A Trade Deal For The 21st Century: TPP Dilemma

The Trans-Pacific Partnership agreement signed by 12 countries around the Pacific Rim, including the U.S., Japan and Australia, is a complex and comprehensive trade agreement designed with the 21st century in mind. Importantly, China, India and South Korea are not signatories, although they could join at a later date.

It is an important part of President Barack Obama’s “pivot to Asia”, which he had hope to be part of his administrative legacy of the aim at undercutting or at least slowing China’s efforts to expand its “soft” as well as its military power.. Hence, President-elect Donald Trump victory making clear opposing to almost any US trade deal a centerpiece campaign, sending the TPP reeling.

The deal, like most of the multilateral trade-liberalizing agreements negotiated since World War II, specifies reductions in tariffs on manufactured goods and on agricultural products as well. But the TPP goes much further, entailing a global code of conduct of trade that takes into account its increasing complexity.

Recognizing the growing importance of services and digital products, it aims to reduce nontariff barriers in these areas too. It specifies rules for the protection for intellectual property. Going beyond previous agreements, it incorporates provisions for the protection for labor and the environment.

The provision of the TPP that has engendered the most controversy, even though it already exists on thousands of other treaties, is the Investor State Dispute Settlement provision. This allows a corporation to take complaints that a foreign government has violated its property rights to a special international tribunal, whose decision cannot be appealed. 

Prime Minister Datuk Seri Mohd Najib who has long tried to strike a balance in its relationships between U.S. and China, has been making similar noises about moving its fulcrum in the direction of China. Both countries have eased their opposition to China’s incursions into the South China Sea.

China itself has been actively initiating programs directed at enhancing its global role, with major implications for the U.S. When China created the Asian Infrastructure Investment Bank in 2014, the U.S. boycotted the new institution and asked allies to do the same. Despite its pleas, some 57 countries joined, including all the major countries of the European Union, as well as Australia and South Korea.

Even more recently, China has announced multi-billion dollar financing for its belt-and-road initiative, a grand plan to finance infrastructure projects throughout Asia and better connect China with the rest of the world that has been termed a Chinese Marshall Plan. 

The Chinese challenge to American hegemony appears to be gathering steam. China has replaced the Soviet Union as the major contender to supplant the U.S. as the world’s dominant power. With TPP cessation, the reframing of TPP as a security issue becomes apparent and relevant for the U.S. Now there existed pressure in Asia for a pivot away from the U.S.

Only two of its 12 signatories, Japan and New Zealand, have so far ratified the TPP. If the U.S. does not ratify, the deal will probably wither on the vine – although there have been suggestions that the other 11 members could ratify it and put it into force on a provisional basis.

The failure of the TPP would not leave a vacuum. China is already spearheading a proposal for a Comprehensive Regional Trade Partnership (CREP), which includes the 10 members of the Association for South East Asian Nations plus China, Japan, South Korea, India, Australia and New Zealand. As such, it includes seven of the 12 TPP signatories.

While both agreements cover such issues as trade of goods and services, investment and dispute settlement mechanisms, the CREP does not incorporate the TPP’s protections for labor or the environment or restrictions on the activities of state-owned businesses, which dominate the Chinese economy. These provisions are of key importance of many countries, the United States among them, for whom they represent strongly held values.

China is also hoping to advance its concept of a Free Trade Area of the Asia-Pacific (FTAAP), which would have the narrower goal of overriding and integrating the various bilateral and regional free trade agreements that are currently in force or proposed.

But it would have a broader geographical reach than CREP; it could potentially incorporate all 21 member countries of the Asia-Pacific Economic Cooperation forum, including both China and the United States. Originally, the U.S. had hoped that the TPP would be the main building block of the FTAAP, but China has clearly make headway.