The withdrawal of the United States from the Trans-Pacific Partnership Agreement disrupted the institutional structure of global trade. However, it seems that the foremost loser from the United States’ retreat is the US itself. This article elaborates on the revival of the TPP Agreement by its remaining members, their continued benefit and growth, and the still optimistic future of global trade.
On July 13, negotiators of the 11 remaining members of the Trans-Pacific Partnership (TPP) meeting in Hakone, Japan announced the launch of formal talks to reframe the regional trade agreement following the withdrawal of the United States. This announcement raised hopes for the revival of TPP, which had appeared moribund after President Donald Trump’s executive order of January 23 terminating US membership in the pact.
The main impetus for the resurrection of TPP comes from Japan, historically a subordinate player in international trade liberalisation. Japan’s leadership of “TPP-11” signals a change in the foreign trade policy of Prime Minister Shinzo Abe, who made politically difficult concessions to the United States (notably agricultural market access) and who previously declared that a US exit would render TPP “meaningless”. While still lamenting the loss of the United States (by far the largest economy in the regional pact), Abe now affirms his determination to proceed with a TPP-11 accord retaining the core elements of the original agreement. Abe’s simultaneous pursuit of a free trade agreement between Japan and the European Union (dubbed the “cars for cheese” deal) further demonstrates his willingness to fill the void in global trade leadership left by the Trump Administration’s protectionist retreat.
As an advanced regional trade agreement, TPP remains attractive to developed economy members (Japan along with Australia, Canada, New Zealand, and Singapore) that stand to benefit from provisions on cross-border data flows, intellectual property rights, and related issues.
However, the case for TPP-11 is less compelling for developing and emerging market member states such as Malaysia and Vietnam, whose acceptance of the original agreement was premised on enactment of domestic reforms (child labour laws, environmental protections, trade union rights, transparency of state owned enterprises) at the behest of the United States to expand their access to the huge American market. But even the latter countries now support TPP-11, which would generate significant trade gains in the absence of the United States. These countries also view TPP as a geopolitical counterweight to China, which is spearheading parallel negotiations for the Regional Comprehensive Economic Partnership (RCEP).
The TPP-11 countries aim to consummate an agreement at the APEC summit in Da Nang in November 2017. Of the remaining member states, two have signed and ratified the agreement (Japan and New Zealand) while nine have signed but not ratified (Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, Singapore, Vietnam). For the agreement to go into effect, six countries representing 85 percent of the combined GDP of the original 12 members must ratify the pact. The withdrawal of the US (which accounts for nearly 60 percent of the group GDP) will necessitate a revision of the ratification protocol. The TPP-11 states will also have to agree on what (if any) modifications of the original text are necessary in light of the changed circumstances resulting from the US exit.
TPP 12 vs. TPP 11
The US withdrawal marks a significant reduction of the size and scope of the Trans-Pacific Partnership, which in its original form would have represented one-third percent of global trade. The United States accounts for 59 percent of the aggregate GDP and 40 percent of the total population of the 12 signatory states. The US also generates outsized shares of the group’s inbound and outbound foreign direct investment, merchandise trade, and service trade. Furthermore, the American exit substantially reduces the per capita income of the rump TPP, which now comprises five high-income economies and six low/ middle-income countries (see Exhibit 1).
Exhibit 1: Transpacific Partnership: Key Metrics, 2015
However, the remaining members of TPP display higher levels of trade dependence than the United States that strengthen the case for their continued engagement in the regional pact. Trade:GDP ratios range as high as 318 percent in Singapore, reflecting that country’s traditional role as a regional entrepôt with extensive transshipment and cross-border flows of goods and services. Other small open economies in the group (Brunei, Chile, Malaysia, New Zealand, Peru) register higher Trade:GDP ratios than the US. The mid-sized economies in TPP with well developed domestic sectors (Australia, Canada, Mexico) also exhibit higher trade dependence than the US. With a trade dependency ratio of 185 percent, Vietnam (a rapidly growing developing economy with a population of 93 million) stands to reap significant gains to regional trade liberalisation even with the US withdrawal.
Japan comes closest to the United States on the trade dependence metric (39 percent versus 28 percent). Moreover, none of Japan’s top five global trading partners (US, China, South Korea, Taiwan, Hong Kong) are current members of TPP. But despite the country’s comparatively low dependence on TPP-related trade, Japan stands to gain from continued membership in the regional pact. Japan’s deep integration in the global value chains of multinational corporations operating in Asia-Pacific heightens the commercial value of TPP, which would simplify and consolidate rules of origin now governed under a complex web of bilateral free trade agreements.
Gains to Trade Under TPP-11
A recent analysis by the Canada West Foundation uses multi-variate modelling to estimate the economic impact of TPP-11. Australia, Chile, Japan, New Zealand, Peru, and Singapore would reap net trade and welfare gains from the continuation of TPP despite the removal of the large US market from the regional pact. Canada and Mexico would actually benefit from the US withdrawal, as those countries would no longer compete with the US in TPP-11 countries while retaining free access to the American market under NAFTA. Overall, the TPP-11 would enjoy a 2.4 percent increase in intra-regional exports resulting from tariff cuts, reductions of non-tariff barriers, and simplification of rules of origin.1
The foremost loser in the US withdrawal from TPP is the United States itself. The Canada West Foundation study estimates that the United States would move from a 1.4 percent increase in intra-regional exports under TPP-12 to a .32 percent decrease under TPP-11.
The foremost loser in the US withdrawal from TPP is the United States itself. The Canada West Foundation study estimates that the United States would move from a 1.4 percent increase in intra- regional exports under TPP-12 to a .32 percent decrease under TPP-11. American trade losses under TPP-11 would stem from (1) the denial of American companies of the benefits of trade liberalisation in highly protected markets (e.g. Japan, Vietnam); 2) the exclusion of US companies from the value chain benefits of a mega-regional trade agreement; and (3) the loss of regional market shares to member states (Australia, Canada, Chile, Mexico, Peru, Singapore) whose existing free trade agreements with the US would ensure continued access to the American market under TPP, but which would enjoy preferential access to other TPP-11 countries (Brunei, Japan, Malaysia, New Zealand, Vietnam) that have not entered free trade agreements with the US.
Regional Trade Agreements in Asia-Pacific and the Americas
These results illustrate the self-inflicted damage resulting from the Trump Administration’s abrupt withdrawal from TPP, whose substantive design follows American rules and norms of international trade. The probable economic losses facing the US after the TPP exit also challenge the wisdom of Trump’s declared preference for bilateral trade deals, which defies the global trend towards mega-regional agreements.
The Trans-Pacific Partnership is one of a number of regional trade arrangements in Asia-Pacific and the Americas, which include RCEP, the Pacific Alliance, and NAFTA (see Exhibit 2).
Exhibit 2: Regional Trade Agreements in Asia-Pacific
Regional Comprehensive Economic Partnership
Launched in November 2012, RCEP began as a regional initiative to rationalise trade arrangements between the 10 members of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam) and seven non-member countries that had separate free trade agreements with that organisation (Australia, China, India, Japan, New Zealand, South Korea).
However, RCEP has assumed increased significance in the wake of the US withdrawal from TPP. With an overlapping membership (seven common members) and a different technical design (exhibiting a shallower degree of transnational integration), RCEP has become an alternative to a Trans-Pacific Partnership that now lacks American leadership. RCEP has also become a vehicle for the growing assertiveness of China, whose foreign trade objectives do not fully align with TPP. Components of the original TPP agreement that bear the imprint of the United States (e.g. labour rights and environmental standards) are weak or missing in the Regional Comprehensive Economic Partnership. With a population of 630 million and a collective GDP of $22 trillion generating 40 percent of global trade, RCEP would surpass TPP-11 as a regional trade bloc.
With a population of 630 million and a collective GDP of $22 trillion generating 40 percent of global trade, RCEP would surpass TPP-11 as a regional trade bloc.
The current round of RCEP negotiations began on July 18 in Hyderabad. India’s participation in RCEP underscores the challenges of devising a regional trade pact comprising 16 countries with widely varying economic and political structures. The developed economies in the organisation (Australia, Japan, New Zealand, Singapore, South Korea) generally support TPP-type “deep” integration on intellectual property rights, investor-state dispute settlement, and related issues. The developing/emerging economy members take a narrower view of RCEP, focussing on lowering of tariffs and non-tariff barriers.
India is caught between these countervailing pressures: As the world leader in offshore IT services, India aligns with the developed market countries on RCEP’s approach to the digital economy and trade in services. But India balks at RCEP’s proposed reductions in tariffs on agriculture and manufactured goods, which would harm major domestic constituencies that lack the social safety nets of high income states like Australia, Japan, and New Zealand. Indian officials are also wary of the fiscal impact of tariff cuts in a country whose national budget heavily relies on tariff revenues. By one estimate, India faces a potential tax revenue loss of 1.6 percent of GDP by joining RCEP.2
Formed in April 2011 with the Lima Declaration, the Pacific Alliance (Chile, Colombia, Mexico, Peru) represents an aggregate population of 215 million (36 percent of Latin America’s population), a group GDP of $1.7 trillion (40 percent of regional GDP), and global trade of $1.0 trillion (52 percent of Latin American world trade). By 2016, the Pacific Alliance had eliminated 92 percent of merchandise tariffs, with the remainder slated for elimination in 2020. The Pacific Alliance has also taken important steps towards deep integration, notably the Mercado Integrado Latinoamericano (MILA) integrating the stock exchanges of the four member countries and joint measures in e-commerce, transportation, foreign investment, and cross-border law enforcement.3
In March 2017, Chile (whose export-led growth strategy has produced a steady increase in per capita income and reduction of poverty) hosted a meeting of the four Pacific Alliance countries, the TPP members, China, and South Korea to discuss trade liberalisation in the Pacific Basin. The meeting demonstrated (1) the eagerness of the Pacific Alliance countries to broaden commercial ties with South East Asia, which represents a small share of Latin American trade, and (2) the role of the Pacific Alliance in sustaining the momentum of regional trade integration amid the US retreat.
As the sole country in the regional group that is a member of three regional trade organisations (NAFTA, Pacific Alliance, and TPP), Mexico is uniquely positioned to pursue a multi-vector foreign trade strategy. Parallel with its engagement of the Pacific Alliance and TPP-11, Mexico is undertaking the renegotiation of NAFTA in the face of heavy handed efforts by the US to reframe that agreement to support Donald Trump’s “America First” campaign.4
With over 80 percent of its exports destined for the United States, Mexico can ill afford to leverage its membership in other regional trade pacts in ways that would antagonise the Trump Administration. But the expansion of regional trade relations via TPP-11 and Pacific Alliance will increase Mexico’s capacity to withstand Trump’s threats to impose punitive tariffs on Mexican exports (e.g. diverting trade to non- NAFTA partners).
The retreat of the United States from leadership of the liberal international economic order has disrupted the institutional structure of global trade.
Similarly, Canada’s high trade dependence on the US (over 75 percent of national exports) limits that country’s ability to parlay its TPP membership as a bargaining tool in the NAFTA renegotiation.
However, as noted earlier TPP-11 will enable Canadian companies to capture market share from American competitors shut of out key markets in the mega-regional pact (Japan, Vietnam). Moreover, in the NAFTA renegotiation Canada can reference components of the original TPP text concerning rules of origin and other critical issues, to which the US had previously agreed.
The retreat of the United States from leadership of the liberal international economic order (signalled by the Trump Administration’s withdrawal from TPP, threats to dismantle NAFTA, and exit from the Paris Climate Agreement) has disrupted the institutional structure of global trade. But the revival of TPP and the ascent of other regional trade organisations allow grounds for optimism about the future of trade integration in Asia-Pacific and the Americas.
Featured Image: US President Donald Trump signs an executive order withdrawing the US from the Trans-Pacific Partnership. © AFP
About the Author
David Bartlett is an Economic Adviser and Writer for RSM. He is Executive in Residence in the Department of Management at the Kogod School of Business, American University in Washington, DC. Bartlett’s research, teaching, and consulting focus on international corporate strategy with special attention to emerging markets and emerging technologies. He has published widely on these topics while leading interdisciplinary research projects on the global economy.
1. Dan Ciuriak & Carlo Dade, “The Art of the Trade Deal: Quantifying the Benefits of a TPP without the United States”, Canada West Foundation,
2. Kavaljit Singh, “Why India Should Rethink its Approach to RCEP Negotiations, Bilaterals.org, 20 July 2017.
3. Anaïs Faure, “The New Trans-Atlantic Partnership: The Pacific Alliance and ASEAN”, The Diplomat, 5 April 2017.
4. See David Bartlett, “The Renegotiation of NAFTA”, The European Financial Review, August 2017.