BEYOND TPP: MAINTAINING US ENGAGEMENT IN ASIA S EMERGING TRADE ARCHITECTURE Jeffrey Wilson November 2017 ALLIANCE BRIEF A rising anti-globalist current in the United States has fundamentally changed the trade agenda in the Asia-Pacific. Since 2010, competition has been building between two emerging megaregional trade agreements with different visions about how to multilateralise Asian free trade agreements (FTAs). The ASEAN-led Regional Comprehensive Economic Partnership (RCEP) was narrowly focused on lowering tariffs among six existing ASEAN-plus-one FTAs. By contrast, the US-led Trans-Pacific Partnership (TPP) provided a more ambitious approach to regional trade based on regulatory rule-making for investment, services, and the digital economy. The 12-member TPP appeared to have the upper hand in 2015 when negotiators settled on a deal. But following a populist backlash against the TPP in America that eventually led Donald Trump to withdraw from the deal the TPP cannot enter into force in its existing form. For the first time since 1989 the United States is absent from key negotiations over the future shape of economic regionalism in Asia. The collapse of the TPP has reignited the contest over the future shape of Asia s trade architecture. China and ASEAN responded by immediately positioning RCEP as an alternative, increasing the pace of negotiations over 2017. At the same time, several TPP members led by Australia and Japan have begun to advocate for a reformulated TPP-11 which would retain some of the features of its predecessor without the United States. As their respective negotiations move towards completion, RCEP and TPP-11 are vying to become the template for a new multilateral trade architecture in Asia. Although the protectionist trade policy instincts of the Trump administration make US involvement unlikely in the immediate term, there is a strong economic case for Washington to remain a key part of a regional trade system. America s economic integration with the region runs deep. Members of Asia-Pacific Economic Cooperation (APEC) accounted for 66 per cent of US two-way trade in 2016, while the United States comprises 18 per cent of APEC s two-way trade. 1 If the new Asia-Pacific architecture is configured around the principle of open regionalism, a space could be carved out for Washington to re-engage in future years. For now, RCEP and TPP-11 renegotiations offer Australia and like-minded partners in the region an opportunity to adopt institutional mechanisms which future proof these agreements for America s eventual return.
Competing designs: The TPP and RCEP models for Asian trade Multilateralism has been the defining feature of recent trade policy initiatives in the Asia-Pacific. Since the early 2000s, bilateral FTAs have proliferated in the region, with 54 agreements negotiated between APEC members by 2016. 2 This created the so-called noodle bowl problem: 3 rather than having a single, transparent, and integrated set of rules, Asia s regional trade system has become fragmented into a number of inconsistent bilateral arrangements. Cognisant of this problem, governments began exploring strategies to multilateralise regional trade architecture through the negotiation of large, multi-member trade agreements. Two such agreements were proposed the TPP and RCEP offering different visions for how trade multilateralism in Asia should be achieved. The TPP promised a high ambition trade agreement amongst a group of like-minded governments. It focused on the so-called WTO-Plus issues rules for investment, services, environment, digital economy, and intellectual property which have yet to be substantively addressed by World Trade Organization (WTO) agreements. These are favoured by developed and service sector-oriented economies as they provide regulatory rules for the increasingly important service and technology sectors. However, they also impose high reform costs by requiring extensive changes to domestic policy regimes. These reform costs can be prohibitive for countries at earlier stages of development. While the promise of greater access to the large US market attracted some developing economies (such as Vietnam and Mexico), others (most notably China and Indonesia) declined invitations to join the TPP negotiations. In contrast, RCEP offered lower ambition liberalisation with an Asia-focused membership structure. Designed as an ASEAN-centred agreement, its principal objective was to multilateralise the six pre-existing ASEANplus-one FTAs 4 into a single regional agreement. The focus of negotiations has been a more conventional Table 1: Comparison of the TPP, RCEP and TPP-11 initiatives Trans-Pacific Partnership Regional Comprehensive Economic Partnership Trans-Pacific Partnership-11 Negotiations 2010-2015; now suspended 2013-present 2017-present Scope and coverage WTO-Plus approach: Market access commitments alongside 24 trade-related regulatory chapters WTO-consistent approach: Focus on trade liberalisation and FTA harmonisation To be determined Members Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, Vietnam ASEAN-10, Australia, China, India, Japan, Korea, New Zealand Original TPP members less the United States Membership model Open to all APEC members, includes accession provisions Closed to ASEAN-plusone FTA partners during negotiation phase Original TPP members only during negotiation phase GDP of members $28.8 trillion (37.8% world) $24.0 trillion (31.4% world) $10.2 trillion (13.3% world) Two-way trade of members $7.9 trillion (24.7% world trade) $9.1 trillion (28.5% world trade) $5.0 trillion (15.6% world trade) Intra-regional trade of members $3.6 trillion (46.1% members total trade) $4.0 trillion (44.2% members total trade) $0.7 trillion (14.8% members total trade) Source: Author s calculations, from UNCTADStat Database, http://unctadstat.unctad.org/en/ 2
emphasis on mutual tariff reductions, with the aim only to be WTO-consistent rather than WTO-Plus. RCEP s members have adopted a consensus-driven approach to negotiations, which has seen more contentious elements excluded from the agreement. As RCEP is calibrated to the interests of developing economies like India, China, and ASEAN nations, it offered a template in which all Asian governments were willing to participate. But it did so by offering far less in terms of regulatory reform, and by excluding the United States, Asia s most important extra-regional trade partner. When TPP negotiations finished ahead of RCEP in October 2015, many concluded it would become the new model for the Asia-Pacific trade system. However, these expectations were soon challenged by the election of Donald Trump. Trump had campaigned extensively against free trade in general and the TPP in particular during the 2016 presidential race, 5 and withdrew the United States from the agreement in his first executive order in January 2017. 6 For the TPP to enter into force, at least six members (accounting for 85 per cent of the bloc s GDP) must ratify the agreement. 7 As the United States alone accounts for 60 per cent of the TPP s economic size, its withdrawal made it numerically impossible for the agreement to continue as originally configured. The Chinese government immediately seized on the opportunity of a failed TPP to back a renewed push for RCEP, using the APEC Summit in November 2016 to call for a speedy completion of the deal. 8 The pace of negotiations has intensified over 2017; currently targeting a completion in early 2018. 9 At the same time, however, the eleven remaining TPP members have begun exploring options to reconstitute the agreement without America. Led by Australia 10 and Japan, 11 these efforts delivered an agreement to assess the prospects for a substitute TPP-11 in May 2017. 12 Five TPP-11 negotiations have been convened so far, and are due to report outcomes before the APEC Summit beginning on 8 November this year. 13 The TPP-11 initiative: Purity or pragmatism? The core objective of the TPP-11 is to salvage something from the original agreement in the face of US withdrawal. The ongoing commitment of Japan and Australia reflects the perceived value of the TPP as a free trade agreement that is also a rulemaking instrument, which establishes high-standard regulatory rules in areas such as investment, services, environment, intellectual property, and the digital economy. Salvaging these regulatory elements could, in principle, be a relatively straightforward process. If the 85 per cent GDP rule is relaxed the remaining eleven members could put the original agreement into effect without the United States. This accession mechanism enables any APEC economy such as South Korea, Indonesia, China, or the United States to seek membership of the TPP in the future. Importantly, a TPP-11 agreement would provide a clear pathway for the United States to rejoin the Asian trade system in the future. Its membership model was premised on the principle of open regionalism : that regional economic agreements should be open to all Asia-Pacific countries. The TPP s original negotiations were open to all APEC members; and the agreed text included an accession mechanism whereby new members could apply to join. 14 This accession mechanism would have enabled any APEC economy such as South Korea, Indonesia, China, or the United States to seek membership of the TPP in the future. Australia has identified US accession as a critical objective, with Trade Minister Steve Ciobo arguing, it s important to leave the door open to the United States. 15 While the Trump administration has unequivocally stated it has no intentions of doing so, 16 it should be noted that in the post-1945 era, all US presidents from both major parties have actively engaged in trade agreement-making. A future US administration with different trade policy preferences may see economic and/or strategic value in re-joining the TPP. In the meantime, the TPP-11 parties need to agree on the extent to which the original agreement is revised. Here, a split between developed and developing economy members will prove difficult to navigate. For the developed economies, the key value of the TPP-11 lies in preserving its WTO-Plus regulatory provisions. They therefore favour a minimalist approach to renegotiation that will make as few variations as 3
is politically viable. 17 Kazuyoshi Umemoto, Japan s chief negotiator, has stressed the importance of [carrying] on working without lowering the TPP s high standards. 18 A minimalist renegotiation that is still agreeable to the developing country members would be difficult to achieve. At the heart of the original TPP was a politicaleconomic trade-off under which developed economies obtained their desired regulatory commitments, and developing economies gained preferential access to large markets. But with almost two-thirds of these market access gains now gone, developing economies are unlikely to accept the high domestic reforms costs of the original regulatory provisions. Retaining as many of the original provisions as possible will increase the probability of a future US administration re-joining the TPP. There are also questions over whether provisions initially included to secure support from the US Congress particularly the labour standards chapter and intellectual property protections for biologic drugs 19 should be retained without receiving access to the US market in return. Vietnam and Malaysia have reportedly expressed significant reservations about a TPP-11 that fails to compensate for the absence of the United States. 20 Some degree of renegotiation will be essential if the TPP-11 initiative is to succeed. The outcome of such negotiations will determine not only the viability of a TPP-11, but also the likelihood of future US accession. If the required changes are extensive and remove or dilute many of the original US-requested inclusions, a more positively-disposed US administration may instead struggle to secure congressional support. One management option is the use of a snapback approach, currently being considered by negotiators, under which a revised agreement would revert to the original text upon re-entry of the United States. But the likelihood that this will be appealing to all members, given the uncertainty surrounding the future outlook of US trade policy, remains to be seen. Nonetheless, retaining as many of the original provisions as possible will increase the probability of a future US administration re-joining the TPP. RCEP: An open Asian trade architecture? Since the US withdrawal from TPP, the prospect that RCEP will become the new model for Asia s regional trade architecture has grown significantly. Its lower ambition is both a vice and virtue: while it will offer less in the way of liberalisation, fewer domestic reform costs also lower the bar for developing economy participation. 21 Political momentum has rounded behind RCEP, with the negotiating parties claiming it will serve as a beacon of open regionalism 22 in the face of rising protectionist moves around the world. Perhaps most importantly, with the TPP now a fraction of its original size, RCEP is the only genuinely regional trade agreement in Asia. In comparison to the TPP, RCEP is a sub-optimal but still valuable trade strategy for developed economies like Australia. Its low ambition approach means it will not offer the regulatory rule-making preferred by service-based economies. Nor does it include the United States, Australia s number two trade partner and leading source of foreign investment. But RCEP still offers several benefits to Australia, including: Market access gains, particularly in the agricultural and services sectors 23 Country-specific commitments on foreign investment, which will help broaden investment relationships to new Asian partners 24 The first multilateral framework for the Asian trade system, enabling easier participation in regional value chains 25 Australia s first preferential trade agreement to include India, an emerging economic partner. 26 A key unresolved issue is whether RCEP will embody the principle of open regionalism in its future membership. During the negotiation phase, RCEP has been open only to the 16 ASEAN-plus-one economies. But members have made an in-principle agreement to include an accession clause that enables additional parties to join post-completion. 27 The design of this mechanism will have a longstanding effect on the architecture of the regional trade system. If RCEP includes a similar accession mechanism to the TPP which invites and encourages the participation from all APEC members it will offer a genuinely Asia-Pacific membership model. It would also open the door to future US accession, a move which would significantly increase the size and global reach of the agreement. 28 4
Another challenging issue is whether the RCEP agreement will be able to expand the scope of its regulatory coverage. The TPP was designed as a living agreement and included a consultative TPP Commission, the purpose of which was to review and consider amendments to the original text. 29 This mechanism allows further provisions to be added by consensus amongst the members. While RCEP will likely include a consultation mechanism, its constitution and remit remain to be determined. If a similar mechanism to that in the TPP is included, RCEP s longer-term value may not lie in what is agreed now but instead its role as a framework for negotiating future liberalisation commitments. For countries with more ambitious trade policy preferences, a robust consultation mechanism would provide a way to upgrade RCEP s regulatory standards once the initial negotiations are complete. These membership and scope issues are interlinked. RCEP s modest reform ambitions reflect its orientation towards predominantly developing economy members. However, an open accession mechanism could present dynamic opportunities to scale-up membership and content. If the United States was to join in future years, it would not only significantly increase RCEP s size, but also add a powerful advocate for liberalisation to the membership. This would create a WTO-Plus coalition within RCEP comprising Australia, Japan, Korea, Singapore and the United States which would be much better positioned to push for regulatory rulemaking as the agreement evolves. Securing open accession and consultation mechanisms will be essential to future proofing RCEP. Maintaining US engagement in the Asia-Pacific trade system For the first time in more than two decades, the United States is absent from the trade negotiation table in Asia, and facing exclusion from the largest and most dynamic region of the world economy at the precise time that regional trade architecture is being redesigned. Reinserting the United States will prove difficult. Trump has ruled out participation in either TPP-11 or RCEP negotiations, leaving the task to a future administration. By this time, regional architecture will have changed dramatically. Success for the TPP-11 would provide the easier pathway for US involvement, but the need for complex renegotiation makes its current prospects uncertain. RCEP is the likelier of the two agreements at this point, but members have yet to decide upon the design of its important accession and consultation mechanisms. As TPP-11 and RCEP continue to advance, Australian negotiators face the challenging task of balancing national trade interests against the compromises required by partners. Australia should adopt a forwardlooking position which seeks regional arrangements that are as open as possible, both for the United States and all other Asian countries. Specifically, it should work to: Ensure a regional trade architecture that can accommodate future US involvement. The United States is Australia s number two trade partner, leading foreign investor, and a key ally in driving WTO-Plus reforms. Maintaining US engagement in the regional trade system is therefore a high priority. While there is uncertainty over the future direction of US trade policy, both RCEP and the TPP-11 can be designed in ways that maximise the likelihood of future US involvement. Maintain a high-standard TPP agreement. The central rationale for the TPP-11 is to preserve the advanced regulatory rule-making of the original TPP agreement. A significantly diluted deal would undermine its raison d être, and threaten the prospects for future US accession. Australia should work with like-minded countries to preserve the WTO-Plus components, and be willing to suspend but not abandon negotiations if a high-standard outcome cannot be obtained. Secure an open RCEP agreement. In contrast to the TPP, RCEP primarily offers market access gains and the benefits that flow from establishing an inclusive, region-wide multilateral agreement. To secure these gains, compromise over regulatory provisions will be required in initial stages. Australia should advocate for an open accession mechanism which enables new members including but not limited to the United States to join. It should also push for a strong consultative mechanism that will enable future upgrades to its regulatory provisions. 5
Endnotes 1. Author s calculations, from UNCTADStat Database, http://unctadstat.unctad.org/en/ 2. Author s compilation, from WTO Regional Trade Agreements Database, https://rtais. wto.org/ui/publicmaintainrtahome.aspx 3. Richard Baldwin (2007), Managing the Noodle Bowl: The Fragility of East Asian Regionalism, ADB Working Paper Series (No. 7), Manila: Asian Development Bank. 4. The ASEAN bloc present has FTAs with Australia, China, India, Japan, Korea and New Zealand. 5. Jeffrey D. Wilson (2017), Australia s post- Trump trade agenda: Making sense of limited options, Sydney: United State Studies Centre. 6. CNN Politics (2017), Trump signs order withdrawing from TPP, 24 January. 7. As per Article 30.5 of the Trans-Pacific Partnership Agreement, https://ustr.gov/ trade-agreements/free-trade-agreements/ trans-pacific-partnership/tpp-full-text 8. Bloomberg (2016), China Set to Push Asia Trade Deal Harder After Trump Win, 15 November. 9. Nikkei Asian Review (2017), With RCEP deal unlikely this year, ministers settle for realistic goals, 11 September. 10. The Diplomat (2017), While Trump and Abe Eye Bilateral Pact, Australia Keeps TPP Alive, 12 February. 11. Foreign Policy (2017), Japan Wants to Revive the Trans Pacific Partnership Even Without the US, 24 April. 12. Monica Stanisis (2017), Back from the Brink? The Future of the TPP-11, http:// perthusasia.edu.au/back-from-the-brink 13. Department of Foreign Affairs and Trade (Australia) (2017), Trans-Pacific Partnership (TPP) Agreement Ministerial Statement, 21 May, http://dfat.gov.au/trade/agreements/ tpp/news/pages/news.aspx 14. As per Article 30.4 of the Trans-Pacific Partnership Agreement, https://ustr.gov/ trade-agreements/free-trade-agreements/ trans-pacific-partnership/tpp-full-text 15. Sydney Morning Herald (2017), Eleven Asia-Pacific nations agree to salvage Trans-Pacific Partnership, 22 May. 16. Reuters (2017), US trade representative says no return to TPP deal and wants bilateral deals in Asia, 21 May. 17. Bennett Jones (2017), A Post-US TPP? Taking Stock and Looking Ahead, 20 July, https:// www.bennettjones.com/publications%20 Section/Blogs/A%20Post-US%20TPP 18. Nikkei Asian Review (2017), The TPP 11 agree to move forward with minimal tweaks, 20 July. 19. Respectively, see Chapter 19 (Labor) and Article 18.51 (Biologics) of the Trans-Pacific Partnership Agreement, https://ustr.gov/ trade-agreements/free-trade-agreements/ trans-pacific-partnership/tpp-full-text 20. CNBC (2017), Japan wants a massive trade deal without the US but these countries stand in its way, 13 July; Mike Callaghan (2017), TPP: With one down, can 11 stand?, Lowy Interpreter, 25 May. 21. Mireya Solís and Jeffrey D. Wilson (2017), From APEC to mega-regionals: the evolution of the Asia-Pacific trade architecture, The Pacific Review. 22. RCEP Negotiating Parties (2017), Third Intersessional RCEP Ministerial Meeting Joint Statement, 22 May, http://dfat. gov.au/trade/agreements/rcep/news/ Documents/joint-media-statement-thirdrcep-intersessional-ministerial-meeting.pdf 23. Department of Foreign Affairs and Trade (Australia) (2014), Australia s Trade and Investment Interests in Regional Comprehensive Economic Partnership (RCEP) Participating Countries, https://dfat. gov.au/trade/agreements/rcep/documents/ rcep-background-paper-interests.pdf 24. Ibid. 25. Jeffrey D. Wilson (2017), The Regional Comprehensive Economic Partnership: An Indo-Pacific approach to the regional trade architecture?, Perth: Perth USAsia Centre. 26. Jeffrey D. Wilson (2017), The Regional Comprehensive Economic Partnership: India s bridge into the Asian economic region?, in Realising the Indo-Pacific: Tasks for India s Regional Integration (Chapter 5), Perth: Perth USAsia Centre. 6
27. As per s6 of RCEP Negotiation Parties (2013), Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership, http://www.asean.org/images/2012/ documents/guiding%20principles%20and%20 Objectives%20for%20Negotiating%20 the%20regional%20comprehensive%20 Economic%20Partnership.pdf 28. Based on 2016 GDP figures, US accession to RCEP would increase the size of the bloc by 77 percent to $43 trillion, equivalent to 56 percent of global GDP. 29. Article 27 of the Trans-Pacific Partnership Agreement, https://ustr.gov/tradeagreements/free-trade-agreements/ trans-pacific-partnership/tpp-full-text 7
About the author Jeffrey D. Wilson Jeffrey D. Wilson is a Research Fellow with the Perth USAsia Centre at the University of Western Australia. He is a political scientist, who specialises in economic regionalism and resource/energy politics in the Asia-Pacific. He consults for governments in Australia and the region on trade, energy and security policy issues; and is a sought-after expert commentator on Asian affairs in local and international media. He was the inaugural winner of the Australian Institute of International Affairs Boyer Prize (2012) for his work on Chinese mining investment in Australia. He is currently the Chief Investigator (with Mark Beeson, UWA) on an Australian Research Council Discovery Project on the politics of Australia- China economic relations. He is a faculty member of the Asia Research Centre at Murdoch University, where he is a Senior Lecturer in International Political Economy. Cover photo: US President Donald Trump and Singapore Prime Minister Lee Hsien Loong at the White House, October 2017 (Getty Images) This report may be cited as: Jeffrey D. Wilson, Beyond TPP: Maintaining US engagement in Asia s emerging trade architecture United States Studies Centre at the University of Sydney, November 2017. Briefs published by the United States Studies Centre are anonymously peer-reviewed by both internal and external experts. 8
The United States Studies Centre at the University of Sydney deepens Australia s understanding of the United States through research, teaching and public engagement. Through rigorous analysis of American politics, foreign policy, economics, culture, and history, the Centre has become a national resource, building Australia s awareness of the dynamics shaping American society and critically their implications for Australia. The Centre s Alliance 21 Program is a multi-year research initiative that examines the historically strong Australia- United States relationship and works to address the challenges and opportunities ahead as the alliance evolves in a changing Asia. The Australian Government and corporate partners Boral, Dow, News Corp Australia, and Northrop Grumman Australia support the program s second phase, which commenced in July 2015 and is focused on the following core research areas: defence and security; resource sustainability; alliance systems in Asia; and trade, investment, and business innovation. The Alliance 21 Program receives funding support from the following partners. Research conclusions are derived independently and authors represent their own view not those of the United States Studies. United States Studies Centre Institute Building (H03) The University of Sydney NSW 2006 Australia Phone: +61 2 9351 7249 Email: us-studies@sydney.edu.au Twitter: @ussc Website: ussc.edu.au