On Monday, President-elect Donald Trump said that he would pull out of the Trans-Pacific Partnership, President Obama’s signature trade deal linking countries around the Pacific Rim, on his first day in office. Immediately before, a gathering of international leaders in Peru gave early hints of what might happen next.
The picture is one of China rushing forward to lead the world’s next trade agreement, with U.S. allies such as Australia and Japan in tow.
Without the United States, the TPP is effectively done. But international trade negotiations will not stay quiet for long. America’s largest trading partners are already looking toward the next agreement. That appears likely to put China, Russia and other countries — which the United States had pointedly excluded from the TPP, in hopes of encouraging them to improve their trade practices and join at a later date — in a more favorable position to negotiate a trade pact that works for their economies.
At the summit in Peru this weekend, world leaders turned toward two agreements China has been negotiating in the TPP’s shadow. As the United States pushed ahead with the TPP in the past several years, China had been pushing for the Regional Comprehensive Economic Partnership, a deal negotiated among 16 Asian countries that is now close to completion, as well as the Free Trade Area of the Asia-Pacific (FTAAP), which is open to 21 economies along the Pacific Rim, including China, Russia, Indonesia, Canada, Mexico, Peru, Chile and the United States.
In the past few years, the United States had persuaded its Pacific trading partners to set aside that second deal, the FTAAP, in favor of the TPP. But now that the TPP appears to be dead, China and other countries are pushing ahead with FTAAP.
Fred Bergsten, senior fellow and director emeritus of the Peterson Institute for International Economics and the author of a blueprint that led to the TPP, said the feeling from the Lima, Peru, meeting was that the world would continue down a path of trade liberalization, perhaps without the United States.
“It’s pretty clear the sentiment there was a backlash against a backlash,” he said.
In interviews and an op-ed published before the event, Australia's trade minister, Steve Ciobo, signaled that his country was moving on to the new free-trade agreement.
“With the future of the TPP looking grim, my ministerial counterparts and I will work to conclude a study on the Free Trade Area of the Asia-Pacific, which sets out agreed actions toward a future free trade zone,” Ciobo said, according to the Guardian.
After a meeting between Chinese President Xi Jinping and Russian President Vladimir Putin on the sidelines of the meeting, China’s Foreign Ministry announced that China and Russia would work together to promote the free-trade area.
Leaders from Singapore, Vietnam and Malaysia also confirmed they were shifting their focus to a China-backed deal, while Japan still appeared to be holding out hope that the United States would reverse its position on the TPP.
Trump and his trade advisers say that the TPP is a bad deal for the United States, citing the large numbers of losses in the manufacturing industry and other sectors that have come since the United States deepened trade in the 1990s. But Bergsten, a proponent of free trade, argues that being left out of the next global free-trade deal will hurt U.S. workers.
Although other countries will always hold the door open for an economy as large as the United States to join them, they also appear likely to forge a deal without the United States. If the United States does not join, the result would be what economists call “trade diversion” — where lower barriers to trade mean that countries in the pact may choose to buy goods from each other, even if an American-made good is cheaper. That could weigh on American exports and worsen the U.S. trade deficit.
The other risk is that China, Russia and other countries will probably create a trade agreement that is more favorable to them on certain issues, and less favorable to the United States, Bergsten says.
Although the TPP attempted to limit unfair competition by state-owned enterprises, China could push for more lenient treatment for its powerful state-owned companies in a new deal. The TPP also carved out tougher standards for the implementation of intellectual-property rights, which generate much of U.S. companies’ profits. A free-trade agreement negotiated by China could be more lax on that front as well.
“This is really a contest for the economic architecture of the most dynamic part of the world economy,” Bergsten said. “If we now cop out, I’m suggesting that the debate will continue and the process of integration will continue, but yes, more likely on somebody else’s model.”
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