TPP could go forward without the United States
The election of Donald Trump has closed the door to consideration of the Trans-Pacific Partnership (TPP) during the lame duck session of Congress this year. During the campaign, Trump vowed to rip up TPP; Republican leaders in Congress, beholden to Trump for saving their majorities in the Senate and House, will not challenge him in the flush of this unexpected but decisive electoral victory.
What’s the future for TPP? Most likely, Trump will simply not implement it. Without US participation, the pact cannot definitively enter into force. It’s death by malign neglect.
But there are 11 other TPP signatories, and they may not follow the US example. Indeed, each of them agreed to TPP obligations that require substantial changes in their economic policies primarily because it is in their economic self-interest to do so. The concessions offered in return by the United States were modest, since the US market is already relatively open and US negotiators only offered to partially reform many of the remaining US barriers inhibiting foreign suppliers of goods and services. In other words, the United States did not commit to substantial changes in existing policies but won agreement from 11 other countries to improve access to their markets for US exporters and investors.
Sounds like a good deal for Uncle Sam, and it is: According to a comprehensive PIIE analysis of the TPP, the pact will provide substantial benefits for the United States. The TPP will boost US real income by about $130 billion, increase high-paying jobs in export industries, and lower costs for US consumers and manufacturers. The economic reforms advanced by the TPP should boost US productivity: Faster productivity growth is the key to strengthening our economy over time and increasing real wages and incomes.
The other TPP countries understand the importance of using TPP reforms to reinforce domestic economic growth. In Japan, despite Trump’s position on TPP, the Lower House of the Japanese Diet passed TPP implementing legislation on November 10—a vote that affirmed support for the economic reform strategy of Prime Minister Shinzo Abe and recognized that TPP contributes importantly to advancing structural reforms long needed to revive the Japanese economy. Other TPP countries are advancing domestic legislation to implement TPP for similar reasons, including Vietnam, a TPP country that has to make fundamental changes to its economic regime. Moving TPP forward will likely be discussed in some detail when leaders of the Asia-Pacific Economic Cooperation (APEC) meet in Peru for their annual summit later this week.
The 11 other TPP countries may not sit idly on the sidelines waiting for US ratification (see infographic on the status of TPP ratification by country). Instead, they could agree among themselves to extend the TPP benefits to each other on a provisional basis, leaving the door open for US participation in the future. If the United States subsequently ratifies the TPP, the pact would then enter into force on a permanent basis. But note: Until the United States joins the party, US firms, workers, and farmers would not be eligible for TPP tariff preferences and other benefits in those markets, and US competitiveness vis-à-vis farmers, firms, and service providers to the other TPP countries would suffer accordingly. For example, new opportunities to provide services in Japan or supply government contracts in Vietnam and Malaysia would be open to firms in other TPP countries but not to those based in the United States.
There are obvious precedents for such a strategy: The General Agreement on Tariffs and Trade (GATT) was a provisional agreement pending congressional ratification of the Havana Charter for an International Trade Organization (ITO), the planned trade regime for the immediate post–World War II era. Congress failed to vote on the ITO Charter, and the GATT became the de facto postwar trade regime until a new agreement established the World Trade Organization—47 years later.
The TPP should not require such a long gestation period. The pact commands substantial support among Republicans in Congress and is supported by the vast majority(link is external) of US farm, industry, and services associations because it opens new opportunities abroad for trade and investment. It also has substantial bipartisan appeal because it reinforces US security alliances with key Asian partners.
Moreover, dropping TPP or delaying action on its implementation would cost more than just the foregone opportunities to expand US exports and jobs: US firms already risk losing customers because of existing free trade agreements (FTAs) to which the United States is not a party. For example, US beef exporters would continue to be disadvantaged in both the Japanese and Australian markets because other suppliers pay lower tariffs under the Japan-Australia FTA. In other words, US firms now face discrimination in some TPP markets, and the TPP would help level the playing field.
Given the cost to US firms and workers, if the United States drops TPP while the other pact members move forward, my advice to the incoming US administration is simple: Fix it, don’t deep-six it. Every negotiated agreement between sovereign nations can be improved. My next blog post offers some suggestions for how President-elect Trump could renegotiate the TPP to substantially respond to key criticisms of the pact put forward by Republicans and Democrats alike.