Tax & Accounting Blog

What Does the United States’ Withdrawal from the TPP Really Mean?

Blog, Checkpoint, Global Trade, ONESOURCE January 27, 2017

Headlines around the world announced U.S. President Donald Trump’s formal withdrawal of the United States from the Trans-Pacific Partnership (TPP) agreement on Monday.  In a reversal of the former Obama administration’s position on the multi-lateral trade deal, President Trump signed an executive order, effectively killing the TPP for the 12 countries involved in the negotiations.  Or did it?  The answer is it depends on who you ask.

Australia and New Zealand want to salvage the deal even without the United States.  Australia Prime Treasurer Scott Morrison insists that “[t]here’s still a lot that can be gained,” even without the United States involved in the TPP, “and we intend to continue to pursue that, where those opportunities persist and where there is potential for other partners to step into this.”[1]  Australia Trade Minister Steve Ciobo encouraged parliament to ratify the agreement because “ratification of the agreement is the strongest message we can send on the importance of TPP.”[2]   While Australia Prime Minister Malcolm Turnbull has acknowledged the U.S. withdrawal from the TPP agreement makes it very difficult to move forward with the remaining 11 countries,[3]  he insisted that “there is potential for China to join the TPP.”[4]

Japan is reluctant to move ahead with the TPP without the United States and Japan Prime Minister Shinzo Abe has balked at the suggestion that China could replace the United States in the trade deal.  Instead, Prime Minister Abe wants to convince the United States to reconsider its position on the TPP agreement, assuming “President Trump also understands the importance of free and fair trade.” [5]  Japan has ratified the TPP and is “encouraging [Australia] to complete [its] ratification process,” explained Australia Prime Minister Turnbull in describing his conversation with Abe, “because everyone would like, in the future, the United States to rethink its position and join the TPP.”[6]   Abe has stated that he wants to meet with Trump “to steadfastly seek his understanding of the strategic and economic significance of the TPP agreement.”[7]

The prevailing thought, however, is that the TPP agreement in its current form is dead and that the remaining 11 countries must now form new deals.  For example, Canada Foreign Affairs Minister Chrystia Freeland explained that the TPP “was so constructed that it can only enter into force with the United States as a ratifying country.” [8]   Recognizing the trade deal will not move forward, Peru President Pedro Pablo Kuczynski indicated that he wanted to work with countries with which Peru did not currently have a trade deal, including China, and renegotiate the TPP, stating, “[w]e are going to take the best things out of TPP and get the not-so-good stuff out.”[9]  Similarly, both Chile and Mexico vowed to continue talks on other trade deals, and Chile initiated a March summit for the TPP leaders to discuss next steps in a post-TPP world. [10]

Some suggested surprise that despite Trump’s campaign pledge to back out of the TPP, he did not approach Japan, Australia and the other TPP larger economies and ask for some concession so he could show the American people and the world he negotiated a better trade deal while still keeping opportunity for U.S. exports.[11]  After all, although the TPP agreement has its issues, it did remedy some of the social and economic issues that were of concern to many.  For example, it imposed stricter labor standards as well as opened borders to countries that traditionally have had both tariff and non-tariff barriers to U.S. exports.

Trump has repeatedly told the story of watching Japanese cars rolling off cargo ships for sale in the United States.  In fact, Trump called Japan “unfair” for making “it impossible to sell cars in Japan” when he withdrew from the TPP.[12]  If the Trump administration is leaning on the U.S. automaker to produce cars in the United States, so we are not relying on Japanese cars made in Mexico, couldn’t he have gone to Japan Prime Minister Abe and negotiated a specific concession related to the automotive industry within the trade deal?  Instead, the United States withdrew. But what if walking away from the table is Trump’s way of negotiating a stronger trade deal in the future?

President Trump often boasted on the campaign trail that he could have negotiated a better Iran deal than the Obama administration by simply walking away and waiting for the other side to call a couple of days later. One could argue that is precisely what is happening now that Prime Minister Abe is asking the United States to reconsider its position on the TPP.  One Japanese former trade ministry official stated, “Relations with the U.S. are the top priority, so the prime minister’s office will have to make some concession.” [13]   If that is the case, perhaps there is a future bilateral trade agreement between Japan and the United States that addresses Trump’s concerns while simultaneously promoting free trade.

The multi-lateral agreement may be out of scope for the United States, but Trump has said he would negotiate bilateral agreements.  By walking away from the TPP agreement, the United States has the ability to negotiate separate deals with each nation, a forum that may be more comfortable for President Trump.  On the one hand, each country can ask for specific concessions from the other trading partner, focusing primarily on trade between the two countries. On the other hand, trade between two nations does not happen in a vacuum and it is naïve to think other countries do not influence those negotiations even if they are not parties to the agreement.

So what does the United States’ withdrawal from the TPP really mean?  It likely means a bit of uncertainty in the short term, reliance on current free trade agreements in the midterm, and new bilateral trade deals with new rules in the long term.  But it still depends on who you ask.

Learn More About Thomson Reuters Solutions for FTA

 

Sources

[1] Henry Belot, “TPP: ‘Australia first’ trade policy outlined by Scott Morrison after Donald Trump’s withdrawal,” available at www.abc.net.au (1/25/17).

[2] Gabriel Chan, “Malcolm Turnbull cools on TPP ratification in face of hostile Senate,” available at www.theguardian.com (1/25/17).

[3] Chan, “Malcolm Turnbull cools on TPP ratification in face of hostile Senate,” available at www.theguardian.com (1/25/17).

[4] Reiji Yoshida, “Tokyo turns down Australian proposal for TPP without U.S., vows to keep pushing Trump,”available at www.japantimes.co.jp (1/24/17).

[5] Linda Sieg and Izumi Nakagawa, “Japan cool to inviting China into TPP as Abe repeats free trade mantra,” available at http://mobile.reuters.com/article/idUSKBN1590O0 (1/25/17).

[6] Chan, “Malcolm Turnbull cools on TPP ratification in face of hostile Senate,” available at www.theguardian.com (1/25/17).

[7] Sieg and Nakagawa, “Japan cool to inviting China into TPP as Abe repeats free trade mantra,” available at http://mobile.reuters.com/article/idUSKBN1590O0 (1/25/17).

[8] David Ljunggren, “Canada says TPP trade deal dead without United States,” available at http://www.reuters.com/article/us-usa-trump-trade-canada-idUSKBN1582P3 (1/24/17).

[9] Caroline Stauffer, “Peru to work with China, others on TPP alternative: president,” available at http://www.reuters.com/article/us-peru-trade-idUSKBN15829U (1/24/17).

[10] Stauffer, “Peru to work with China, others on TPP alternative: president,” available at http://www.reuters.com/article/us-peru-trade-idUSKBN15829U (1/24/17).

[11] Fareed Zakaria, host of CNN’s GPS, appearing on CNN’s Don Lemon (1/23/17).

[12] Isabel Reynolds and Yuki Hagiwara, “Abe’s Trump dilemma: Getting Japan to buy U.S. cars,” available at http://www.japantimes.co.jp/news/2017/01/26/business/abes-trump-dilemma-getting-japan-buy-u-s-cars/#.WIsDDLczUqT (1/26/17).

[13] Hiroyuki Kishi is a professor at Keio University who is a former trade ministry official. Reynolds and Hagiwara, “Abe’s Trump dilemma: Getting Japan to buy U.S. cars.”