Back from the Brink? The Future of the TPP-11

Back from the Brink? The Future of the TPP-11

Back from the Brink? The Future of the TPP-11

By Monica Stanisis from Perth USAsia Centre | 08 Aug 2017

Back from the Brink? The Future of the TPP-11 teaser
The withdrawal of the United States from the Trans-Pacific Partnership (TPP) has thrown the Asia-Pacific trade system into crisis. What was once the best opportunity for countries of the region to embrace multilateral trade liberalisation has essentially been sent back to the drawing board. The very feasibility of the deal is now in question.

The Australian government has made its disappointment over the American rejection of the TPP clear, and has led efforts by the remaining eleven members to salvage the deal. Trade Minister Steven Ciobo has said that he wants to ‘keep all options on the table’.

In reality, Australia’s ongoing commitment to the TPP appears to depend on the maintenance of the original provisions, given that reopening negotiations could lead to a watering-down, or even unravelling, of the trade deal. This position creates a dilemma that will be difficult to manage because any revival of the trade deal without the United States – known as ‘TPP-11’ – will necessarily be a radically different agreement.

‘The gold standard’                           
When negotiations for the TPP were concluded in late 2015, it was lauded as a new paradigm for global trade law. Carefully designed by its twelve members, the ambitious and innovative deal was about much more than mutual tariff reduction:
  • The TPP set high standards in ‘new’ trade policy areas such as investment, services, intellectual property, environment, labour and the digital economy. Few of the existing free trade agreements in Asia contain strong and effective provisions in these areas.
  • It represented a genuine attempt to multilateralise trade in the Asia-Pacific, which is currently criss-crossed by hundreds of asymmetrical bilateral agreements. These have fractured the Asia-Pacific trade system and undermined the cohesiveness of regional rules.
  • It was also step towards the Free Trade Area of the Asia-Pacific, long envisioned by leaders of APEC countries.
As a result, the TPP was not without contentious provisions, nor without its detractors. It became an important issue in the 2016 American presidential election campaign, with Donald Trump consistently arguing that the TPP would cost American jobs. Upon taking office in January, Trump withdrew the United States from TPP ratification with his first executive order.

Picking up the pieces
Throughout the first half of 2017, trade officials from the remaining eleven members have convened a number of times to discuss how to manage the American departure. The first two meetings, held in Chile in March and Canada in May, were open-ended talks.

Then, on the sidelines of the APEC Summit in Vietnam in May, the idea of a TPP without the United States (TPP-11) was formally accepted. Members declared they had ‘agreed to launch a process to assess options to bring the comprehensive, high quality Agreement into force expeditiously, including how to facilitate membership for original signatories’. A fourth meeting took place in Japan in July, where the negotiating parties agreed that the high standards of the original trade deal should not be compromised.

This ongoing commitment to the TPP reflects its systematic importance to, and impact for, both regional and global trade systems. The problems that the TPP was designed to fix – a lack of ‘high quality’ free trade agreements and a fractured regional trade system – still exist. Members believe that the TPP remains the best solution to these problems.

Another factor at play is that ratification by all of the original signatories, barring the United States, would send an important political signal about commitment to free trade. TPP-11 governments are affirming that trade liberalisation is the best way to promote growth, create jobs, and foster innovation, notwithstanding the protectionism emanating from the United States. This is especially important given that the alternative is the Chinese-led Regional Comprehensive Economic Partnership (RCEP) that is currently under negotiation. RCEP is sort of a ‘TPP-lite’ that will remove import tariffs, but ignore the other new trade policy areas emphasised in the TPP.

Japan is particularly enthusiastic about keeping the TPP alive, and has taken on a crucial leadership role. First, it would give Japan leverage in future trade negotiations, including with the United States. Second, it could help Japanese interests with respect to RCEP, and by extension China, by ensuring that quasi-liberalisation does not become the norm for Asian trade. Furthermore, some Japanese officials see TPP-11 as fitting into a broader plan to ‘contain’ the influence of Beijing in Asia by setting standards that China will be unable to meet in the foreseeable future.

The Australian government shares this vision of regional trade liberalisation, and has also been an outspoken advocate of TPP-11. Following the withdrawal of the United States, Australian government and trade officials reiterated their support for the trade deal, with Ciobo even announcing a strategy for ‘reconstituting’ the TPP.

Damned if you do, damned if you don’t
However, one important question remains for the remaining eleven members: to renegotiate, or not to renegotiate? There are two options:
  • Renegotiate the deal to better reflect the dynamics both between the remaining members, and between the Asia-Pacific and the rest of the world, or
  • Scrub the United States from the agreement while leaving everything else intact.
Renegotiation would seem the most politically viable strategy. Many of the concessions made by signatories like Vietnam and Malaysia were underpinned by the assumption that they would gain access to large American industrial and consumer markets. Without this powerful incentive, why should these governments still implement the politically sensitive reforms demanded by United States? Put simply, American negotiating points do not have a place in TPP-11.
 
Nonetheless, preserving the original TPP has drawn support from the Australian, New Zealand and Japanese governments. The TPP cannot be brought about in its existing form because the ratification clause requires a minimum of six of the original signatories, representing at least 85 percent of the total GDP, to ratify the TPP. As the United States alone accounts for 65 percent of that total GDP, this is now numerically impossible. Therefore, these governments have argued the easiest way to proceed without the United States is to simply amend the ratification clause.

The rationale behind this position is that renegotiation would be wasteful and counterproductive: wasteful because the TPP was carefully devised by the signatories, which invested a considerable amount of resources in the project, and counterproductive because TPP-11 would probably be less comprehensive and far-sighted than the original trade deal.

In May, Steven Ciobo likened renegotiating the TPP to opening Pandora’s Box, and said that there is ‘no merit’ to such an option. At present, it is unclear whether the other members will accept this reasoning.

Waiting on a black swan?
If renegotiation – the most plausible path for TPP-11 – is unacceptable for Australia, New Zealand, and Japan, why do they continue to champion the agreement? One answer is that they are keeping it warm in the hopes that the United States will have a change of heart (or leadership) and return to the trade deal in the future.

Unfortunately, ratification clause indicates the TPP must be ratified within two years. Even discounting the possibility that the four-year term of the American presidency will not be seen through by the incumbent, the United States Congress is highly unlikely to get back on board within the next 12 months.

It is more likely that the United States’ partners in the Asia-Pacific are hoping to preserve the high standards of the original TPP, so that a future American government will be able to join after it has come into force. Whether TPP-11 members are comfortable with this high-risk strategy remains to be seen.

Monica Stanisis is an intern at the Perth USAsia Centre.

[Editor’s Note: This is the first part in a Perth USAsia Centre series 'After the Trump Shock: Australia’s trade policy options in a new world'. Future instalments will explore Australia’s ongoing FTA negotiations with Indonesia and the ASEAN+6.]

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