the TPP has a number of additional issues, in comparison to the US’ existing bilateral trade deals. These include regulatory coherence, state-owned enterprises, small and medium-sized enterprises, temporary entry of businesspersons, competitiveness and business facilitation, development, and cooperation and capacity building. Separate bilateral trade with each TPP partner will be a time-consuming and tedious process that will re-invent significant parts of an existing wheel, i.e. the TPP.
Senator Orrin Hatch has suggested that perhaps Trump could consider converting the TPP into a bilateral deal with Japan. Such a strategy will significantly dilute the likely US strategic influence that the TPP will provide to counter China’s influence in the Asia-Pacific region. To achieve a similar result, any other set of negotiations will have to involve all current TPP members. Once again a tedious time-consuming job to reinvent part of the existing wheel.
Interestingly, House Ways and Means Committee chairman Kevin Brady has urged the president-elect not to withdraw from the TPP agreement but to renegotiate parts of the deal, because the Asia-Pacific market is “crucial” to the US economy. At the recent Asia-Pacific Economic Cooperation meeting, some world leaders have seen a need to renegotiate the TPP rather than jettison it.
In this background, it is hoped that the term “bilateral trade deals” will not be interpreted literally. Then, if a revised trade agreement is negotiated, it could give rise to a revised single TPP with the existing group.
This brings us to how a revised TPP might evolve. A close look at the TPP shows that it is an agreement which the US negotiated to achieve its strategic goals vis-à-vis China, and to address its perceived concerns about a “non-level playing field” in global markets. To create a “level playing field” or a “fair agreement” the US focused within the TPP, for example, on addressing weaker social and sustainability standards in other major competing economies; to strengthen intellectual property rights (IPR) in digital and other new technology areas to maintain its competitiveness in “sunrise” sectors; address non-tariff barriers in its export markets; reduce constraints on Internet-based trade and on investment agreements; and establish “competitive neutrality” by curbing arbitrary policies relating to state enterprises and competition policy. These US objectives will remain relevant even in the new political situation and, therefore, parts of the TPP which have established disciplines in these areas will continue to remain relevant.
Nonetheless, the current political situation in the US is anti-TPP and anti-trade. This is largely due to a perception of “unfair” imports, particularly from China, eroding job opportunities in the US, and the US’ low-wage growth perceived to result from import competition and downward wage pressure from immigrant labour. Thus, US negotiators will not be in favour of reducing tariffs as much as was agreed under the TPP. They will nonetheless seek more open markets abroad, and greater disciplines relating to labour standards, IPR and exchange rates, but weaker provisions on the environment. Given the concern regarding the adverse effect of import competition on domestic industry, some new provisions on safeguards against imports may be evolved, and provisions to allow disincentives to investment from moving abroad may be considered.
A revised TPP, whenever it is negotiated, will result in trade and investment diversion away from India. The current lull provides India time to mitigate these effects through improved policies and domestic capabilities to compete through cost-effective and quality products meeting international standards, enabling stronger links with global value chains, and better capabilities in emerging technologies and new product areas.
This article first appeared in the Mint on November 30, 2016. Like other products of the Brookings Institution India Center, this article is intended to contribute to discussion and stimulate debate on important issues. The views are of the author(s). Brookings India does not have any institutional views.