The Rushford Report 2012

The TPP Negotiations: Is the U.S. Poised to Fail?

by Greg Rushford
posted on June 14, 2012

Trade aficionados may be treated to some positive spin concerning the Trans-Pacific Partnership negotiations on the sidelines of the forthcoming G-20 Summit, which will be held in Los Cabos, Mexico on June 18-19. President Barack Obama and Mexico's president, Felipe Calderon, seem to be ready to announce that Mexico will join the TPP talks. There is a possibility --- not considered a probability, as this article went to press --- that Canada and Japan would also be invited to join the negotiations. More likely, Obama will say that while both Tokyo and Ottawa are not quite ready to participate, they are making progress and he looks forward to welcoming them into the TPP talks as soon as they are ready, hopefully by the end of this year. The White House spinmeisters will portray whatever happens in Los Cabos as another illustration that the US continues to exercise leadership aimed at expanding trade flows in the fastest-growing part of the world. It is safe to predict that there will be repeated references to the exciting TPP success story from candidate Obama until the Nov. 6 presidential election.

[As this article went to press, all that seemed clear was that the White House was positioned to welcome the Mexicans into the TPP next week, or at least before Mexico's presidential elections on July 1. Much thought in the administration seemed to be focused on how to explain the inevitable awkward questions as to why Canada, like Mexico a Nafta member, would be excluded. White House economic adviser Michael Froman was believed prepared to play a blame game, portraying the Canadians (and Japanese) as lacking the political will to negotiate a fast-moving, high-standard 21st century TPP deal. At a recent appearance before an audience of Washington insiders convened by the influential Center for Strategic and International Studies, Froman spoke of trade "tensions" with both Ottawa and Tokyo, but (unconvincingly) denied that any decision to keep them out had been made. A spokeswoman for U.S. Trade Representative Ron Kirk declined to comment. There there also seemed to be quite a bit of intense behind-the-scenes high-level jockeying going on this week, raising the possibility that Prime Minister Stephen Harper and Japanese PM Yoshihiko Noda were perhaps privately-but-firmly going to take Obama to the mat over their TPP accession --- hoping to avoid their humiliation in Los Cabos. Of course, both the Canadians and Japanese have been widely criticized for foot-dragging on trade liberalization in recent years. Still, the buzz around town has focused on the question as to whether the Obama White House really has earned the right to decide whether other countries can be trusted to deliver on enhanced market-opening moves. Especially in the TPP context, a perceived American negotiating intransigence is widely believed to explain why the TPP negotiations are not on track to be concluded this year, as previously promised.]

Regardless of how the issue of possible TPP participation involving the Mexicans, Canadians and Japanese plays out at the G-20 Summit, or perhaps soon thereafter, there are some fundamental concerns about where the TPP process is heading that haven't received the public attention they seem to deserve. Serious diplomatic observers say privately that while the U.S. is moving to strengthen its military and security ties throughout Asia, they worry that America's economic influence in the region could be on the decline.

Let's take a closer look at why the worries about the U.S. approach to the TPP is raising such geo-political concerns.


A mismatch between economic realities and the hype?
For the Obama administration --- having essentially turned away from the World Trade Organization and genuine multilateral trade expansion --- the TPP is the only trade game now playing. But should the TPP talks fail, every other involved country is positioned to move on by expanding economic ties elsewhere, leaving the Americans on the outside. China now looks to be the big winner in expanded Asian trade ties. So if it's true, as the Chinese have reason to suspect, that the U.S. sees the TPP as a way to encircle China economically, nobody in Beijing seems to have serious cause for concern..

First, the hard question: just how big a deal is the TPP, really, for the United States? The U.S. already has, in Nafta, preferential trade deals with Mexico and Canada. The same for Singapore. And Australia. Plus Chile. Also Peru. So it's difficult to see the real gains in trade that would be associated with negotiating the TPP with them.

What about the other TPP negotiating partners who don't already have preferential trade ties with the Americans? Well, New Zealand punches above its weight in international trade circles because the Kiwis --- like Singapore, Australia, and Chile --- practice what they preach when it comes to free trade. Dynamic up-and-coming Vietnam is certainly a worthy trade partner (and security ally, especially in the current Chinese-sparked South China Sea disputes.) Malaysia's involvement raises the prospects of more investment opportunities in that middle-income country that has for too long shunned such. And who could be against adding in the oil-and gas-rich Brunei --- pop. 408,786, according to the CIA's World Factbook. How many Americans could find the Sultanate of Brunei on the map? (Hint: it's close to Borneo, if that helps.) Still, some trade-watchers wonder if an expanded TPP with smaller economies really matches the promised economic benefits that the Obama administration touts.

While the addition of Japan to an expanded TPP would certainly be very welcome economic news, the Japanese also have even bigger ambitions to expand important Asian trade routes --- consider the recent announcement that Tokyo, Beijing, and Seoul are considering a China-Japan-Korea pact.

What if Obama can't deliver on TPP?
If there were no expanded TPP beyond it's present members --- Singapore, Chile, New Zealand, and Brunei --- everyone except the U.S. is poised to expand trade regardless. New Zealand has a bilateral trade deal with China, and is talking with India and Russia. The Kiwis also have an economic partnership agreement with Thailand. The Australians are negotiating a bilateral trade deal with China. Beijing already has a preferential trade deal with six Asean countries. South Korea is proposing a free-trade arrangement with Malaysia. Singapore, Vietnam and Malaysia are looking to an Asean Regional Comprehensive Economic Partnership. Canada (like the U.S.) has a trade deal with Korea, and is talking with the European Union.

None of these deals would involve the United States, which should be starting to contemplate the implications associated with signs of a decline of its traditional economic strength. "Thanks to the financial crisis and its impact on American purchasing power, the percentage of Canada's exports to countries other than the United States jumped from 18 percent in 2005 to more than 25 percent just four years later," Ian Bremmer notes in his new book, Every Nation for Itself. "Canada now draws nearly 40 percent of its imports from countries other than its giant neighbor to the south." (One wonders if the same Obama White House that has been looking to next week's G-20 Summit as an opportunity to deny or delay Canada's involvement in the TPP talks is aware that the G-20 is essentially an idea that was pressed successfully by former Canadian Primer Minister Paul Martin.)

Other numbers raise further questions of where the U.S. is headed in Asian markets. While U.S. exports to Asia increased 5.4 percent between 2000 and 2010, somewhat faster than total U.S. exports to the world (5 percent), there's another trend to worry about. The U.S. share in imports from Asia declined during the same decade from 15 percent to 8.6 percent --- many of those imported components are of vital importance to American manufacturers who need them to make final products. Meanwhile, the U.S. share in Asia's manufactured imports declined in the last decade from 17.1 percent to 9.8 percent.

In search of a leader
If either Obama or his predecessor, George W. Bush, had been able to wrap up the World Trade Organization's Doha Round, and thus expand trade flows globally, perhaps the trend lines would now be looking more encouraging. But touting the WTO's vital importance to the health of the world's trading system has all-but-disappeared from the agenda in in Washington, D.C. these days. One recent exception: At the same June 5 CSIS conference that White House economic aide Michael Froman participated in, Jean-Guy Carrier, the secretary general of the Paris-based International Chamber of Commerce, put deep feeling in his voice as he warned that "the WTO is at risk." And from Geneva, WTO Director General Pascal Lamy has been another voice in the wilderness, warning of the dangers of protectionist backsliding --- especially involving many G-20 leaders who have failed to deliver on their promises to avoid such.)
There is talk that Lamy may soon leave the WTO for a high-level position with new French President Francois Hollande. While present attention is focused on who might be tapped to replace the energetic Lamy, perhaps the real leadership vacancy involves a broader question. Which WTO member will step up to the plate to fill the present void left by the AWOL United States? The European Union? Probably not. Brazil? We've been waiting for a long time to see real leadership from Sao Paulo. India? Forget it.

Here's an idea: Imagine the geo-political tremors that would be felt if China stepped forward in the WTO? What if Beijing's leaders would announce that they are prepared to cut all of their industrial tariffs to zero, as they have been urged to do in the stalled Doha negotiations? Such tariff-slashing would be in China's own best economic interests. What if Beijing would advance truly generous proposals to bring market-oriented reforms and transparency to their state-owned-enterprises? That would not only be in China's best economic interests, but think of how shocked the comparatively unimaginative Americans, Europeans, Brazilians, and Indians would be. It used to be that the comparatively bolder Americans were at the head of the pack when it came to sparking multilateral trade liberalization. Now there is a leadership vacancy, waiting to be filled.

Ad Hoc Protectionism
Meanwhile, US trade negotiators in the TPP have been playing small ball, acting as if Uncle Sam can continue to get away with just about anything. One veteran trade observer calls the American game: "ad hoc mercantilism." You don't have to look far to see why.

New Zealand is being asked to reform its pharmaceutical-procurement practices (which it really should), while being informed that there will be no talk --- at least before the Nov. 6 U.S. vote --- of giving the Kiwis more access to protected American dairy markets. The U.S. has informed the Australians that Uncle Sam is not interested in talking about increasing Aussie access to U.S. sugar markets. The Canadians are pressed to demonstrate their willingness to dismantle some of their protectionist agriculture schemes as one price of entry into the TPP talks. Can anyone imagine the reaction in Washington, should the Canadians say that to prove their good faith, the Americans should first agree to make the U.S. farm program more market-oriented? But Washington doesn't mind telling Ottawa such things.

There's even talk that Obama has positioned himself to be the anti-smoking advocate, by proposing that cigarettes be excluded from tariff cuts in the TPP --- while the same Obama wants to promote the export of U.S. tobacco leaf, an obvious sop to voters in the politically important battleground states of North Carolina and Virginia. While it's difficult for outsiders to know how serious the president is on tobacco issues, the White House pressures on Vietnam and Malaysia are at least transparent, if embarrassing.

The Vietnamese (and Malaysians) are being bullied --- there's no better word for that --- into accepting a complicated and economically unwise scheme where they would agree to buy American yarn and fabric to make apparel --- if they have any hopes to get around high U.S. tariffs on imported clothing and footwear.

Meanwhile, Obama is demanding that Prime Minister Nguyen Tan Dung reform that Southeast Asian country's state-owned enterprises. The Vietnamese agree that their SOEs need long-overdue reforms to make them more transparent and market-oriented. Still, imagine the political heavy-lifting required to restructure nearly 40 percent of the Vietnamese economy. But while he asks a lot of Hanoi, the American president doesn't like being asked to cut tariffs on clothing that isn't made in America anyway.

Barack Obama was 13-years old when Hanoi won the Vietnam War in 1975. Does the president really understand how determined the Vietnamese can be, when their core interests are involved?Today, Prime Minister Dung has the welfare of more than two million Vietnamese clothing and footwear workers to consider. Many of these people are women who come from poorer parts of the country --- and their prime minister is supposed to sell them out to please the U.S. textile lobby? U.S. Trade Representative Ron Kirk was born in 1954, the year the Vietnamese Communists defeated the French in the battle Dien Bien Phu. Mr. Kirk has said that Vietnam is only a "small country" that will give in to U.S. pressure in the TPP. Perhaps he will be proven right. Still, does the U.S. trade negotiator appreciate that history suggests otherwise?

Inexperience Matters
The U.S. insistence on ad-hoc mercantilism --- making demands upon other countries to summon the political will to open their markets, while stonewalling suggestions the Americans might do more of the same --- explains why the TPP process is nowhere nearly ready to be completed by the end of this year. Obama lacks the necessary congressional authority even to conduct trade negotiations. So what's going on now in the TPP talks is the predictable consequence of letting the special pleaders loose to dominate the process. If Congress had given Obama so-called fast-track negotiating authority, he would be freer to send negotiated packages to the Hill, where they would not be subject to the otherwise inevitable run of protectionist amendments. So any president in such an unenviable position would be hard-pressed to deliver much.

Still, even though he has been dealt a weak hand, the president has been playing it, well, weakly. Obama's inexperience still shows into his fourth year in office. And regarding the quality of advice that Obama is getting --- or perhaps wants --- what has Michael Froman been smoking? This is the same Froman who was refusing to send the U.S. trade deals with Colombia and Panama to Capitol Hill earlier this year. Froman and Obama finally caved, after vigorous protests from prominent business leaders like Caterpillar's CEO, Douglas Oberhelman, and Thomas Donahue at the U.S. Chamber of Commerce, plus real pressure from Speaker of the House John Boehner and a few other lawmakers. That saved Obama from a serious diplomatic embarrassment throughout Latin America. Now, as this goes to press, many trade observers were wondering why the president and his people would be even thinking about how to admit Mexico into the TPP --- trying to figure out a plausible way to finesse the humiliation of Canada's Harper and Japan's Noda.

On January 19, 2012 Caterpillar's top Washington operative on trade, Bill Lane, warned the White House that we "need results" soon on TPP. Lane explained that the sooner that Japan, Canada and Mexico were admitted into the process, the better. The White House would have been smart to take the advice. Of course, Obama has been listening to his anti-trade allies in the United Autoworkers, who don't want Japan in the TPP; and also to some U.S. farm groups who have gripes about competition from north of the border.

Perhaps the biggest irony one hears expressed half-seriously at least when talking with trade observers here in Washington, D.C. is that --- on trade at least --- Obama conceivable still could be a more attractive candidate this November than Republican Mitt Romney. So far, Romney has failed to offer any sensible talk on the importance of trade expansion, while missing no opportunity to pander for votes by demonizing China. So perhaps Obama in a second term would be freer to be more reasonable on trade expansion than a Romney in his first term, some wags are saying. After all, the wags say, Obama should have learned by now that following protectionist special pleaders takes American down a path to economic decline.

That expresses about all the real "optimism" being uttered in Washington these days about the future of American leadership in international trade.