A lot can happen in one month, let alone one year.
A year ago, President Donald Trump withdrew the United States from the largest and most comprehensive free-trade agreement in human history, the Trans-Pacific Partnership. Last month, his administration published two little-noticed documents:
- On Jan. 17, 2018, the United States Trade Representative issued its annual Report to Congress On China’s WTO Compliance.
- On Jan. 19, the Pentagon issued an unclassified Summary of the 2018 National Defence Strategy of the United States.
The Pentagon dubbed China a “revisionist power” threatening America’s interests.
Then, on the one-year anniversary of Trump’s withdrawal, came a third underappreciated event:
- On Jan. 23, 2018, the other 11 countries in TPP — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam — announced that they had finalised a slightly revised deal, a Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which they will sign in Santiago on March 8.
These three dots are not random data points. China frames the pattern. The administration’s failure to connect the dots is trade policy incoherence.
Coherence requires seeing the non-random pattern and connecting the dots with TPP.
If America faces a revisionist power in China that conspiratorially undermines the multilateral trading system, then TPP is part of the solution.
It’s neither a panacea nor a sufficient solution. But, TPP is necessary to restore trade policy coherence.
The China Pattern
Why does the third dot (TPP) help connect the first two dots (the USTR and Pentagon documents)?
The answer requires examination of the first two dots.
The USTR Report says China dashed hopes it would trade freely and fairly after joining the WTO. China failed to “dismantle existing state-led policies and practices that were incompatible with an international trading system expressly based on open, market-oriented policies and rooted in the principles of non-discrimination, market access, reciprocity, fairness and transparency.” (Emphasis added). Instead, China “pursues a wide array of continually evolving interventionist policies and practices aimed at limiting market access for imported goods and services and foreign manufacturers and services suppliers.” And, “China offers substantial government guidance, resources and regulatory support to Chinese industries, including through initiatives designed to extract advanced technologies from foreign companies in sectors across the economy.” (Emphasis added).
In brief, the USTR dot contains three trade problems:
- China is not a market economy, but rather a state-dominated one, especially through State Owned Enterprises (SOEs).
- Goods, services, and foreign direct investment face substantial impediments to market access in China.
- China rips off intellectual property.
As for the Pentagon dot, that’s a national security problem.
The Pentagon says “China is a strategic competitor using predatory economics to intimidate its neighbours while militarising features in the South China Sea.” (Emphasis added). China generates state-based economic power, coercively extracts foreign technology from American joint venture partners, and purloins IP, all of which energises its regional muscle. That’s right out of the playbook of Paul Kennedy’s 1987 book The Rise and Fall of the Great Powers: predicate military power on a preeminent economic pedestal.
So, how does TPP offer a coherent solution to these problems?
1. TPP As A Solution To The State Economy Problem
TPP Chapter 17 contains the most advanced disciplines on state-owned enterprises of any free-trade agreement in the world, to level the playing field on which SOEs and private companies from TPP parties buy and sell goods and services within the TPP zone.
Thanks to Chapter 17, in most instances, SOEs must make purchases and sales based on commercial considerations. They must pay attention to profits and losses. SOEs must not discriminate against businesses, goods, or services from another TPP party. But, they could discriminate against SOEs from a non-party, like China.
Suppose a party subsidises one of its SOEs. That’s a common occurrence in China. TPP says the subsidy must not cause adverse effects to the interests of any other party, or injury to the domestic industry (against which the SOE competes) in another party. There’s no need to worry about adverse effects or injury to a non-party like China.
Thanks to President Trump, America is a non-party, too.
So, America cannot use TPP as a shield against Chinese state-dominated industrial policies.
2. TPP As A Solution To The Market Access Problem
The whole point of a free-trade agreement is to create trade among its members while diverting trade away from outsiders. That’s what TPP is all about. TPP even covers electronic commerce and government procurement. So, with America minus China in TPP, America could seize opportunities to generate more trade with Japan, Malaysia, New Zealand, and Vietnam — TPP countries with which America lacks an FTA. And, it could divert trade away from China.
These effects happen through calibrated Rules of Origin. These Rules encourage companies to establish supply chains within the TPP zone that add value to the merchandise they produce and thereby qualify for duty-free, quota-free treatment across that zone. TPP negotiators bargained hard to forge Rules of Origin for autos and auto parts, and textiles and apparel, which would not give Chinese producer-exporters a duty-free, quota-free backdoor into the zone.
Instead, the Trump Administration diverted America from TPP and created trade litigation ranging from conventional anti-dumping and countervailing duty actions to unconventional Section 201 safeguard and Section 232 national security remedies.
Indeed, the latest data from the Administration’s Commerce Department prove the incoherence of that idea.
America’s trade deficit is at its highest monthly and annual levels than at any time since October 2008. In December 2017, it jumped 5.4 percent to $53.1 billion, and up 12 percent to $566 billion for 2017. To be sure, exports were up for 2017 by 5.5 percent (to $2.33 trillion); yet imports rose 6.7 percent (to $2.9 trillion).
Same story for two politically symbolic bilateral trade deficits: up 8.1 percent for 2017 with China to a record ($375.2 billion), and up 10 percent with Mexico to the highest level ($71.1 billion) since 2007.
These figures come after the Administration’s ballyhooed safeguards against China and Korea on solar panels (a 30 percent tariff rate quota) and washing machines (50 percent tariff rate quota), with no exemptions for anybody, plus countless anti-dumping, countervailing duty actions against everybody on everything, with some punitive duties in the triple digits.
It is incoherent for the Administration to seek contemporaneous strong economic growth and a shrunken trade deficit. Growth depends on consumer spending and business investment, and both require imports, from a new sofa for the family to a new robot for the factory. That economic growth is why the overall 2017 export and import gains were the biggest since 2011. That’s also the reason American trade with China and Mexico is at its highest.
The cut could boost consumption and investment expenditures —that’s the point, right? — meaning more imports. And, it could make the dollar more valuable to foreign currencies, thus rendering dollar-invoiced exports more expensive, meaning fewer exports.
3. TPP As A Solution To The IP Problem
Just like TPP Chapter 17 on SOEs, Chapter 18 is chock-full of ‘WTO-Plus’ commitments, that is, protections to update and exceed those in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), which dates from the 1986-94 Uruguay Round. Chapter 18 is a rulebook for the creation, limitation, revocation, and enforcement of copyrights, patents, trademarks, trade secrets, geographical indications, and industrial designs.
For instance, TRIPs copyright protection is for the life of the author plus 50 years. TPP extends that to life-in-being plus 70 years.
TPP forbids circumvention of technological controls on access and use of copyrighted works and mandates a “Copyright Safe Harbor” to protect internet service providers from liability for copyright infringement. TRIPs does not touch these twenty-first century issues. TPP also is WTO-Plus on data exclusivity to protect undisclosed test data submitted by an original applicant to obtain patent and marketing approval — 10 years for agricultural chemical products, and 8 years for biologic medicines (which can be reached by a 5-year base plus 3 years through comparable measures.
Now, with America out, the TPP 11 have suspended some of these protections. That means the TPP 11 need not adhere to all of the WTO Plus IP rules on which America insisted during the eight years (2008-2016) the Obama Administration negotiated TPP.
4. TPP As A Solution To The Security Problem
TPP is designed as a de facto trade alliance to contain — or, euphemistically, offset — aggressive Chinese unilateralism. One thread stitching together more closely America with the 11 other Asia-Pacific friends is a shared concern about the Nine Dash Line. This U-shaped Chinese demarcation covers 90 percent of the South China Sea, through which half of world trade flows. It also cuts through the exclusive economic zones of three TPP Parties (Brunei, Malaysia, and Vietnam) plus Indonesia, the Philippines, and Taiwan.
Shared values are another common thread, like labour rights.
During TPP negotiations, the Communist Party of Vietnam conceded the right of workers to form independent trade unions — a concession the Chinese Communist Party has never made.
That guarantee is in a TPP Side Letter.
After Trump’s TPP withdrawal, the TPP 11 suspended the guarantee and distanced themselves from anti-Chinese rhetoric. Witness Peru’s polite in-your-face reply to the Feb. 5 admonition from Rex Tillerson, America’s Secretary of State, to be wary of China’s growing influence in Latin America, because closer trade ties with the Mainland “always comes at a high price.” The next day, Peru’s Trade and Tourism Minister, Eduardo Ferreyros, said “China is a good trading partner,” and added: TPP “is the most important trade agreement today. It is unfortunate that the United States is not a part of it….”
No Coherence In Sight
In his Jan. 30 State of the Union Address, the President intoned: “The era of economic surrender is over. From now on, we expect trading relationships to be fair and to be reciprocal.”
And, from now on, expect trading relationships to be non-reciprocal, with FTA preferences running in their favour. That’s a fair deal for them, and probably China, too.
America is privileged to have the TPP 11 as friends. They are holding the door open for the Trump Administration to realise CPTPP is a coherent synthesis of trade and national security policy to address the China problems his USTR and Pentagon identify.
But, on Jan. 25, President Trump said he’d consider re-entry only if America got a “substantially better deal.” Good luck with unsettling a 5,000-page FTA. His statement comes after six rounds of renegotiations of the North American Free Trade Agreement, which he triggered. That’s just a 1,700-page FTA with two other countries. But so far, कुछ नहीं (kucchh naheen — nothing).
So, don’t expect a lot of dots to be connected next month, let alone next year.
Raj Bhala is the inaugural Leo S. Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.