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Trans-Pacific Partnership, a brief introduction and the changing stance of the US

  • Overview of the 12 nations Trans-Pacific Partnership trade agreement
  • How is it different from other regional trade agreements?
  • Trump’s latest stance on the TPP

 

Trans-Pacific Partnership (TPP) was a free trade agreement (FTA) between 12 countries surrounding the Pacific Ocean (Pacific rim countries). On October 4, 2015, the members of the TPP namely; the United States, Canada, Mexico, Australia, New Zealand, Japan, Brunei, Chile, Peru, Malaysia, Singapore and Vietnam concluded their negotiations on liberalising trade policies. The agreement was subsequently signed on February 4, 2016, and comprised all sectors from agriculture, service, industry to technology. TPP was an exhaustive and challenging regional trade agreement that aims to remove trade barriers, create more jobs, improve the economic growth and encourage foreign investments within the member states. It required ratification by at least 6-member nations, this should comprise 85% of the GDP of its members. However, the alliance suffered a huge blow when the US withdrew from the deal in January 2017.

Furthermore, there exists a considerable number of regional trade agreements (RTA) between nations such as the European Union (EU), North American Free Trade Agreement between Canada, Mexico and the United States (NAFTA), Mercosur between 6 Latin American states and South Asian Preferential Trading Arrangement (SAPTA) covering 8 South Asian countries among others. The aim of all these regional trade agreements has been an open market and elimination of tariffs. Presently, there are 287 RTAs in force and this number has been increasing with globalisation and liberalisation. EU has so far been the most substantial RTA as it includes 28 nation states, which accounts for 26% of the world’s economy in terms of the GDP (Source: Trading Economics).

How is TPP bigger and different from other RTAs?

  • Japan and the US along with the other 10 countries have a GDP of approx. $28 trillion and represents 40% of the global economy. Further, without the US, the rest of the 11 countries contribute $12.4 trillion to the world economy.
  • The pact opens trade horizons between Japan and the US (if it agrees to join back) as these do not have a bilateral trade agreement.
  • It does not include China and in fact poses a threat to the Chinese supremacy pertaining to exports, especially with respect to textiles. TPP will bring China’s counterpart in South East Asia like Vietnam closer to the world, which has already become a garment manufacturing hub owing to low labour and land costs.
  • The focus of TPP is to gradually eliminate all restrictions on Non-Tariff Measures (NTM) in addition to reducing tariffs. The examples of NTM being restrictions on imports of dairy products and imports of tobacco from member countries.
  • TPP does not only cover tariff related policies but also encompasses policies on the supply chain, environment, labour and intellectual property rights (IPR). It has thus become one of the most comprehensive FTA.
  • TPP promises to extend transparency in terms of regulatory trade practices between members and non-members.
  • Other nations can also become members of TPP as it is not restricted to the 12-members.

 

The below table represents the trade figures of TPP member nations (2015) and how it made sense for these countries to sign a treaty on the free trade.

Canada’s merchandise trade account with TPP members, for instance, represents 76% of its total trade, this stands 82% for Mexico. In fact, except for Singapore, all nations have more than 50% of their trade dealings with TPP members. Therefore, easing trade regulations with countries with significant import-export relations will only help improve the economic growth.

Then why did the US pull out of the agreement?

TPP was basically a trade pact encouraged by Barack Obama and Donald Trump withdrew from the agreement as soon as he assumed the office. Trump believes that such multi-national trade agreements would cut jobs for Americans and lay more importance to institutional interests. NAFTA had already taken away low-skilled jobs, especially in the manufacturing sector from the US to Mexico and Canada. Trump did not want a repetition of NAFTA that too at a larger platform. Further, several activists, worker’s unions and lawmakers have raised their voices against the agreement and the withdrawal from the TPP became a part of the political campaign for the new President, which was known as ‘America First’.

There was other criticism of the agreement, mainly due to a clause that allowed MNCs’ to sue governments on bypassing laws in the agreement or issue regulations that negatively affected their operations. The agreement could also lead to the death of the internet freedom, wherein, journalists will lose their right to report on the internet, users’ internet activity will be policed and the internet service providers would be imposed to take off content form their websites. Additionally, it is being said that the provisions in the agreement were kept secret and would not be made public, thereby questioning the transparency of the system.

What is the current status of the agreement?

Everyone believed that the US withdrawal would have led to a failure of TPP, particularly with respect to ratification clause of the agreement. Canada was concerned that its support to the TPP could adversely affect a further dialogue with the US on NAFTA. However, Japan stood the ground and made efforts to resurrect the deal. Shinzo Abe, the Japanese prime minister even parleyed with Trump to get the US back on board. Although Trump went ahead with the tariff imposition on aluminium and steel goods, the remaining 11 members signed a new agreement on March 8, 2018, which was led by Japan, Australia and New Zealand. The members instead vowed to create an open economy promoting multi-national cooperation and unification.

TPP was renamed as Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11 or CPTPP) and included Canada, Mexico, Australia, New Zealand, Japan, Brunei, Chile, Peru, Malaysia, Singapore and Vietnam as members. TPP 11 retained the original provisions of the TPP 12 except for a suspension of roughly 20 clauses, relating specifically to IPR and pharmaceutical sector. A major drawback was taken out, TPP 11 or CPTPP now protect the governments and allows these to pass regulations in the interest of public health, education and other related services which may violate the terms of CPTPP, but cannot be sued for the act.

Trump, to reconsider TPP?

Trump in an interview to CNBC (January 2018) at the World Economic Forum stated, ‘I would do TPP if we were able to make a substantially better deal. The deal was terrible, the way it was structured was terrible. If we did a substantially better deal, I would be open to TPP.’ In April 2018, he tweeted that the US is ready to renegotiate if the terms of the agreement were made more favourable for the nation. Many consider this as a backlash of the US-China tariff conflict. Trump has been trying to enforce import tariffs on China, but he has failed to get the backing of other countries. Japan and EU have been trying to persuade the US to relax its plans to impose the tariff of 25% on steel and 10% on aluminium. In addition, renegotiations on the NAFTA have been unconstructive. Thus, there was a mounting pressure to create beneficial trade policies, which might have led Trump to change his stance on the TPP.

What the future beholds?

As the 11 members proceeded with the pact with few revisions, there are other Asia-Pacific nations that are pondering over the agreement. Indonesia, which earlier was of the belief that if the US is not part of the deal, it would not be economically beneficial for the bloc. The nation is having second thoughts and this was bound to happen if other nations would not pay tariffs, why should Indonesia be uncompetitive in the market and pay tariffs. There is also a school of thought that is of the opinion that China may show an interest as the US has pulled out of the deal. Addedly, when TPP was led by the US, China considered it as an attempt to restrict its trade prowess. Hence, with the US no more, China being the largest market could revise the terms in its favour. The nation is an active participant of Regional Comprehensive Economic Partnership (RCEP), an FTA between 10 members of South East Asia. It is believed that even if it does not immediately join the pact, it may cooperate with the TPP members for promotion of the trade in the Asia-Pacific.

On the other hand, a trade war has ensued between China and the US. On June 15, 2018, the US levied import duties worth $50 billion on the Chinese goods and China retaliated by imposing similar tariffs on the US products for an equal amount. The US, in fact, is all set to charge import duties on metals from Europe, Mexico and Canada. These countries are not going to be a mute spectator, the trade war will spread further. This gives more incentive to China for joining TPP and gets a strong footing from TPP members. Televisory believe that in line with Trump’s vigour to lay import duties globally, the prospect of the US rejoining TPP is extremely bleak and is contrary to Trump’s fundamental beliefs.

In another development, recently, Malaysia (June 2018) demanded a renegotiation of the agreement to differentiate between developing and developed nations. Mahathir Mohamad, the Malaysian prime minister, who took the charge in May 2018 has asked for certain protections and privileges for developing economies for a fair competition. Thus, what remains a major challenge for CTTPP is its implementation as it is politically linked and a change in the political dispensation or leadership of member states can delay or halt the entire process of its execution.

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