The Trans-Pacific Partnership, originally conceived as a sweeping free trade agreement linking the major economies of the Pacific region, is at risk of turning into a political weapon against those opposed to American economic influence – including China and Russia.
U.S. President Barack Obama in the White House briefing room in Washington, May 6, 2016. Photo: AP
In a recent op-ed in the Washington Post, U.S. President Barack Obama attempted to lay out the case for the Trans-Pacific Partnership (TPP), framing the issue as one of American competitiveness vis-à-vis China. Calling for a swift approval by the U.S. Congress of the sweeping TPP agreement, Obama stressed that time was of the essence lest the Chinese succeed in completing a rival agreement that would jeopardize American jobs and run roughshod over intellectual property rights.
Unfortunately, the op-ed strikes exactly the wrong chord for gathering support for TPP, and only reinforces the fears in the region of what the deal might bring. By overtly politicizing the agreement and moving the focus away from free trade, President Obama has undercut America’s position as a champion of economic liberalization.
TPP and its discontents
The TPP is a big deal, as Obama’s Vice-President Joe Biden might say. It covers twelve countries in the Pacific region (including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam), which collectively make up 40 percent of global GDP.
Covering everything from market access to competition, telecommunications, and dispute settlement, the TPP could deliver benefits in the form of increased trade, resulting in an average increase of 1.1 percent of GDP for its signatories, according to the World Bank.
While the Bank notes that the benefits will accrue slowly at first, there will be a large positive impact for small open economies in the region, such as Malaysia and Vietnam, who could see GDP gains in the range of 8 to 10 percent. Moreover, unlike some regional arrangements, which replace burgeoning trade flows with ones artificially contrived via preferences, the TPP is not envisaged to have large trade diversion effects and will instead facilitate new trade amongst members.
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While TPP has tangible economic benefits, it has run into some opposition at the international level. The usual suspects have protested the TPP’s signing, with labor unions, Marxists, environmentalists, and other anti-trade organizers on the streets in Auckland, New Zealand and elsewhere.
Their critique of the TPP focused on the impact the agreement would have on the jobs of today, a point that Obama acknowledged in his op-ed. Indeed, President Obama attempted to turn this argument on its head, asserting that jobs were in danger not from TPP, but if TPP were not passed.
A more substantive argument against the TPP has come from the geopolitical realm, and is the core of Obama’s exhortation for passage of the agreement. Russia and, more importantly, China are not parties to the TPP, an oversight that could diminish the benefits to the agreement. While Russia has been busy with its own regional project, the Eurasian Economic Union, China has been pursuing completion of an agreement to directly rival TPP, the Regional Comprehensive Economic Partnership (RCEP).
Encompassing seven of the members of TPP plus an additional nine South and Southeast Asian countries (and without the U.S., Canada, or Mexico), the RCEP would be a much more regional vehicle, as well as form a way for China to have a bigger say in the trade patterns in Asia.
With the North American countries excluded, China would remain the biggest economic pole in the agreement and thus be expected to garner much of the benefit. Russia, as with the TPP, would remain on the outside, but India would also be included, thus expanding the agreement to nearly 50 percent of the world’s population.
Is TPP free trade or anti-China?
Worries about China’s ascendancy and the reality that it might undercut the TPP talks was the main motivation for President Obama’s op-ed, which stresses that the U.S. must take the lead in trade negotiations in order to counter China’s state-owned enterprises and lack of intellectual property protections.
Claiming that TPP would remove “18,000 taxes” placed on American goods, while ensnaring American businesses in “red tape,” Obama bemoaned the fact that American businesses would not face a “level playing field” against China’s presumably state-subsidized corporations. In a direct challenge to Beijing, Obama claimed that “The world has changed. The rules are changing with it. The United States, not countries like China, should write them.”
By attempting to sell the idea of TPP as an anti-China device, Obama completely misses the benefits or indeed the reason behind trade agreements. The reason for an agreement such as TPP is to spur on liberalization, not a more tailored set of preferences, which will then result in greater trade volumes as barriers are removed. No one can definitively say what trade patterns will look like ex post rather than ex ante, but it is assumed that through the reduction of trade barriers, general welfare will be increased.
Unfortunately, Obama is playing the same game that the Chinese are, utilizing trade as a weapon, even though he is using the prospect of relatively freer trade (rather than embargoes or sanctions) to do it. Indeed, he is trying to have both trade restrictions and free trade at the same time through the vehicle of TPP, by creating a preferential regime for the U.S. and then denying this same regime to China. Such an approach views trade as zero-sum, a school of thought that was disproved by economist David Ricardo in 1817.
This framing of the issue as a pre-emptive strike against Chinese influence in the region could be a political disaster. Promising to wield trade as a weapon to bring others to heel is more in line with Russian President Vladimir Putin’s philosophy of commerce serving the state rather than the laissez-faire of Adam Smith. It also ignores America’s own history is mismanaging trade relations, specifically the Smoot-Hawley Tariff of 1930, which raised tariffs on more than 20,000 goods in the U.S. and is credited with exacerbating the Great Depression.
Farmer protesters rally against the Trans-Pacific Partnership (TPP) in in Tokyo, March 15, 2013. Photo: AP
More dangerously, positioning the TPP as an agreement directed against China rather than for free trade brings with it a high prospect for instability, much as has been seen on Europe’s periphery with the jockeying between the European Union (EU) and the Eurasian Economic Union (EEU).
One only need remember the events of Maidan, sparked by former Ukrainian President Yanukovych’s turn away from the EU to the EEU, to see the effect of a tug-of-war between trade groupings. By laying out a strategy to deny China the benefits of freer trade, Obama’s approach also plays into the very same fears that Russia has expressed in the past, that the U.S. is using TPP as a vehicle for regional economic cooperation to benefit only the U.S.
What can we expect from free trade going forward?
In short, a radical re-think is needed regarding TPP and how it should position itself going forward. The best policy, as in all international trade, would be for the U.S., China, and Russia to unilaterally reduce their tariffs and non-tariff barriers without waiting for some sort of trade deal.
The entire philosophical idea underpinning trade negotiation is that governments can pick and choose their liberalization in a strategic manner. This approach does not reap the full benefits of trade liberalization, and often simply entrenches more bureaucracy (in the form of trade administrations). By committing to full trade liberalization, each of these large players would not only make a statement about free trade, they would be aiding their own economies to the largest possible extent.
Unfortunately, such a policy is unlikely to be followed by any of the major partners. China and Russia remain highly interventionist economies that reserve the right to meddle in trade, while the U.S. under Obama has been no friend of free markets or freedom to trade. In his Washington Post editorial, the President gives a nod to how beholden he is to trade unions and the environmental lobby, and no such unilateral reductions would ever be accepted by his anti-trade allies.
However, given that international trade is the slice of economics that has given us the “theory of the second-best,” the next preferred strategy would be to widen TPP to as many parties as possible, including China, pushing for a Free Trade Area of the Asia-Pacific (FTAAP).
This could mean jettisoning some of the provisions of the deal that do not belong in a trade liberalization agreement in the first place (i.e. the aforementioned labor standards, which would also be difficult), but it would also signal a true commitment to freer trade across the region. Including China and perhaps Russia would also remove the adversarial approach that Obama has now explicitly attached to TPP.
An unfortunate drawback to this approach, apart from the resistance from organized labor, is that there is no guarantee that even an expanded TPP would bring freer trade to the region. An agreement cannot be binding unless a government wishes it to be, and even supra-national institutions have a difficult time enforcing trade agreements on sovereign nations.
A prime example of this is Russia, which joined the World Trade Organization (WTO) in 2012 after starting negotiations 19 years prior. Despite finally becoming a member of the world’s premier rules-based organization overseeing trade, Russia has engaged in trade wars, embargoes, arbitrary halts in imports, industrial policy, and subsidies, and the WTO has been powerless to shift the Russian position.
It is unlikely that any mechanism envisaged under TPP would be able to change this behavior in the Kremlin, so long as Russian policymakers calculated that their gain from managed trade was far above the cost of retaliation.
With these obstacles in the way, there is perhaps no other route than to stay the course on TPP, and hope to include China sometime in the future (or, perhaps, even start negotiations between TPP and RCEP immediately to reduce inconsistencies). The same World Bank study cited earlier made the point that Russia would gain from positive spillovers from TPP even without being a party to the agreement, and it is likely that China would also see such gains.
But such an approach would have to be accompanied by a massive change in public relations, one that stresses the benefits of free trade rather than setting up trade as a weapon against the Chinese. As of right now, the U.S. is following, not leading, on trade policy, and its choice of role models is not encouraging.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.