What Does the US TPP Withdrawal Mean?

Spearhead Analysis – 13.02.2017

By Shirin Naseer
Research Analyst, Spearhead Research

American President Donald TrumpOn his first full weekday in office, President Trump signed an executive order to withdraw the United States from the Trans-Pacific Partnership multilateral trade deal brokered by his predecessor– a deal that he himself described as a “disaster” and the “worst deal ever”. 

Withdrawal from the 12-nation Trans-Pacific Partnership (TPP) featured high up in Trump’s to-do-list for his first 100 days in office. As a candidate in the presidential elections one of the subjects that Trump spent the most time dwelling on was the TPP- a free trade agreement whose members comprise around 40 percent of global GDP. Trump vowed to take an aggressive stance against foreign competitors, which he fit under his “America First” approach. As on other important issues, Trump’s hardline stance on this particular issue is also a far cry from what we are used to hearing. Traditionally US presidential candidates seldom question the indispensability of the US in alliances and free trade agreements; these are rather encouraged as emblematic of the US’s commitment to the liberal world order.   

The move itself was expected but what this means for the future remains to be seen. 

Multinational trade agreements have defined global economics for decades. Trump’s decision to withdraw carries broad geopolitical implications for a fast-growing region. One major thing to watch will be the impact of this decision as it will affect America’s credibility and its influence in Asia. With US no longer in the picture, it will be interesting to note how existing signatories will continue with TPP. 

Economically, the withdrawal from TPP has put the US at a disadvantage. Apart from the typical gains any traditional trade pact offers, the TPP presented an additional opportunity for the US to dictate the rules of trade alongside major powers in the region. In this sense, the US has opted out of the chance to fully participate in the world’s most dynamic and thriving regions. 

As a trade pact TPP breaks new grounds in fields like state-owned enterprises, the digital economy, and the environment. This is why US policymakers initially deemed the agreement an opportunity for the US to write the rules of 21st century trade. The TPP, as a multilateral initiative, could have helped attract new members and catalyze a competition between states regionally by virtue of the fact that it has “open architecture”- an opportunity not available under bilateral deals. 

Strategically too, Trump’s skepticism for alliances and free trade will damage US credibility in the region. Trump’s decision to scrap the Trans-Pacific Partnership is a blow to America’s efforts at strengthening capabilities of its Asian allies who could have benefited from domestic reforms offered under TPP. 

Many commentators see Trump’s move as akin to the US conceding its traditionally held position as a champion of free trade, and handing the torch over to China. Popular media outlets have been feverishly debating the chances of China now expanding its sway over Asia and beyond, especially as Beijing has expressed excitement over the Regional Comprehensive Economic Partnership (RCEP) with other Asian states.

According to Victor Shih, an expert on China’s political economy, after withdrawing from the TPP, “The U.S. will be seen as an unreliable partner both economically and perhaps even in the security arena…While some countries in Asia have no choice but to be close to the US, others may begin to look to China.”

Given Trump’s harsh attacks on China and the appointment of a leading China critic, Peter Navarro, to the post of trade council director, Beijing is preparing itself for what could be a combative relationship. There is a lot of hype surrounding the RCEP as many observers see it as a China-led alternative pact to the TPP.

In light of these developments some clarifications are in order.

RCEP is actually not a Chinese-led agreement. Rather, it consists of over lapping free trade agreements between ten members of ASEAN –Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam – and six partners that have a trade pact with the regional grouping – Australia, China, India, Japan, South Korea, and New Zealand.

So, if we are to call RCEP as led by any country or body, it will have to be called ASEAN-led and not Chinese. The reason why the US is not part of RCEP- an agreement with much lower standards than the TPP- is because Washington requires much higher standards than the ones RCEP can offer. So, contrary to the hype surrounding RCEP’s conclusion, it is neither a big win for China, as being portrayed, nor a big loss for the US.

A similar line of reasoning also applies to China’s exclusion from the TPP. Like RCEP does not meet the US requirements, China at this point in time does not meet TPP’s standards.   

Hence, whether US’s loss will be China’s gain is difficult to gauge.  

The decision to part ways with the TPP is one of the very first moves the Trump administration has taken to carve out its Asia policy. Following it up with a lack of a clear movement towards alternatives has not been an ideal kickoff to the Trump presidency. It must be considered that if retaliation ensues, any negotiations at a later stage would become more difficult for the US.

According to Flynn, President Trump’s adviser, Trump prefers bilateral deals over multilateral blocs because “we have opportunity to cut [a] better deal.”

The Trump administration continues to insist that TPP, which is essentially a collection of bilateral deals, can be salvaged by pursuing several bilateral free trade agreements with stringent enforcement and withdrawal clauses. 

Trump has harbored severely protectionist views for decades. His worldview consists of a bleak assessment of America’s position in the world, a superficial understanding of US interests, and a transactional approach to democracy and dealing with the international community.

From the US standpoint, Washington already enjoys free trade agreements with most of the TPP members– Japan, Malaysia and Vietnam being the major exceptions. So for argument’s sake in the absence of the TPP, the US and these countries can potentially conclude bilateral FTAs that would have otherwise occurred under the agreement. Other countries have also shown willingness to move forward with concluding bilateral deals. However, this is not to imply that bilateral pacts will be easy to form considering the protectionist bent the Trump administration has demonstrated so far.

Even if the Trump administration is able to replace the TPP with bilateral deals, optics-wise it will be hard to match the appeal of a US-led single multilateral effort.

Essentially, however, high-standard bilateral agreements would also be accomplishing the same purpose: allowing the US to write the rules of international commerce. Even though engaging in bilateral deals will be a more inward looking initiative that would also be tied to America’s other economic initiatives it would not be too far a departure from Washington taking part in a multilateral deal.

Knowing the current President, the possibility of him backtracking can also not be completely ruled out, especially when he has a knack for the unpredictable. It won’t be the first time a president has changed his mind. George W. Bush, for instance, began his presidency pursuing bilateral deals with key Asian countries like Singapore and South Korea before softening his stance towards the TPP. 

Trump has said very little on broader questions relating to the economic dimensions of the US Asia policy. TPP was pitched as a way to permanently tie the United States to East Asia and create an economic bulwark against a growing China. The deal could have been used to influence the institutions and existing rules of Asia’s economies. The lack of policy clues in Trump’s inauguration speech makes it difficult to make any informed guesses about what Trump means for Asia. For evidence we have on the one hand Trump’s campaign rhetoric, his tweets, personal background and business career, and on the hand remarks from the Trump team—remarks that are often times at odds with Trump’s own statements.

Trump’s advisers have said that little can be expected to be achieved in the way of specificity until we are well into 2017. The only thing that can be anticipated with certainty is that amid all this confusion if presented the opportunity China will gladly step up and take on the responsibility for regional economic leadership.