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Trump walks the talk, quits Pacific trade pact. What happens now?

On his first weekday at work, the US President ‘terminated’ the Trans-Pacific Partnership, the biggest trade deal in history, Barack Obama’s signature achievement and the proposed American counter to China’s economic influence in the region.

Written by Anil Sasi |
Updated: January 25, 2017 12:18:01 am
donald trump, trump, us president, trans pacific partnership, trans pacific partnership terminated, barack obama, china economy, us trade, TPP, TPP trade deal, what is TPP, APEC, Beijing, asian trading partner, asia trading, us asia trade, us beijing trade, GDP, RCEP, indian express news, india news, indian express explained Trump upended calculations of US trade partners and allowed Beijing a commercial and strategic advantage.

What is the Trans-Pacific Partnership (TPP) trade deal?

The TPP was envisaged as a trade pact among 12 Pacific Rim nations: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. It was the most ambitious agreement of its kind ever reached, and was aimed at slashing tariffs on most goods traded between member countries. These countries, home to nearly 800 million people and accounting for 40% of world trade, could have potentially created a single market along the lines of the European Union.

Watch | President Donald Trump Signs Executive Order, Pulls US From TPP Deal

How did the idea of the pact come about?

On June 3, 2005, on the sidelines of a Asia-Pacific Economic Cooperation (APEC) meeting in Jeju, South Korea, representatives from Brunei, Chile, New Zealand and Singapore agreed on a Trans-Pacific Strategic Economic Partnership Agreement. In January 2008, the US began talks with these four countries on trade liberalisation in financial services, a move that eventually set the stage for the TPP. The Partnership was subsequently broadened to include, apart from the US and the four original APEC members, Japan, Malaysia, Vietnam, Australia, Canada, Mexico and Peru.

Read | Donald Trump pulls out of TPP deal: Other executive orders signed by Trump administration so far

After 8 years of painstaking negotiations, the TPP pact was signed in February 2016 in Auckland. It was to have been implemented after ratification by the legislatures of member countries, but was never taken up by Congress in the US. Japan ratified the TPP last week, even though it was clear that the future of the deal was bleak.

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Which goods and services would have benefitted from the TPP?

A full range — tariffs would have been removed immediately in some cases, and over time in others. Japanese carmakers like Toyota, Nissan and Honda would have got cheaper access to the US, their biggest export market. US vehicle exports would have found new markets if tariffs of up to 70% in countries like Vietnam and Malaysia were slashed. American farmers and poultry firms stood to benefit, as did Vietnamese textile exports. Dairy, sugar, wine, rice and seafood would have seen lower taxes, and exporter countries such as Australia and New Zealand would have gained. Liberalised free trade was likely in services too.

So why did President Donald Trump pull the US out of the TPP?

It was expected. He had repeatedly referred to it as “a terrible deal” a “job-killer”, and “a potential disaster for our country” during the campaign. On November 21, he released a two-and-a-half-minute infomercial-style video on YouTube, in which he said the US would leave the TPP on his first day in office. He stuck to that vow, signing an executive order confirming the US withdrawal on his first full weekday in the White House.

Read | Donald Trump as US president: Here is what he did in first week after taking office

In place of multinational pacts, Trump wants to “negotiate fair, bilateral trade deals that bring jobs and industry back on to American shores”. Indeed, the TPP was seen as being likely to intensify competition between countries’ labour forces. Labour groups had expressed concern over the possibility of jobs moving from large, developed economies such as the US to countries with lower wages and less strict labour laws.

And exactly why is the US pullout from the pact such a big deal?

For one, the largest regional trade accord in history, and probably the most sophisticated deal of this kind ever negotiated, would have set new terms for trade and business investment among its 12 signatories whose combined annual GDP is $ 28 trillion. It sought to bind Pacific nations closer, and serve as a levee against China’s regional influence. An independent study said the deal, championed by President Barack Obama as a way to establish a “gold standard” of rules for 21st century trade, would have increased US incomes and exports, though not jobs.

Second, there is geopolitics. For Trump’s constituency, the TPP was a lightning rod for broader discontent with stagnant wages and job losses that were blamed on globalisation and past trade agreements — junking it, however, puts at immediate risk America’s role as the leader of global trade policy, and therefore, the global economy. “When more than 95% of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy. We should write those rules, opening new markets to American products, while setting high standards for protecting workers and preserving our environment,” Obama had said.

So does this mean Beijing might be celebrating this week?

Quite possibly. China, kept out of the TPP, had viewed it as a potential threat and a US ploy to tighten its hold over Asian trading partners. Obama had stressed that TPP was a fundamental part of the US’s strategic “pivot to Asia”, and Chinese media had denounced the deal as “the economic arm of the (US’s) geopolitical strategy to make sure that Washington rules supreme in the region”.

Now, following Trump’s action, several TPP nations have said they hope to push ahead with the pact even without the US, and possibly in collaboration with China. Prime Minister Malcolm Turnbull of Australia said he had discussed the matter with the PMs of Japan, Singapore and New Zealand, and “certainly there is the potential for China to join the TPP”. His Trade Minister Steven Ciobo said, “There would be scope for China if we were able to reformulate it to be a ‘TPP 12 minus one’, for countries like Indonesia or China or indeed other countries to consider joining. This is very much a live option and we are pursuing it and it will be the focus of conversations for some time to come.”

New Zealand’s Prime Minister Bill English noted that Beijing “hasn’t been slow to spot the opportunity” to cast itself as a free trade supporter. Malaysia’s Second Trade Minister, Ong Ka Chuan, said that “there are many possibilities that (the remaining) 11 countries can still proceed with.” Thailand’s central bank Governor Veerathai Santiprabhob said US protectionism “might provide a better opportunity for some of the regional trade agreements”, which “could be helpful for regional integration efforts”.

In Beijing, Foreign Ministry spokeswoman Hua Chunying did not say directly whether China would be interested in joining the TPP.

However, she said, “We think that in the present situation, no matter what happens, all should keep going down the path of open, inclusive, continuous development, seeking cooperation and win-win.” China has proposed a counter pact, the Free Trade Area of the Asia Pacific (FTAAP). A Southeast Asian-backed Regional Comprehensive Economic Partnership (RCEP), of which India too is part, is in the works.

But why do the other 11 countries need a replacement for the US in the TPP?

Because, for the pact to come into force in its original form, it must be ratified, before February 2018, by at least 6 countries that make up 85% of the signatory nations’ economic output. And since the US accounts for 60% of the combined GDP of the group, those conditions cannot be met without US participation. Trump’s decision essentially means the deal has to be renegotiated — and that, as Japan’s Prime Minister Shinzo Abe had said in November, “would disturb the fundamental balance of benefits” from the TPP.

Why India may gain

Like China, India too is outside the TPP. Pacts like the TPP and the proposed Trans-Atlantic Trade and Investment Partnership (TTIP), a US-EU agreement, can potentially erode the demand for Indian products in traditional markets such as the US and EU, while benefitting the partners in these agreements. Vietnam, for instance, was expected to gain at India’s expense in the garments business in the US market, as TPP would have given it zero-duty access for textiles — Indian exporters, on the other hand, would have been forced to pay 14%-30% duties. Again, a ‘yarn forward’ provision, which requires clothing to be made from yarn and fabric manufactured in one of the TPP partner countries to qualify for duty-free treatment, could have impacted yarn and fabric exports from India to countries such as Vietnam. The Peterson Institute for International Economics in September 2015 said that if China and the rest of the APEC were to join a second stage of the TPP that continued to exclude India, India’s annual export losses would be $ 50 billion.

Some analysts had wanted India to calibrate the impact of the TPP fine print, and get its act together on regional pacts that it is part of, including the RCEP. In a report on TPP and India’s Emerging Challenges, Amitendu Palit of the Institute of South Asia Studies at the National University of Singapore urged India to “study the TPP carefully for anticipating its possible impact on its RCEP negotiations”.

India will gain from the RCEP, which will offer its exports greater access to several Asia Pacific markets, including China.

(With The New York Times, AP and Reuters)

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