After killing TPP: now what?

Gary Hufbauer has written extensively on international trade, investment, and tax issues. He is coauthor of Bridging the Pacific: Toward Free Trade and Investment between China and the United States (2014), and has contributed or authored more than a dozen other books. Gary Clyde Hufbauer, Reginald Jones Senior Fellow since 1992, was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations (1996–98), the Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University (1985–92), senior fellow at the Institute (1981–85), deputy director of the International Law Institute at Georgetown University (1979–81), deputy assistant secretary for international trade and investment policy of the U.S. Treasury (1977–79), and director of the international tax staff at the Treasury (1974–76). He was interviewed by Chuyi Sheng '17 on February 3, 2017.

President Trump and his administration abandoned the Trans-Pacific Partnership trade deal (TPP) and called for more bilateral trade agreements that will bring jobs back to the U.S.. What are potential trade policies toward Asia that Trump may pursue? 

President Trump has talked in short sound bites and contradicted himself at times so it is hard to know what he is going to do. But I can offer a few guesses on his policies toward Asia. First of all, there will likely be many trade remedy cases brought against China, such as those involving anti-dumping and countervailing duty petitions on Chinese products. I expect Trump’s team to welcome cases that U.S. companies want to bring against China in hopes of protecting domestic employment. 

Second, it is quite possible that Trump will initiate a bilateral dialogue with Japan. He has been urged to do this by Senator Hatch, a powerful politician who is the chairman of the Senate Finance Committee. When you look at the TPP, the biggest benefits for the U.S. stemmed from trade liberalization with Japan. Trade with Malaysia and Vietnam created much smaller gains. That said, there are several problems related to any potential dialogue with Japan. The Trump administration will likely ask Japan to make more concessions than it already did in the TPP, especially in the agricultural, auto and service industries. The U.S. is a strong service exporter, but at the same time, Japan’s service market is quite closed. Japan has a lot of barriers targeting foreign companies in service industries. As a result, there is hardly any foreign presence in the areas of big retail stores, telecom, banking, and insurance companies in Japan. It is well known that Japan is highly protective of agriculture, starting with rice and beef. Moreover, Japanese auto standards effectively exclude U.S. cars from the Japanese market. However, the Trump administration does not seem in a mood to offer reciprocal concessions to Japan in the automobile industry or other sectors of the U.S. economy. Trump and his team complained that the TPP was too generous to Japan in the first place. But if serious talks occur, the United States will be doing all the asking and Japan will be expected to do all the giving. Politically, it will be difficult for Prime Minister Abe to accept any deal that seems highly unbalanced by the standards of past trade negotiations. If the U.S. goes forward with bilateral talks with Japan, it will be in the spirit of an economic partnership agreement under a strong security umbrella. The economic paragraphs will contain a lot of fluff, with talk about how we love each other and how we welcome student exchange, tourism and so on. Basically the new agreement would be an affirmation of our diplomatic and military alliance with Japan, which is not actually in question. 

The Trump administration’s view is analytically wrong and politically impossible. Its view is that, in bilateral negotiations with other countries, any U.S. trade deficit with that country should be reduced sharply through trade renegotiation. (For further reading on the issue of trade deficit, please see “Is Our Trade Deficit a Problem?” ) That objective is hard to achieve for several of reasons. For Japan, a country which has a $70 billion trade surplus with the U.S., I don’t see how a new trade agreement can succeed if the overriding objective is to slash the U.S. bilateral trade deficit. 

As for other Asian partners, Trump’s thinking may entail new negotiations with countries like Australia, Korea, Singapore, Peru, and Chile, where the United States already has a free trade agreement. But overall, it seems likely that the U.S. will be less engaged in terms of Asian economic policy initiatives, which might give China a diplomatic opening. 

Singapore's Prime Minister Lee Hsien Loong used an interesting analogy during a state visit. He said, "If, at the end, waiting at the altar, the bride doesn't arrive, I think there are people who are going to be very hurt, not just emotionally but really damaged for a long time to come." How does the withdrawal from the TPP by the Trump administration damage America’s political and economic relationships with its Asian trade partners?

It is tremendously damaging for a couple of reasons. First, so much effort was put into this agreement by all countries over many years. At the last minute, it was simply thrown out by the U.S.. Furthermore, both Trump and Clinton were against the TPP in the presidential election campaign, but they never fully explained the reasons for their opposition. They simply used the TPP as a scapegoat for all the wrongs suffered by middle class Americans. They used the TPP as a symbol and attacked it to please the electorate. This political theater must seem quite peculiar to the eyes of our Asian partners. I had dinner with a diplomat from the Chilean embassy in Washington last week. He told me that Chile has invited all TPP countries to Santiago to discuss the future of the agreement. It is interesting that besides current members, Chile also invited Korea and China, but he did not know whether these two countries would attend because they had not yet responded to the diplomatic invitations. Other TPP members want to know whether there is a way to go forward with the TPP, possibly with China’s closer engagement. Given the history of the TPP, the current situation is clearly not the vision President Obama had in mind or even what President Trump anticipated. It is quite an unfortunate development for the U.S..

"President Barack Obama attends the Trans-Pacific Partnership (TPP) meeting at the ASEAN Summit at Peace Palace in Phnom Penh, Cambodia, Nov. 20, 2012." (Official White House Photo by Pete Souza — via Flickr Creative Commons —

The TPP was once considered an important pillar of the Obama administration’s pivot to Asia. Do you expect that Trump will also prioritize Asia or shift America’s focus to other regions instead? 

Trump’s first initiative is to have a friendly relationship with Russia. Realizing that aspiration depends on what Russia does in Ukraine and Russia’s other “near abroad” countries. Trump’s diplomatic plans for the EU are unclear. As for Asia, we can expect an antagonistic trade relationship with China in the first year of the Trump administration. How the military alliance with Japan, Korea and Australia develops remains to be seen. At one point there was loose talk by Trump about encouraging Japan and Korea to have their own nuclear weapons. With Australia, he had a rather testy dialogue with Prime Minister Turnball. However, Asia is important to the U.S. economically and geopolitically. We may see an evolution in Trump’s policy toward Asia towards a traditional emphasis on security alliances. 

Let me share a peculiar remark I heard on a panel. One of the panelists suggested that Trump’s relation with China might turn out as Nixon’s relationship with China did. President Nixon ascended to power by promoting anti-communism to an extreme degree. Then Kissinger persuaded Nixon to establish diplomatic ties with China. Historically, this may be the most important thing that Nixon did in his entire political life. Trump is in a similar position. If he decides (and he seems to constantly change his mind) to negotiate major trade deals with China in the later years of his administration, he could accomplish the goal without the strong opposition from protectionists in both parties. This would be akin to the “Nixon in China” scenario that Republicans of that era could not oppose. A parallel scenario with Trump on the trade front is really thinking-outside-the-box, but it is a possibility. In the short term, however, improving America’s relationship with Asia may not be a high priority for Trump, while many causes for friction are evident, such as international trade disputes, tensions in the South China Sea, and North Korea. In the long term, the diplomatic relationship may become rosier. 

How does the demise of the TPP in the U.S. affect trade relations among Asian countries? Is it possible for the remaining 11 countries to form a new trade agreement without the U.S.? 

Japan may become the centerpiece. If Prime Minister Abe wants Japan to become a constructive player in Asia, the TPP is his golden opportunity. If Japan is willing to ratify the TPP, it will be sensible for the remaining countries to embrace the agreement. The current members should not hold back simply because the U.S. withdrew from the international economic model that we have known since World War II. Japan could go forward and other countries would follow. From an economic standpoint, the other TPP countries are looking for greater access to the Japanese market. If Japan doesn’t show an interest, however, it would be hard for the rest to sustain the TPP. 

Japan could also go beyond ratification of the TPP pact and invite Korea to join. While these two countries have a complicated diplomatic history, it would be easier politically for both countries to improve bilateral relations in the future if Korea joins the TPP. The TPP 11 members could go even further and include countries like Thailand and Indonesia. They might also form an auxiliary or associative relationship with China. China is not yet ready for the disciplining effect of the TPP, especially since China has pursued strongly protective trade policies over the last two years. The liberalization provisions of the TPP do not accord with China’s current perceived interests.

In short, the withdrawal of the U.S. provides a great opportunity for Asia. Hopefully, Asia’s leaders will be smart enough to take it. 

Analysts and experts believe that China will be eager to fill the political and economic vacuum caused by the withdrawal. In fact, President Xi has repeatedly vowed to promote globalization and free trade. How can China potentially benefit from the U.S. withdrawal from TPP, and will agreements like the Regional Comprehensive Economic Partnership gain momentum?

My view is rather skeptical. China is not prepared at this juncture to open its market to other Asian countries. The Chinese government is pursuing protective trade policies and is experimenting with the transition to a more service-oriented economy. There is also a lot of worry at home about capital outflows, corporate debt, and mediocre growth rates. Chinese leaders know that their legitimacy depends on visible progress on multiple challenges.  Diverting attention to the demands of world leadership probably entails an unwanted distraction. Rhetorically, China favors globalization and is not interested in going backwards (unlike some people in the Trump administration). But does China really want to discipline its state-owned enterprises or open its agriculture and service sectors? Serious world leadership would require dramatic opening of Chinese markets in sensitive sectors (agriculture, services, digital commerce), and generous provision of credit to developing countries.  Such measures are costly in the coinage of domestic politics. China is not currently ready for the change. It will concentrate on construction instead. Chinese firms are excellent at building infrastructure of all kinds, like telecom, railways, highways, and ports. The country has ambitious initiatives like “One Belt and One Road” and the Asian Infrastructure Investment Bank. China will do projects and provide finance for other countries. However, it is not likely that China will follow the other side of the globalization equation, namely opening its domestic market. To be sure, Trump’s policies, together with populist turmoil in Europe, create an opening for China, but Beijing views the opening as an opportunity to improve its international status rather than an invitation to seize the mantle of leadership. My vision of the world for the next four or five years is that neither the EU, the U.S., nor China will take the lead. The global market in the immediate future is relatively leaderless. China will not step up and given the EU’s internal problems and crises, Europe is incapable of leading the market.

In an interview last November after Trump won the presidential election, you stated that the “TPP is now in the history dustbin for sure.” The TPP contained an ambitious framework aimed at strengthening labor and environmental protection. How will environmental and labor protections embedded in the TPP agreement influence future trade agreements?

There are many useful chapters in the TPP, such as those on labor, the environment, state-owned enterprises, and digital commerce. As the U.S. renegotiates NAFTA and other bilateral agreements, it will in fact borrow from those chapters, concepts, and language for the new negotiations, without acknowledging their origins. However, the Trump administration has nothing good to say about the TPP and won’t make that connection. Nevertheless, researchers, experts and some politicians will recognize the origin of these provisions. In that sense, the work done in the TPP will carry on. And conceivably the non-U.S. members of the TPP will rescue the pact from history’s dustbin. 

Wendy (Chuyi) Sheng '17 Student Journalist
"Donald J. Trump at Marriott Marquis NYC September 7th 2016 10" by Michael Vadon — Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons —
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