The TPP is dead. How will the RCEP shape up?
In the following article, Kavaljit Singh considers the future of the RCEP in the context of the impending demise of the TPP, the other Asia-Pacific trade treaty.
ON 21 November, US President-elect Donald Trump announced that the US will pull out of the Trans-Pacific Partnership (TPP) trade pact on his first day in office (20 January). In a video message outlining his policy plans for the first 100 days in the Oval Office, Trump stated: 'I am going to issue a notification of intent to withdraw from the TPP, a potential disaster for our country. Instead, we will negotiate fair, bilateral trade deals that bring jobs and industry back on to American shores.'
The administration of outgoing President Barack Obama had been trying hard to seek US Congressional ratification of the TPP this year but it abandoned efforts after Trump's victory in the November presidential election. The TPP faced stiff political opposition cutting across party lines and ideologies. Both the major presidential candidates had expressed their opposition to the TPP and avowed to reject it if elected. Trump was very vocal in his opposition to the TPP as well as the North American Free Trade Agreement (NAFTA) throughout his campaign, whereas Hillary Clinton flip-flopped on the TPP pact. While serving as US Secretary of State, she had praised the TPP as setting the 'gold standard in trade agreements', but she reversed her position during the presidential campaign due to a tough primary challenge from TPP critic Bernie Sanders.
As per the rules laid out in the TPP, the agreement allows a two-year ratification period in which at least six original member countries, representing 85% of the combined gross domestic product (GDP) of the grouping, should approve the text for the agreement to be implemented. The US alone accounts for nearly 60% of the grouping's GDP. Thus, with the US announcing its withdrawal, the TPP simply cannot enter into force even if all the remaining 11 member countries ratify it.
In simple terms, the TPP, in its present form, is effectively dead.
What is the TPP?
Signed in February 2016, the TPP pact involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. The idea of a Trans-Pacific Partnership had in fact been initiated by four countries - New Zealand, Singapore, Chile and Brunei - way back in 2002.
Initially, the US was not interested in joining the negotiations but President Obama in November 2009 decided to take part. Later on, many other countries such as Malaysia, Japan and Vietnam also entered the negotiations. China did not join; although it officially maintained that it has an 'open-minded attitude' towards the TPP, it was not ready to meet the higher standards (particularly on the operations of state-owned enterprises) envisaged in the agreement.
Seven years of negotiations culminated in the 4,500-page document that is the TPP agreement. It is the most ambitious free trade pact ever signed. It is much more than a typical free trade agreement (FTA) which aims to reduce import tariffs on agricultural and manufactured goods. This is because the average applied tariff rates among most TPP member countries are already very low, so there is little scope for further reduction.
The TPP represents a new generation of 21st-century trade agreements creating new mechanisms to govern cross-border economic activities with much higher standards than any existing bilateral, regional and multilateral trade agreements. As analysts have pointed out, the TPP is a kind of 'economic constitution' governing cross-border trade and investment with greater emphasis on the removal of regulatory barriers.
The TPP is touted as the 'gold standard' of trade and investment agreements because it contains stringent rules on a wide range of issues such as cross-border investments, intellectual property rights, state-owned enterprises, government procurement, electronic commerce, services liberalisation, regulatory coherence, labour and the environment.
One of the most contentious issues is the incorporation of an 'investor-state dispute settlement' mechanism which would allow foreign investors from TPP member states to bypass domestic courts of host states and sue a host state through international arbitration proceedings.
With the US and Japan in the driving seat, the negotiating agenda of the TPP was drastically reshaped to suit their core interests, while other negotiating countries (particularly the developing ones) did the heavy lifting to meet the onerous demands put forward by these two countries.
Concerned over the potential negative effects of the TPP on jobs, the economy and regulatory space, civil society groups and labour unions from both sides of the Pacific launched popular campaigns focused on the secretive nature of the negotiations and sought greater public participation during the negotiation process.
Obama's pivot to Asia-Pacific
For the Obama administration, the TPP was not purely a trade and investment agreement. It foresaw huge strategic value in joining this pact. The TPP was a key component of Obama's policy of 'rebalance' towards Asia which rested on three pillars: economic, political and security. By 2011, the TPP had become the linchpin of the administration's 'pivot to Asia' strategy to contain China's economic and geopolitical influence in the Asia-Pacific region.
Obama repeatedly emphasised the importance of maintaining US leadership in crafting global trade rules and how the TPP would strengthen the US's power in this area. In an opinion piece in the Washington Post, Obama stated: 'America should write the rules. America should call the shots. Other countries should play by the rules that America and our partners set, and not the other way around. That's what the TPP gives us the power to do . The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let's seize this opportunity, pass the Trans-Pacific Partnership and make sure America isn't holding the bag, but holding the pen.'
Is 'TPP minus one' feasible?
Some trade experts argue that it may be too soon to bury the TPP. Of course, the TPP agreement could possibly survive provided the remaining 11 signatory countries drastically modify the rules governing its entry into force. The so-called 'TPP minus one' pact is theoretically possible. It is also conceivable that countries like Indonesia and Thailand may join the TPP in future, thereby expanding its membership.
However, one is not sure whether all the remaining member countries of the TPP would agree to modify the rules governing its coming into force. With the lead country pulling out before the ratification process, the remaining members (particularly the traditional allies of the US) may lack motivation in ratifying and implementing the pact. For instance, Vietnam has already decided to shelve its ratification of the TPP. In a statement issued on 17 November, Vietnamese Prime Minister Nguyen Xuan Phuc said, 'Vietnam has prepared adequate conditions to join the 12-nation TPP. However, as the United States has announced to stop the deal, so Vietnam has not had enough basis to submit TPP participation to the National Assembly.'
Moreover, many member countries would not be keen to pursue a 'TPP minus one' pact due to the lack of exclusive access to the US market, which may have been a prime motivation for them to join in the first place.
The RCEP: The next best hope?
In this rapidly evolving scenario, many TPP members (in particular Japan, Australia and New Zealand) which are also members of the proposed Regional Comprehensive Economic Partnership (RCEP) will now shift their attention to this pact. These countries may further push for TPP-like provisions in the RCEP in order to secure the maximum possible outcome with the imminent demise of the TPP deal.
It is hard to deny that for many Asia-Pacific countries with a small domestic market, the export economy remains very important. Such countries would prefer a deal to no deal when it comes to joining a regional economic bloc. Of late, TPP member countries like Peru and Chile have also shown interest in joining the RCEP.
The RCEP is a proposed mega-regional free trade agreement between 16 countries (the 10 ASEAN countries and their six FTA partners, namely, Australia, China, India, Japan, New Zealand and South Korea). If accomplished, the RCEP would pave the way to the creation of the largest free trade bloc in the world, covering 45% of the world's population with a combined GDP of $22 trillion and accounting for 40% of global trade.
The RCEP would cover a wide range of issues including trade in goods, trade in services, investment, intellectual property rights, competition policy, dispute settlement and economic and technical cooperation. The negotiations were officially launched in November 2012 at the ASEAN Summit in Cambodia and the 16th round of negotiations will be held in Indonesia in December.
China-led or ASEAN-centric?
Many commentators have described the RCEP as a China-led trade pact. There is no denying that China is an export powerhouse in manufactured goods and has enormous economic clout in the region, but it would be erroneous to view the RCEP as a China-led pact for three important reasons. Firstly, the RCEP is an ASEAN-centred FTA as it seeks to harmonise and build on existing FTAs between ASEAN and its six trading partners.
Secondly, having signed an FTA with ASEAN is the precondition for joining the RCEP negotiations. In other words, the US or any other country can also join the RCEP negotiations provided they first conclude an FTA with ASEAN.
Thirdly, Japan has pushed for strong RCEP rules in the areas of investment and intellectual property rights despite opposition from India and other members. Leaked draft texts of the RCEP reveal that TPP disciplines in areas such as investment, intellectual property rights, services, electronic commerce and telecommunications are currently under discussion in the RCEP talks at the insistence of Japan and South Korea.
Rethink of FTA strategy
In many important ways, the imminent demise of the TPP has eased pressure on India and other developing countries which are not supportive of an ambitious agenda on investment, intellectual property rights and zero tariffs under the RCEP framework due to potential negative impacts on local producers and businesses. Such countries would prefer the proposed pact to limit itself to a modest agenda with adequate flexibility available through provision for special and differential treatment, particularly to the least-developed member countries of ASEAN.
For India and many other developing countries, the pressure to sign bilateral and regional FTAs in order to counter other mega-regional trade pacts (such as the TPP) has subsided for the time being. Also, the demise of the TPP deal has weakened the negotiating position of countries like Japan and Australia in the RCEP.
At the forthcoming round of RCEP negotiations in December, India should forcefully argue that the 'gold standard' TPP framework has lost its appeal and popular support, and that therefore only a modest agenda based on the diverse circumstances of the negotiating countries should be pursued at the RCEP talks.
In the present context, when world trade is slowing and protectionist tendencies are rising across the developed world, India and other developing countries should rethink their FTA strategy in the short and medium term.
What about NAFTA, TTIP and FTAAP?
What will be the fate of the US's other regional FTAs? It remains to be seen whether Trump will renegotiate or withdraw altogether from NAFTA once he takes office.
Since 2013, the US has been negotiating the Transatlantic Trade and Investment Partnership (TTIP), another ambitious free trade agreement, with the European Union. The future of TTIP has become highly uncertain in the wake of the Brexit vote and Trump's election victory.
To a large extent, the prospects of a Free Trade Area of the Asia-Pacific (FTAAP) would depend on how negotiations proceed on the RCEP and other FTAs in the region. The idea of an FTAAP was proposed in 2006 by the Asia-Pacific Economic Cooperation (APEC) forum as a long-term, comprehensive FTA covering the entire Asia-Pacific region, but no concrete steps were taken by APEC member states to turn it into a reality.
At the APEC summit in Beijing in 2014, China revived the FTAAP idea by proposing a feasibility study but the US and other members did not support it. Given Trump's stated preference for negotiating bilateral trade deals, attempts to launch negotiations on giant regional trade pacts like the FTAAP are unlikely to gather support during his presidency.
Kavaljit Singh works with Madhyam, a non-profit organisation based in New Delhi devoted to research and public education on economic and developmental issues. This article first appeared on the Madhyam website (www.madhyam.org.in).
*Third World Resurgence No. 314/315, October/November 2016, pp 16-18