TPP: Refining the World Order through Trade

By David Jankowski

The centerpiece of President Obama’s trade policy, the Trans-Pacific Partnership (TPP) focuses on strengthening economic and diplomatic relationships among twelve nations along the Pacific Rim. The ambitious preferential trade agreement (PTA) is a large step in the Obama Administration’s rebalance to Asia. The TPP seeks to economically integrate approximately 800 million people. The member nations include Canada, Chile, Mexico, Peru, and the United States in the American Pacific and Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam in the Asia-Pacific.

The TPP aims to reach beyond the World Trade Organization’s (WTO) Most Favored Nation trade preferences by expanding established economic relationships in a region that already accounts for 40% of world GDP and a third of world trade (USTR, 2015). While pending final approval, the partnership would be the US’s largest PTA for the exchange of goods and second largest for the exchange of services (Ferguson, McMinimy, & Williams, 2015). Through trade liberalization, the twelve nations will share increased and meaningful market access. The agreement would provide the US with increased access to one of the world’s fastest growing regions and serves as a springboard for further liberalization of global markets.

On the surface the TPP appears to present a myriad of economic opportunities for the US. The TPP is positioned as a cornerstone to the Obama Administration’s rebalance toward Asia. The PTA provides an opportunity to further US interests, policy, and ideals. While some argue the TPP could detract from larger, multilateral organizations’ attempts at global trade arrangements. This paper will analyze the TPP as a tool of statecraft and briefly consider the role of the trade agreement for the US and other nations affected by the partnership.

US GROWTH & OPPORTUNITY

A main reason the US is promoting the TPP is to gain increased access to rapidly growing markets in the Asian Pacific. The proposed elimination of tariffs and other trade barriers is intended to spur trade and investment among the twelve nations. An increase in economic activity through liberalized trade preferences is intended to stimulate economic growth and innovation as the regional agreement facilitates the development of production and supply chains.

The rapidly expanding Asian economies have been moving toward regional integration through an increase in trade agreements over the past three decades. The TPP allows Southeast Asia to expand its regional agreements to the ripe markets on the Western Pacific Rim. Together the GDP of the twelve partner nations accounted for nearly 40% of world GDP in 2014 and roughly a third of world trade (USTR, 2015). Further trade liberalization will promote GDP growth for all nations involved by increasing market access, leveling the trading field, and decreasing unnecessary barriers to trade.

TPP_enlargement
Dark Green: Reached Conclusion on Content / Light Green: Announced Interest / Light Blue: Potential Future Members Source: Wikimedia Commons

The TPP would create mutually beneficial trading relationships between Southeast Asia and the US. While access to Western markets, particularly the US and Canada, is attractive for Southeast Asian economies, the US will capitalize from one of the fastest growing regions in the world.  The proposed agreement aims to further align Asia-Pacific Economic Cooperation (APEC) forum members, a group of nations that accounts for 60% of US trade (Ferguson, McMinimy, & Williams, 2015). While APEC does not negotiate PTAs among members, it serves as an open forum for dialogue to establish non-binding commitments and to spark investment and open regional trade. The 21-member forum indicated the desire for the creation of a Free Trade Area of the Asia-Pacific (FTAAP), however aspirations have not resulted in action. APEC remains a forum for ideas exchange without genuine action. The TPP has the potential to change the APEC dynamic by deepening ties among TPP partner states while creating a foundation for a future FTAAP agreement.

This partnership is a promising platform for regional integration that may extend to more than the current negotiating members. As of this writing, South Korea, Colombia, and Costa Rica have expressed interest in joining the TPP. The US favors waiting to complete current negotiations before adding members.

The strategy of waiting to add members until after negotiation allows the US greater influence in the current PTA negotiations. Permitting too many nations of varying ideologies entry to the foundation of the TPP could dilute the breadth of the agreement. By maintaining the current membership, negotiators will be able to consider and agree to a broader scope of topics, rather than being limited by too many competing ideas. This problem has been seen in the Doha Development Round of the WTO, which has lingered since 2001. By allowing nations to join after TPP negotiations are complete, the US gains by requiring later partners to agree to TPP rules without having the ability to negotiate the initial terms.

THE WASHINGTON CONSENSUS

In the 1920s President Woodrow Wilson emphasized the importance of the US role in spreading free and open capital markets. Based on the tenants of Adam Smith and further delineated by John Maynard Keynes, open capital markets are considered the most efficient form of economic activity. The US believes that open markets allow all nations to fully realize their comparative advantages, which facilitates an increase economic growth, catalyzes employment rates, and advances technological innovation.

The TPP is a method of expanding US ideology abroad, but more importantly it serves as a tool for the US to write the rules of trade for the Pacific region and to ensure those rules are not written by an emerging power. In the 2015 State of the Union, President Obama highlighted this point stating the US needs to level the economic playing field in Asia by introducing trade deals that are both free and fair. As a beacon of US ideology, the TPP focuses on protecting American jobs and creating more efficient global markets through the liberalization trade in the Pacific Region. The partnership aims to liberalize trade of all goods and services exchanged between the twelve nations through the elimination of tariff and non-tariff barriers to trade. The TPP reaches many aspects that the US considers critical to fair trade practices such as intellectual property rights and deregulation of trade between the twelve member states.

One of the largest threats to US influence and reputation in the world is China’s growing influence through projects like the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank. Both projects provide potential alternatives to the current, US-lead, world organizations (Totten, 2014). China also seeks to strengthen its ties within its region. The Chinese have begun to introduce a variety of regional arrangements to increase influence in the region: the New Silk Road, the Maritime Silk Road, and the Air Defense Identification Zone (Kuo & Tang, 2015). As China leads new regional and global projects, its influence will continue to expand and may jeopardize US influence across the globe (Totten, 2014).

China’s rapidly growing economy and influence present a challenge to the US market-economy approach. Chinese growth has been accomplished through non-Western market practices that may lead other nations to question the US market approach. China has emphasized that the financial crisis highlights the weaknesses of the Western approach to economic growth. Economist Xinbo (2010) claimed that the Washington Consensus was a myth about the efficient free market based on the growth of developing economies relative to the US during the financial crisis of 2008. This argument neglects a foundational aspect of economics, diminishing returns.

The Solow Model demonstrates why developing economies experience rapid growth rates relative to developed economies. The blue line in the figure below illustrates the trajectory of a nation’s growth (y) relative to its capital inputs (k). As developing nations increase in capital they will initially experience large returns in growth; however, as a nation accumulates capital, its returns diminish. Because China has a large potential for growth it has experienced impressive growth rates as it has utilized its factors of production (labor) and capital, but, as the Solow Model depicts, there will come a point in which returns to growth cannot be sustained without a change to another factor of production. Without innovation or access to new markets, Chinese growth is not sustainable. Open markets provide a vehicle for continued growth for China and developing nations by increasing access to markets and spurring innovation through competition.

image023
Source

The problem persists, however, as China’s steady growth throughout the crisis of 2008 may compel developing and middle-income economies to errantly regress toward protectionism and the maintenance of state owned enterprises (SOEs). And these threats to open market ideology are most pronounced in China’s neighborhood of Central and Southeast Asia. The US should be concerned that a rogue economy may alter the make up of the world economy and orient nations toward inefficient markets or economic practices. The TPP agreement is a method for the US to rebuff China’s rising influence in this region and realign member nations to efficient market practices.

Despite ideological differences between the two nations, China and the US have worked to build a strategic partnership. Chinese President Xi Jinping announced this intention during the 2013 Sunnylands Summit in California (Bush, 2013). Since the summit the US and China have worked toward mutual cooperation on a variety of issues and continue to discuss the possibility of future cooperation. While China is not currently a TPP member, continued collaboration between nations may provide an opportunity for China’s entrance into the pact.

China’s inclusion into the TPP would promote open markets in China, more closely aligning it with the tenants of the Washington Consensus, and present a great capital cost to China in reforming much of its economy. This would undermine arguments presented against the Washington Consensus, as Chinese inclusion would tacitly acknowledge the value of liberalization of trade and the open-market economy.

GOADING THE WORLD TRADE ORGANIZATION

US participation in TPP negotiations builds on the established trade policy of using PTAs to promote trade liberalization and to incite multilateral trade negotiations in the WTO. The US strategy of using PTAs to promote liberalization began with the 1994 North American Free Trade Agreement (NAFTA) and has expanded into 14 PTAs with 20 countries (USTR, 2015). The TPP seeks to broaden previous PTAs that focused on a more narrow, goods-based approach. This allows the TPP to establish principles of new trade issues, such as SOEs and supply chain facilitation, which could provide a template for future bilateral, regional, or multilateral negotiations.

Despite differences in economic development, current TPP partner nations share a reliance on world trade and have been advocates for greater trade liberalization. These ideals have enticed partners to commit themselves to negotiating a comprehensive, 29-chapter PTA (DePhillis, 2015). This method of negotiation will serve to further the US strategy of comprehensive and high standard PTAs, which encourage further liberalization of trade.

Open negotiations on innovative trade models are becoming particularly important as the Doha Development Round of the WTO stalls. As critics contend that the Doha agenda is losing relevance, the TPP represents an opportunity for the US and its partners to discuss a modern trade agenda (Ferguson, McMinimy, & Williams, 2015). The eclectic group of nations involved in TPP negotiations serves as an example to the WTO, as each comes from varied economic and development background. This will emphasize the utility of open markets for all nations.

Despite potential benefits there are naysayers to bilateral and regional PTAs like the TPP. Critics argue that PTAs divert attention from WTO objectives and also create uneven world trading cliques. Despite criticism, the successful negotiation of the TPP on emerging issues stands to galvanize progress within the multilateral organization. The WTO is slowed by its agreement method called the  “single undertaking,” in which nothing is agreed to until everything is agreed upon. This method of agreement better ensures full participation of all nations but is limited by nations that are most protectionist and least willing to liberalize. For this reason, it will require smaller multilateral PTAs to persuade WTO members to continue moving toward increased trade liberalization. As TPP partners benefit from trade liberalizing practices, such as the minimization of SOEs, more regulatory coherence, dispute settlement, better defined rules of origin, and increase protection of intellectual property rights WTO members be forced to take notice, incentivizing negotiation on these topics at a multilateral level.

Another concern inherent in broadening PTAs is that increased trade between international trading blocs will be trade diverting, pulling trade away from other regions. This too serves US interests and goads WTO members to continue progress into increased trade liberalization. The US will gain leverage against countries that become marginalized and isolated as their economies reject liberalization practices that would allow them access to US and US-partner markets. In this manner, the TPP may become a powerful tool to signal to protectionist nations that the US will find trading partners that will play by its rules, even if it is at the short-term expense of developing nations.

CONCLUSION

The TPP is symbolic of US trade policy and economic ideals. It represents an enormous opportunity to augment US trade and galvanize liberalization efforts across the world. The successful implementation of the TPP will serve to strengthen the US trade position in the world as well as to further US strategic economic interests within the Asia-Pacific.

Trade with APEC nations currently accounts for nearly 60% of US trade, and TPP presents promise to increase regional ties and enhance economic cooperation within the region. A successful TPP agreement has the potential to become a template for a wide-reaching Asia-Pacific free trade area. The 21 members of APEC have expressed interest in the adoption of the TPP model to set a foundation for the FTAAP agreement spanning the Asia-Pacific (Ferguson, McMinimy, & Williams, 2015). A US-designed Asia-Pacific free trade area could serve to blunt Chinese influence in the region and slow its reach into world markets.

The TPP presents a further opportunity to jump-start WTO negotiations. The partnership spans a diverse array of economies and varying levels of developmental. Successful implementation of the TPP will ameliorate concerns from protectionist and developing nations that slow the progress of global trade liberalization. Implementation will further stimulate WTO members to consider the adoption of a wider array of liberalizing policies or face exclusion from the world’s preeminent trade network, especially if APEC members adopt this agreement as a foundation of a more comprehensive Asia-Pacific free trade area.

Additionally, the successful negotiation and implementation of the TPP will create a vast amount of leverage for the US to further its international trade agenda. The scope of this agreement could serve as a springboard for multilateral trade negotiations and a counterpoint to errant arguments about protectionism and closed markets. The TPP, if agreed upon, will become a potent tool for the US to influence and augment the world economic order.

REFERENCES

Bush, R.C. (2013). Obama and Xi at Sunnylands: A Good Start. Brookings Institute. Retrieved April 10, 2015 from http://www.brookings.edu/blogs/up-front/posts/2013/06/10-obama-xi-sunnylands-bush

DePhillis, L. (2015). Everything you need to know about the Trans Pacific Partnership. Washington Post. Retrieved on April 10, 2015 from http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/11/everything-you-need-to-know-about-the-trans-pacific-partnership/

Ferguson, I.F., McMinimy, M.A., & Williams, B.R. (2015). The Trans-Pacific Partnership Negotiations and Issues for Congress. The Congressional Research Service. Retrieved April 10, 2015 from https://www.fas.org/sgp/crs/row/R42694.pdf

Kuo, M.A., & Tang, A.O. (2015). China’s AIIB and the US Reputation Risk. The Diplomat. Retrieved on April 12, 2015 from http://thediplomat.com/2015/04/chinas-aiib-and-the-us-reputation-risk/

Obama, B. (2015). State of the Union Address. Retrieved on April 4, 2015 from https://medium.com/@WhiteHouse/president-obamas-state-of-the-union-address-remarks-as-prepared-for-delivery-55f9825449b2

Office of the United States Trade Representative. (2015). Trans-Pacific Partnership (TPP). Retrieved on March 30, 2015 from https://ustr.gov/tpp

Totten, J. (2014). BRICS New Development Bank Threatens Hegemony of U.S. Dollar. Forbes. Retrieved on April 12, 2015 form http://www.forbes.com/sites/realspin/2014/12/22/brics-new-development-bank-threatens-hegemony-of-u-s-dollar/

Xinbo, W. (2010). Understanding the Geopolitical Implications of the Global Financial Crisis. The Washington Quarterly, 33(4).


10996559_10102514738376102_2584848218111765962_nDavid recently completed an internship for the United States Trade Representative in Washington D.C.  He is a Master’s Candidate at the Patterson School of Diplomacy and International Commerce. He is a former professional athlete with a passion for diplomatic relations, international trade, and international athletics. Contact David with any questions, comments or opportunities: https://www.linkedin.com/in/jankowskidavid

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s