CPTPP-11 Signed, US Abdicates Trade Leadership

Trade & Policy

CPTPP-11 Signed, US Abdicates Trade Leadership

As the United States retreats from its traditional role as champion of trade liberalisation, the successful conclusion of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has illustrated that other countries can and will step in to fill the void and provide trade leadership.

Japan cut its teeth on trade leadership with the CPTPP, proving that it's time to revise the image of Japan as a passive rule taker in the multilateral trading system and a country that defensively negotiates bilateral trade agreements of low ambition because of its own sensitivities with agricultural liberalisation. That is no longer Japan's profile.

Japan picked up the mantle of leadership in the TPP, and subsequent CPTPP, despite the fact that the US withdrawal made two of Japan's core objectives in the agreement unattainable. Japan's decision reflects its desire, and that of the other member states, for the CPTPP to survive because it offers significant opportunities. It helps fight the tide of rising protectionism, it enhances the operation of global supply chains (something that bilateral agreements cannot do), and it helps fill the void left in the region by US disengagement by offering an alternative to China-centric economic integration initiatives.

In order to fully grasp the significance of the CPTPP, it is important to highlight its timing. It comes at a time when there is grave concern over the direction of the two largest economies in the world. China's appetite for reform has waned and there is apprehension regarding the negative effects of some of its market distorting policies (overcapacity, digital protectionism).

The United States is turning inward, relying on unilateral trade remedies and protectionist measures (the imposition of steel and aluminum tariffs on feeble national security grounds). The CPTPP helps member countries hedge against the adverse trends of Chinese mercantilism and US protectionism. While there will be a cost of exclusion for the Unites States, it is hard to tell as yet whether it will be enough of an incentive for the United States to return to the CPTPP. Recent signals from the Trump administration on potentially rejoining the CPTPP may come from a realisation, though not openly acknowledged, that it misread the dynamics of trade diplomacy in the region.

After all, it was one thing to ditch the TPP under the assumption that the US exit de facto killed the agreement, it is another to realise that the agreement is very much alive and American export industries will be at a disadvantage in the large Asia-Pacific market. Similarly, it was easy to promise a string of bilateral trade agreements in the region, but the reality is that there aren't any countries lining up to negotiate one on one with the United States.

The CPTPP members are not waiting for Washington; they are standing by their hard-won agreement and moving forward with the ratification process. The CPTPP will generate US$ 147 billion in income, according to simulations conducted by the Peterson Institute for International Economics. In comparison, the original TPP would have resulted in US$ 492 billion in global income benefits, the think tank said.

"The US, which drove the TPP initiative from the early days, stood to benefit from it significantly and will be harmed by being out of it - has pulled out and gone in the completely opposite direction," said Deborah Elms, executive director of the Asian Trade Center in Singapore. "The US has ceded its leadership on trade to Asia." The CPTPP covers 500 million people and has a collective GDP of US$ 12.4 trillion. Though still huge, accounting for 13.5% of global GDP, it is less than half of the 38.2% under the TPP with US participation. "We haven't had an agreement since NAFTA that is as deep and as broad and as comprehensive as TPP," said Elms, referring to the 1994 North American Free Trade Agreement. "Once it comes into force, which could be this year, it could transform business for the TPP members."

Sense of urgency in Mexico

In mid-February, Mexico's Economy Minister Ildefonso Guajardo rhapsodized over the benefits the TPP 11 would bring to the country's economy. It would open six new markets in Asia and allow Mexico to boost exports of food items such as pork, avocados, tomatoes and tropical fruits, he told members of the federal upper house.

Mexico is no stranger to free trade deals, having signed such accords with 46 countries, including Japan. But the TPP 11 represents an important opportunity for the country to establish trade relations with many new governments, including Australia, New Zealand, Brunei, Malaysia, Singapore and Vietnam.

The existing deals are mostly with the Americas and European countries. For Mexico, NAFTA prompted an influx of US manufacturers seeking to employ its plentiful low-wage workers. As a result, the Mexican economy grew as it became a production base for the US market. Today, Mexico's economy is heavily reliant on the neighboring country: The US represented 80% of Mexico's exports and 46% of its imports in 2017. Worried that its NAFTA-dependent economic model may break down under Trump's agenda, Mexico is trying to diversify its economy. Mexican President Enrique Pena Nieto has called for expanding both its export markets and the scope of foreign investors to countries other than the US. In 2017, the share of the US in Mexico's exports declined 1.1 percentage points from a year earlier, although the US remains by far the biggest importer of Mexican exports by value. Members of the US Congress are beginning to press the Trump administration to reconsider its approach to trade, especially as the costs of a possible withdrawal from NAFTA become clearer, Elms said.

"This is going to be slow and painful, but there is discussion in Washington of the economic costs of being out of the TPP, especially when key competing nations are in," she said. "The assumption was that when the US pulled out, the agreement would fall over. The reality is they did it, and this agreement is starting to really focus attention on the American people negatively affected, including agricultural interests." The CPTPP may or may not bring immediate economic benefits to member countries. But it does send a clear signal that the 11 nations in Asia and Latin America have cast their lot with free trade - and said no to Trump's "America first" policy.