Nov 19th 2016 | SHANGHAI | From The Economist print edition
Depending on who is talking, the Trans-Pacific Partnership (TPP) is either the world’s most ambitious trade deal or the most dangerous. But these days a simpler description suffices: it is dead. With Donald Trump’s victory, America has abandoned TPP, in effect killing the trade pact that was a decade in the works and nearly complete. Amid all the unknowns about what Mr Trump’s presidency might mean, this is one of the few certainties.
The consequences are far-reaching. TPP’s collapse removes the main economic plank of Barack Obama’s much-hyped, largely abortive “pivot” to Asia. It leaves a gaping hole in the architecture of Asian commerce. And it adds to the strong headwinds that are buffeting global trade. The chances that America would ratify TPP had already been dwindling because of growing opposition. If Hillary Clinton had won the election, Mr Obama might have made a last-ditch push during the lame-duck session of the outgoing Congress, which started this week. With the triumph of Mr Trump, who has called TPP a “terrible deal”, even that faint hope has vanished.
On the basis of size alone, TPP would have been important, the largest regional trade deal in history. It encompassed 12 Pacific countries, including America, Japan and Canada (see chart). Together, they account for two-fifths of the world economy. But what made it all the more significant was its strategic intent. Notably absent from the membership was China. Economically, this made little sense. Studies indicated that including China, the world’s biggest exporter, would have substantially expanded the benefits of TPP. But America wanted to show that it could set Asia’s economic agenda. China might eventually have been invited to join TPP, but only after America had written “the rules of the road”, as its negotiators liked to say.
Rather than a conventional focus on cutting tariffs, TPP emphasised stronger safeguards for intellectual property, the environment and labour rights (detractors felt it went too far on the first and not far enough on the other two). Matthew Goodman of the Centre for Strategic and International Studies, a think-tank, considers its collapse a “body blow” to American economic policy in Asia.
It is also a blow to the global economy. Over the years rich countries have cut tariffs to the point where the main obstacles to commerce now lie in regulations that discriminate against foreign companies. TPP took aim at barriers hidden in government-procurement guidelines and investment restrictions. It would have raised the bar for future trade deals, says Jayant Menon of the Asian Development Bank: “That’s where the biggest loss lies.”
Global trade is on track to expand more slowly than world GDP this year for the first time in 15 years, according to the World Trade Organisation. In Asia exports are set to grow just 0.3% this year in volume terms, well below the 8% average of the past 20 years. For poorer countries, exports have long been the most reliable way to kick-start development. That route now looks less accessible. If Mr Trump keeps his threat to slap fearsome tariffs on Chinese goods, the fallout could easily tip global trade into outright contraction.
There are a few candidates to fill the void left by TPP. One possibility is that the 11 remaining governments forge on, minus America. Having agreed to the deal in February, they were on the cusp of ratifying it (Japan did so this month). But the withdrawal of America is likely to prove fatal. When countries made difficult concessions—for instance, Japan’s opening to more foreign rice and beef—it was with a view to expanding their access to America’s vaunted consumer market. Take that out and the incentive to give ground in other areas quickly dissipates.
The focus is shifting to whether China might step in with an alternative trade deal. Chinese officials have vowed to push for an even larger regional pact called the Free Trade Area of the Asia-Pacific (FTAAP), tying together 21 countries including America. It will, however, go nowhere. Opposition in America to an American-led deal was already fierce enough; it would be even fiercer to a China-led one. Optimists can at least point to one trade pact that is close to completion. The Regional Comprehensive Economic Partnership (RCEP) includes China, India, Japan and South-East Asian countries. It covers nearly a third of the world economy and a much bigger share of its population than TPP. But RCEP is far less ambitious, focusing on the basic business of cutting tariffs, rather than more complex regulations. Tariffs are still high in Asia, so lowering them would help. But He Ping of Fudan University in Shanghai, who has monitored the talks, expects few breakthroughs. India, a perennial sceptic on free trade, has been dragging its feet and others are wary of China’s export juggernaut. A weak RCEP will do little for Asia, even if China relishes the opportunity to show that, unlike America, it can bring deals to fruition.
For Asia’s reformers, there is thus no getting around the disappointment of TPP’s demise. Vu Thanh Tu Anh, a Vietnamese economist, says that Vietnam had hoped to use the deal to pressure sluggish state-owned companies to shape up. Shinzo Abe, Japan’s prime minister, viewed it as part of his programme of structural reforms, since it would have exposed coddled Japanese industries such as health care and agriculture to more competition. Even in China, liberal officials thought TPP might prompt the government to loosen its grip on markets in order to join one day. Big regional trade deals are, mercifully, not the only show in town. There has been a bewildering array of smaller, often bilateral, pacts in recent years. Asia now has 147 free-trade agreements in force, up from 82 a decade ago. A further 68 are under negotiation. From the perspective of trade theory, these are suboptimal: a jumbled, overlapping mess. In practice, they may well be Asia’s best hope for getting more goods and services to flow across borders.
