So, is the TPP dead or alive?

Spearhead Analysis – 20.02.2017

By Shirin Naseer
Research Analyst, Spearhead Research

The Trans-Pacific Partnership (TPP) was to play a strategic role in American diplomacy. Touted by the Obama administration as the economic lynchpin of US’s ‘pivot to Asia’, it was to act as a counterweight to an expansionary China. However, under the Trump administration, several of Obama’s signature achievements have been either trashed or blunted dramatically—the TPP being one of them.

The Trump administration kicked off with the US exit from the TPP—a deal painstakingly negotiated, but little understood. Several serious political risks were taken by participating countries to forge the compromises required for the TPP to surface. Negotiations took five long years, after which the TPP was hailed as the most sophisticated deal to cement the US alliance with Asia.

For many, forsaking the agreement has undercut the United States’ standing in the Asia-Pacific region and jeopardized US engagement with Asia. America’s future role in the region, the prospects of Trump being able to negotiate sufficient and beneficial bilateral deals to replace the TPP and the likelihood of the deal torpedoing now that the US has withdrawn, are all legitimate concerns. Most significant however is the growing anxiousness regarding China’s gain from the American shift. 

Since his January 23 decision to exit the 12-nation pact, Trump has made some progress in the way of seeking trading relationships outside the TPP.

Last week, the US president held his first official meeting with Japanese Prime Minister Shinzo Abe. Talks concentrated on trade and investment, among other things, adding to speculations over a bilateral trade deal between the two countries.

Trump has voiced his preference for bilateral deals over multilateral pacts and this meeting was perceived as President Trump making good on campaign promises and pursuing stronger bilateral economic ties regionally.

While the US seems to be moving on at its own pace it might be too soon to mourn the death of the TPP—which is still very much alive and optimistic for the future.

Admittedly, the group’s biggest economy has removed itself from the TPP. Arguably, however, this has been as much of a blow to US credibility as it is to the TPP and its position. The dangers that the US withdrawal pose to TPP’s survival have been long debated.

Now that Trump’s campaign promises have materialized into a complete separation, it raises the question: Can the TPP grapple with Trump’s decision?

Australia’s response has been pragmatic and fairly optimistic. Australia had welcomed the TPP and has invested in it heavily.

After the US withdrawal, Australia’s trade minister has reaffirmed his confidence in the TPP vowing to restore the deal at upcoming Match talks. Australian Trade Minister, Steven Ciobo told Bloomberg News that the TPP remains significant despite Abe saying that it was “meaningless” without US involvement.

He said, “That’s why I put a focus on whether or not we could have for example, a TPP 12 minus one… We’ll be having a meeting in Chile in March of this year to canvas all of the options… We could make minor changes to the text to allow for the exclusion of the United States and still get the TPP into place”.

Ciobo has suggested a “slimmed-down” version of the TPP including countries like Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru and Singapore.

Over the years, Australia’s foreign policy choices have indicated that while the US is significant as a security partner and valuable friend to Australia, a good working relationship with China is also equally important.

Back in 2015, then-PM Tony Abbott led Australia into the China-sponsored Asian Infrastructure Investment Bank despite President Obama’s protests. Later that year, the Australian government approved a Chinese company’s bid to buy Port of Darwin, situated right next to a facility that hosts rotations of thousands of US marines. The US government was informed of this decision much later. Another red flag surfaced when Australia politely declined the suggestion of three US admirals to join in running provocative freedom of navigation patrols within 12 nautical miles of Chinese-claimed features in the South China Sea.

President Trump’s notoriously frank exchange with Malcolm Turnbull earlier this month has set the tone for US-Australia relations. Widely publicized details of the Trump-Turnbull call were leaked to the US media, in which Trump reportedly told Turnbull that his was the “worst phone call by far”. Furious about the refugee swap deal, the US president took a hardline with Australia: reportedly accusing the Australian Prime Minister of trying to send the “next Boston bombers” to the United States before cutting the call short of its allocated time.

This was clearly an ill-planned phone call: the president continued to call refugees that the former Obama administration made a legal agreement to accept, “illegal immigrants”.

What’s more, Trump fired off a tweet calling the refugee resettlement plan “a dumb deal”–damaging relations with a key strategic ally.

Later, Trump counselor, Kellyanne Conway tried to pin the blame on Australia for leaking details of the Trump-Turnbull conversation, despite the fact that the earliest reports cited White House sources, only later confirmed by Australian ones. 

Whether turbulence in US-Australia relations is understood as part of the historical norm with new administrations coming in, or is attributed to Trump’s lack of foreign policy understanding, there is likely to be one winner emerging from this situation: China.

Australia’s tilt to China has always been fairly visible but Trump’s handling of US-Australia relations has given it definition and incentive—both of which it was previously lacking.

Australia’s longest-serving foreign minister, and now high commissioner to Britain, Alexander Downer, advised that perhaps a US-less TPP might be best salvaged if China is also persuaded to join in.

Australian Foreign Minister Julie Bishop also pointed to the Regional Comprehensive Economic Partnership (RCEP)-of which China is prominently part of-as capable of filling the vacuum created in the absence of the US.

There is a strong possibility that post-March talks, Asia will profit from both the RCEP and the TPP, even without the participation of the world’s biggest economy in either of the two.

In retrospect, the former US Secretary of State, John Kerry, did warn the incoming US administration of the need to stay engaged and involved in the TPP. In a speech in September he said that if TPP is rejected, “we (the US) take a step away from the protection of our interests and the promotion of universal values, we take a step away from our ability to shape the course of events in a region that includes more than a quarter of the world’s population — and where much of the history of the 21st century is going to be written.”

The Trump administration, however, is clearly willing to risk it.

In any case, President Trump and his administration pitched the TPP withdrawal as a way to bring about a ‘systemic difference’. Though the decision itself was particularly inward-looking it should be justified if it is to reverse America’s trade deficit—which brings us to the question: what does getting rid of trade deals really do to improve America’s trade balance?

A study by the nonpartisan Congressional Budget Office revealed that estimates of the impact of “trade agreements on the U.S. trade balance are very small and highly uncertain.” Large tariffs are also unlikely to be conducive. While they do lower imports, it is likely that they will also lower exports, together through a stronger dollar and through retaliatory tariffs from trading partners.

Trump promised the TPP withdrawal would be a “great thing for the American worker.” Trump’s optimism came alongside promises to impose tariffs on imports and crack down on American companies that manufacture overseas.

While these claims make for great optics, in real economic terms ripping up trade deals unfortunately doesn’t achieve much.

In order to tackle a trade deficit: the amount a country saves and invests, demand for traded goods and services, relative competitiveness of the companies that produce these goods and, most important, exchange rates– all have to be factored in. Irrespective of how productive US manufacturers are they can’t compete in foreign markets if exchange rates sway against them.

Mexico and New Zealand have reportedly shown support for reviving the now 11-member TPP. There are signs that China will take full advantage of the American shift to promote its own trade vision. The RCEP-hailed as a rival pact and strongly backed by Beijing-has countries like Peru and Malaysia (who have signed TPP) eager to focus on trade negotiations with China.

China is positioning itself as the more reliable superpower and it will be interesting to see how China asserts itself amid these developments.