The Trans-Pacific Partnership — Its Economic and Strategic Implications

While the challenges of the World Trade Organization (WTO) Doha Round have been the focus of attention recently, real trade policy action has been happening in the Asia-Pacific region. Already the Asia-Pacific accounts for about 50 percent of trade and 60 percent of global GDP and the International Monetary Fund (IMF) estimates that by 2030, the GDP of Asia will exceed that of the G7.

One of the key trade negotiations currently underway in the Asia-Pacific region is the Trans-Pacific Partnership (TPP), a regional free trade agreement (FTA) that comprises the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. These countries represent about 26 percent of global GDP and approximately 17 percent of world trade. Currently, U.S. trade with TPP countries represents 6 percent of total U.S. trade and 17 percent of trade with Pacific Rim countries. Additionally, the economic significance of the TPP for the United States will likely increase as the Obama administration has signaled its willingness for other countries to join the partnership and for the TPP to become a building block for a free trade area of the Asia-Pacific ­ a goal that was proposed at the 2006 APEC Summit in Hanoi. To strengthen the role that the TPP could play in building towards an Asia-Pacific FTA, all parties have agreed that, in principle, APEC members are eligible to join the new partnership.

A successful conclusion to the TPP negotiations will be economically beneficial to all parties, and its significance will go beyond the capacity to liberalize trade. As the only regional trade negotiation involving the United States and other countries in the Asia-Pacific region, the TPP could be the basis for building the rules for international trade and investment in the region for years to come.

In this respect, it is important to recall that the overwhelming benefits from trade liberalization do not accrue from increased access to other countries markets, but instead by liberalizing one’s own market. For many TPP parties, binding themselves to such rules in an international treaty can be an important impetus for domestic economic reform. Deepening the role of fair, open and competitive markets in the Asia-Pacific region should help drive continued economic growth.

The TPP parties are, therefore, developing new rules to reflect the growing economic importance of the Asia-Pacific region and its role in manufacturing, global supply chains, and as a destination and source of foreign investment. So far, this has included new rules on regulatory coherence, supply chain management, intellectual property and investment. The United States will also propose for the TPP rules on state-owned enterprises to address market distortions caused by unfair competition from government-owned businesses. These are in addition to rules more commonly found in FTAs to which the United States is party, such as on non-tariff barriers including sanitary and phytosanitary measures and standards, labor, the environment, transparency and dispute settlement.

The TPP will also have important strategic implications for United States engagement in Asia moving forward. U.S. economic engagement in Asia has been declining over the last decade. For instance, in 2000 the United States was Malaysia’s largest export market and second largest source of imports and by 2010 the United States had slipped to being Malaysia’s third largest export market and fourth largest source of imports. This is an example of a trend of declining U.S. trade across the Asia Pacific region.

The United States has also been left behind in the growth of FTAs in Asia. The only FTAs the United States has finalized in the region are with Australia and Singapore—and the importance of Congress passing the Korea-U.S. FTA should been seen in this light. In contrast, from 2000 to 2009, the number of FTAs in Asia increased from three to 54 and another 78 are under negotiation. Moreover, the European Union (EU) has an FTA with Korea and is assessing whether to negotiate an agreement with Japan. U.S. absence from this proliferation of rule-making in Asia has limited the nation’s role in designing the rules under which increasing amounts of trade and investment are occurring. These FTAs will also divert trade from the United States, further reducing U.S. economic significance in this region.

During this same period, Asian economic architecture has also matured. In addition to APEC, a range of other forums for discussing and pursuing economic goals have developed. Some forums, like ASEAN +3—ASEAN countries plus China, Japan and South Korea—have been closed to U.S. participation. Other forums such as the East Asian Summit the United States has recently joined (members now include ASEAN+ 3, Australia, New Zealand, India, Russia and the United States). Ensuring that the United States plays a key role in shaping Asian economic architecture will also affect its influence in the region. This is particularly the case as China continues to grow and the influence of traditional allies such as Japan declines. In this context, the TPP could become the building-block of a free trade area of the Asia-Pacific region and a basis for international economic cooperation.

In order for the TPP to play its intended economic and strategic role, a successful conclusion to the negotiations is needed. The addition of other parties to the agreement will also be necessary to give it economic and strategic weight. The most pressing issue is whether Japan will join the TPP in time to participate in the ongoing negotiations. In 2010 former Japanese Prime Minister Nato Kan had said that Japan was considering joining the TPP and Prime Minister Noda has recently said that Japan will make a decision whether to join the TPP shortly. Many within Japan see the APEC Summit in Hawaii in November 2011 to be the final opportunity to joining the TPP negotiations.

The significance of Japan globally, but in the Asia-Pacific region in particular, can at times be overlooked in light of its poor economic performance, especially when compared to the stellar growth rates of neighboring China. Yet Japan’s economy remains the world’s third largest, which in 2010 had a GDP of $5.49 trillion, only slight smaller than China’s GDP of $5.87 trillion (World Bank Indicators, 2010). In addition to being a key U.S. ally in the region, Japan represents approximately 5 percent of global trade.

The key hurdle to Japan joining the TPP depends on its ability to reform and open its agriculture sector in ways that would be required under a TPP negotiation. However, the devastation of agricultural districts by the Fukushima tsunami and nuclear meltdown has shifted the focus in Japan to rebuilding its agriculture sector and strengthened the hand of those within Japan who argue that now is not the time to liberalize this sector.

In the event that Japan does not join the current TPP negotiations, the TPP parties should ensure that a final accord includes a process that allows additional countries to accede to the TPP in ways that are workable. How the parties manage their engagement with prospective members such as Japan, but also Canada and possibly South Korea will determine whether the TPP will be an FTA amongst the current parties only, or plays a more significant role in driving economic reform and integration in the Asia-Pacific region.