Hold-up of TPP by US, Japan will cost region

When Japanese and United States trade negotiators met in Washington DC last week for bilateral talks on the Trans Pacific Partnership (TPP) trade pact, the outcome mattered to many other countries.

The TPP has grown to include 12 countries that represent about 40 per cent of global gross domestic product and about a third of all world trade.

The breakdown in negotiations between the US and Japan over farm and auto-parts exports affects the whole region. This goes beyond specific sticking points on agriculture and automobiles. Strategy and credibility are at stake.

For the US, President Barack Obama has made the TPP a major initiative in his “rebalance” or pivot to Asia. He has said he hopes to have a TPP agreement by year-end. Beyond military presence, the pact is meant to be America’s major economic initiative for Asia-Pacific engagement.

In Japan, Abenomics is attempting its “third arrow” on structural reform, but economic confidence over the past months has declined. Concluding the TPP would be a major signal of the Abe administration’s commitment to reform.

For these reasons, despite the impasse last week, the US and Japan must try again to settle their differences and lead the way to a deal.

With the TPP past four years of negotiations, time is not on their side. Last week’s failure relates to the mid-term elections in America, set for Nov 4. The Obama administration did not have the “fast-track” approval by Congress to conclude the TPP and is now unlikely to get that until after the mid-term elections, even if Japan can make concessions. Another window of opportunity will open after the elections and it should be seized.

However, realism is also needed. The promise that the TPP should be a “gold standard” and “21st-century” agreement has haunted the negotiations. Some have taken this as an excuse to include every demand that American lobbyists have harboured.

In addition to the unresolved bilateral issues between America and Japan, the standards demanded on labour, environment and intellectual-property protection are exacting.

There are also issues specific to different countries. Vietnam’s state-owned enterprises could be affected, while Malaysia is trying to retain preferences in government procurement to favour bumiputra, ethnic Malays. On the other side of the Pacific, Canada has an issue about diary products.

Yet, despite this, there has been progress. While negotiations have been secretive, the majority of terms seem agreed in principle, with only smaller issues outstanding — albeit sticky and championed by sectoral interests.

Strategic intent and realism mean the parties should conclude a good agreement sooner, rather than to hold out for the best later, which may never come.

Look otherwise at the Doha Round in global trade negotiations, which have all but died. In our troubled world, as growth prospects have moderated, nationalistic concerns have re-emerged.

Agreements that can bolster economic integration and growth are needed. However, an agenda that is too heavy and ambitious will fail.

COUNTING THE COSTS OF FAILURE

If the TPP fails to conclude as scheduled, there will be costs — chief of which will be the credibility of the US and Mr Obama. Some will also blame Tokyo and the US-Japan alliance. There will be no winners.

However, persistent officials will shift to alternative ways of moving ahead. The TPP, after all, is not the only effort in the region. Other proposals are at varying stages of discussion among different groups.

One is the Regional Comprehensive Economic Partnership (RCEP), which has held five rounds of discussion. The RCEP does not include the US and, instead, centres around the Association of Southeast Asian Nations (ASEAN) to bring together all major Asian economies — including China and India, where RCEP governments will meet again in December.

China is also exploring the possibility of a free trade pact among all members of the Asia Pacific Economic Cooperation, whom it will host next month. Additionally, Beijing has been offering economic integration initiatives that have a considerable upside and yet are light on legalities.

One is China’s pledge to help build and fund infrastructure, both bilaterally and through a new Asian Infrastructure Investment Bank, which is now being formed.

Another is the expected upgrading of the ASEAN-China Free Trade Agreement. Beijing is the largest trade partner of ASEAN and expectations are that trade will grow further — to US$500 billion (S$638 billion) by next year and US$1 trillion by 2020. Projections also see two-way investment flows of US$150 billion in the next eight years.

The failure of Japan and America to compromise last week is not irretrievable. TPP talks are advanced and, if concluded on schedule and realistically, can set the direction for others to come on board thereafter.

US and Japanese officials must return to the negotiating table in the months ahead. When they do so, they would do well to look out of the window and at the clock. They may then be reminded that there are broader strategic imperatives at stake and time will not stand still in a troubled world.

ABOUT THE AUTHOR:

Simon Tay is chairman of the Singapore of International Affairs and Associate Professor at the National University of Singapore Faculty of Law