Background
Regional free trade arrangements, including so-called mega-FTAs, have been proliferating in recent years to accommodate the growing need for reducing barriers to economic growth and development by attracting foreign direct investment and promoting competitiveness,[1] especially in reaction to the collapse of the Doha Round negotiations under the WTO.[2] Oftentimes, they also serve as confidence-builders among participants, which sets the stage for improved political and security relations.[3] Two of these free trade agreements, the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), grew out of this need, and link the economies of the Asia-Pacific region; however, these two mega-FTAs are very different in terms of economic effects for both their signatories and the rest of the international community.
The TPP, begun as an extension of an agreement formed in 2005 among Pacific Rim countries, eventually included twelve countries by the time of its ratification in February 2016: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States. However, less than a year later, the United States withdrew from the agreement, forcing the remaining eleven to create and sign a revised version known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Meanwhile, the RCEP was proposed in 2012 by the ten ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) as well as Australia, China, India, Japan, New Zealand, and South Korea. While formally led by ASEAN, China is the real spearhead,[4] and was keen to form the RCEP as an economic counterbalance to the US-led TPP—this despite the fact that seven of the RCEP partners (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam) were also in the TPP. While the TPP has been nullified, the RCEP is on track to be signed in November 2018.
Figure 1.[1] Shows the Pacific Four, the Trans-Pacific Partnership, the Association of Southeast Asian Nations, and the Regional Comprehensive Economic Partnership.
President Trump left the TPP because he alleged that it was not a fair deal for the United States, and claimed the US would be better off with bilateral trade agreements rather than mega-FTAs.[6] This paper posits that this is not true, and leaving the TPP will have severe negative effects for US economic growth and vitality in the coming years.
The TPP
The TPP started as a free trade agreement between the Pacific-4: New Zealand, Chile, Singapore, and Brunei. The P4 agreement took effect in 2006, and President Bush joined the negotiations in September of 2008,[7] expanding it to become the Trans-Pacific Partnership; seven other Pacific Rim nations joined the negotiations afterwards.[8] The twelve nations of the TPP together account for 40 percent of global GDP, as well as 24 percent of the world’s services trade.[9]
The TPP sought to eliminate barriers to trade and establish rules on trade issues including FDI and intellectual property rights, as well as non-trade issues such as food safety and human rights.[10] When the US was still involved, it was the Western nation’s objective to assert its “political and economic interests against the Chinese” in the Asia-Pacific region[11]—effectively, to isolate China from its neighbors and from the rest of the international economic community.
At first, it was unclear whether or not the TPP would be a true region-wide FTA or simply a “bundle of bilateral deals,”[12] and it was projected to be of low quality and low economic impact[13] because of a “lowest-common-denominator effect” whereby the countries least willing to make concessions set the agenda for everybody else.[14] However, by the time of its ratification, it was the world’s “second largest mega-FTA in terms of GDP and trade volume”[15]:
Figure 2. TPP’s Share in the World Population, GDP, and Trade (%)
In 2017, newly inaugurated President Trump withdrew the United States from the TPP, alleging that the cost for the US outweighed any benefits—however he provided little evidence of this, and in fact there was much evidence to the contrary; most studies showed that, while there were different concrete numbers in terms of economic gains for the US, the numbers were always positive[16]:
Figure 3. GDP and Economic Welfare Impacts of the TPP and CPTPP
Once the US withdrew, the remaining eleven members negotiated a new agreement, the CPTPP, that preserved much of the original text and was ratified by all eleven nations in March 2018. However, the CPTPP was not without revision; it is a full 38 pages shorter than the TPP, and suspended about 20 provisions the US pushed for in the original agreement, mostly dealing with intellectual property protections.[17]
The CPTPP without the United States represent 13.5 percent of global GDP, [18] accounts for 60 percent of the population of the TPP, and has a much lower per capita income average of about one-third the level of the US.[19] Despite these substantially lower numbers, there are many members of the CPTPP that are better off without the US involved—especially Canada, Mexico, Chile, and Peru.[20] These countries “avoid erosion of existing preferences in the US market, while they pick up market share in the Western Pacific from the United States.”[21] Singapore also benefits, since it “avoids preference erosion in its Asian markets from US export gains in those markets.”[22]
The RCEP
Since Asia does not have a universal free trade agreement like North America or Europe, they have made a so-called “noodle bowl”[23] of overlapping bilateral and multilateral negotiations, which creates a labyrinth of complex barriers for investment and trade in the region, slowing growth and prohibiting competitiveness and efficiency. This was especially problematic considering that the emerging economies of the Asia-Pacific account for the majority of economic growth around the globe.[24] So in November of 2011, ASEAN proposed the new FTA initiative of the RCEP.[25] ASEAN’s goals were to “widen members’ participation in regional and global production networks, as well as minimize transaction costs for businesses and inefficiencies created by multiple ASEAN-based trade agreements.”[26]
But since its inception came after the US-led agreement, it is widely acknowledged that its true purpose is to serve as a counterbalancing alternative to the TPP for China,[27] one that “emphasizes flexibility for developing countries and that is less ambitious than the TPP.”[28] China’s original proposal heavily emphasized its desire for an FTA especially covering trade in goods, while Japan’s was more comprehensive, and ASEAN’s less so, since the latter was less well-developed than the former two and wanted more protections for fledgling domestic industries and markets.[29]
The RCEP member states account for 3.4 billion people, total output of about US $22.7 trillion and total world trade of about 44.5 percent in 2015.[30] Despite the larger population, however, they account for only 28 percent of global GDP (in contrast to the smaller TPP’s 40 percent); but they still comprise over one-quarter of total global exports.[31] However, once ratified, it would integrate the Asia-Pacific into the largest economic bloc in the world.[32]
The RCEP, in fact, may be easier to participate in than the TPP for developing countries,[33] this despite the many difficulties in creating a mega-FTA in Asia that transcends the “noodle bowl.” The RCEP is much less ambitious than the TPP in terms of trade liberalization and integration, and provides more protection for its developing member countries.[34] This is evidenced by the fact that seven of the original twelve TPP countries are also poised to ratify the RCEP this year; they do not have the same counterbalancing agendas of China and the US, and therefore will enter into whatever agreements benefit them economically, without worrying about what those two nations want from them politically. Most of the East Asian economies have since become more trade dependent on China’s RCEP than the US’s TPP[35]:
Figure 4: Trade Interdependency Ratio in Mega FTAs Member States (2002-2012, %)
The RCEP still faces many challenges ahead of its formal ratification. The agricultural sector is still heavily protected in the Asia Pacific, and since that sector employs roughly a third of the entire labor force of the agreement, much of the negotiations surrounding agriculture’s liberalization have been very heated.[36] As far as the service sector, its “multifaceted and intangible nature” make it difficult to measure and regulate it across borders.[37] There are also extremely wide development gaps across the region that make for very different economic goals depending where on the spectrum the country falls, which means that there are large disparities in terms of infrastructure, government corruption, skilled workforces, poverty, and literacy. [38] The political factors such as historical tensions and unsettled territorial disputes still play a major role in the cooperative spirit of the RCEP negotiators.[39] Despite this, the RCEP members are still moving forward with ratification, as they believe that the benefits of the RCEP far outweigh these costs, and that once development improves on the lower end of the spectrum, the negotiations can be modified to account for the change.
Conclusions
Leaving the TPP will have severe negative effects for the United States economically and politically. The US will forfeit the gains it stood to garner from the TPP, and suffers loses from erosion of preferences in sectors such as agriculture and services.[40] Any chances they had of curbing Chinese hegemony in the Asia-Pacific are now dashed, as the RCEP will prove extremely lucrative for China both in terms of economic growth and development and political power in the region.
Whether or not it’s too late to rejoin the TPP, however, is unclear. President Trump has expressed interest in rejoining the deal if it could be made “substantially better”[41] for the United States—without clarifying exactly what he wanted to improve. However, since the US unilaterally withdrew from the TPP and effectively nullified that version, the new CPTPP has additions and deletions for which the US had no input. If it were to join the CPTPP, there would have to be new negotiations that could easily take years, and the current members will most likely expect many concessions from the Americans, since they would now set the agenda for the US instead of the other way around.[42]
There are also mixed messages from the CPTPP nations on whether the US will even be allowed to reenter. Some countries like Australia say that the CPTPP was set up as a “trade deal that can admit new members, or even re-admit a member like the United States, that chose to pull out;”[43] however, new members would require a consensus from all eleven existing members, and it’s not certain that everyone would approve US reentry. Many countries are reticent to renegotiate, believing they had already conceded much to the US the first time around and don’t wish to renegotiate to their own disadvantage, especially since many are better off without the US.[44] Japan, the new de facto leader of the CPTPP, expressed that it would welcome the US back if it chose to enter new negotiations,[45] but Prime Minister Shinzo Abe also added that he isn’t quite keen to negotiate with someone as “temperamental” as President Trump.[46]
However, even if the US couldn’t get back everything it wanted from the TPP into the CPTPP, rejoining the mega-FTA is still a vastly better option rather than pursuing the bilateral trade negotiations championed by the Trump administration. A complex web of bilateral free trade agreements would only serve to be a “spaghetti bowl” for the United States, increasing barriers to trade and investment and slowing down progress, innovation, competition, and efficiency. These effects are especially compounded by China’s membership in the RCEP, since it will have eliminated the exact problems that the US has now created for itself. In fact, the European Union, the rest of the Asia-Pacific Economic Cooperation (APEC), and China “experience the largest reduction of negative impact”[47] from the TPP becoming the CPTPP—meaning they have the most to gain from the US staying away from the CPTPP. The US, on the other hand, is projected to go from gaining $8.4 billion thanks to the TPP to losing about $2 billion;[48] and that doesn’t even include effects from the competitive disadvantage with China and the RCEP, or the political consequences from the loss of economic power and agenda-setting abilities. Many of the TPP and other Asia-Pacific nations are seeking to open new trade deals and expand existing ones with China; they are not trying to isolate China in the region, and thus are not standing with the US in its rivalry with China. Those numbers also don’t account for the political and security considerations of the TPP—US Secretary of Defense Ashton Carter stated that the TPP would have been akin to having an extra aircraft carrier in the region in terms of US defense policy.[49]
The US should seize every opportunity to repair relations with the CPTPP members and begin renegotiations to rejoin the mega-FTA, or face significant economic and political repercussions. Bilateral negotiations will not be able to replace the TPP, and if the US truly wants to be able to compete with China, its going to have to catch up quickly, or get left behind.
[1] Chen, YuJane. “Asia-Pacific Regional Economic Integration: Competition vs. Conflict.” Contemporary Chinese Political Economy and Strategic Relations, vol. 2, no. 1, 2016, pp. 141.
[2] Ibid, 145.
[3] Ravenhill, John. “The Political Economy of an “Asian” Mega-FTA: The Regional Comprehensive Economic Partnership.” Asian Survey, vol. 56, no. 6, 2016, pp. 1077.
[4] Chen, YuJane. “Asia-Pacific Regional Economic Integration: Competition vs. Conflict.” Contemporary Chinese Political Economy and Strategic Relations, vol. 2, no. 1, 2016, pp. 165.
[5] Cheong, Inkyo, and Tongzon, Jose. “Comparing the Economic Impact of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership *.” Asian Economic Papers, vol. 12, no. 2, 2013, pp. 145.
[6] Gnanasagaran, Angaindrankumar. “Will the US Rejoin the TPP?” The ASEAN Post, 10 Oct. 2017.
[7] Hamanaka, Shintaro. “TPP versus RCEP: Control of Membership and Agenda Setting.” East Asian Economic Review, vol. 18, no. 2, 2014, pp. 169.
[8] Chen, pp. 147.
[9] Ibid., pp. 148.
[10] Ibid., pp. 147.
[11] Park, Sang. “RCEP versus TPP with the Trump Administration in the USA and Implications for East Asian Economic Cooperation.” Entrepreneurial Business and Economics Review, vol. 5, no. 4, 2017, pp. 137.
[12] Hamanaka, pp. 173.
[13] Cheong, pp. 161.
[14] Ravenhill, pp. 1095.
[15] Park, pp. 143.
[16] Ciuriak, pp. 363.
[17] Ungku, Fathin, and Charlotte Greenfield. “Trump Says US Could Rejoin TPP If Deal Improved. How Hard Would It Be?” Reuters, 16 Apr. 2018.
[18] Tausche, Kayla. “Can the US Rejoin TPP? Yes — with Permission.” CNBC, 26 Jan. 2018.
[19] Dan Ciuriak, et al. “Quantifying the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.” East Asian Economic Review, vol. 21, no. 4, 2017, pp. 346.
[20] Ibid, pp. 343.
[21] Ibid., pp. 360.
[22] Ibid.
[23] Chen, pp. 146.
[24] Park, pp. 136.
[25] Fukunaga, Yoshifumi. “ASEAN’s Leadership in the Regional Comprehensive Economic Partnership.” Asia &Amp; the Pacific Policy Studies, vol. 2, no. 1, 2015, pp. 103.
[26] Basu Das, Sanchita. “The Regional Comprehensive Economic Partnership: New Paradigm or Old Wine in a New Bottle?” Asian‐Pacific Economic Literature, vol. 29, no. 2, 2015, pp. 69.
[27] Basu, pp. 71.
[28] Hamnaka, pp. 178.
[29] Ibid., pp. 174.
[30] Park, pp. 140.
[31] Ravenhill, pp. 1097.
[32] Chen, pp. 150.
[33] Ibid., pp. 178.
[34] Basu, pp. 79.
[35] Park, pp. 148
[36] Basu, pp. 72.
[37] Ibid., pp. 73.
[38] Ibid., pp. 75.
[39] Ibid., pp. 72.
[40] Ciuriak, pp. 368.
[41] Tausche.
[42] Bradsher, Keith. “Trump Weighs Return to Trans-Pacific Partnership. Not So Fast, Say Members.” The New York Times, 13 Apr. 2018.
[43] Tausche.
[44] Bradsher.
[45] Farrer, Martin. “Trump Says He Would Rejoin TPP If Offered Better Terms than Obama.” The Guardian, 13 Apr. 2018.
[46] Ibid.
[47] Ciuriak, pp. 360.
[48] Ibid., pp. 364.
[49] Ravenhill, pp. 1080.
Alexandra Tangalos is a recent graduate with a B.A. in International Relations and a minor in Spanish from the University of Southern California. She works the legal field and hopes to attend law school in the coming years. In her free time, she can be found enjoying Michael Schur sitcoms and peanut butter on a spoon.
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