Foreign Policy Research Institute A Nation Must Think Before it Acts Market Warriors: Why the Trans-Pacific Partnership Matters

Market Warriors: Why the Trans-Pacific Partnership Matters

Overshadowed by the Boston Marathon terrorist attack, military tensions on the Korean peninsula, and possibly Downton Abbey reruns, the Trans-Pacific Partnership (TPP) took a big step forward in April 2013, when Canada assented to Japan’s participation in the partnership’s regional free-trade negotiations.  Begun in 2010, the American-led TPP now encompasses a dozen countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.  Even more noteworthy is that almost all aspects of international trade, except for labor mobility, are open to some measure of liberalization.  If successful, the TPP will rank among the world’s most comprehensive free-trade agreements.

Even so, most consider free-trade negotiations as dull at best, unless of course the outcomes of those negotiations directly impact their lives.  Then, such negotiations become vitally important, because they can result in terms that advantage certain industries over others by removing once-protective barriers to competition.  For example, should the TPP ultimately lower tariffs on motor vehicles and rice, American automobile unions and Japanese rice farmers may find their industries under increased pressure to improve efficiency and productivity.  Sometimes countries join a free-trade arrangement to improve their economic competitiveness.  At other times they do so because they feel forced to.  Japan’s interest in the TPP reveals elements of both.  Japan surely seeks higher economic growth; but it is also concerned that without freer trade its businesses would face even stiffer competition from other Asian countries, such as South Korea, that do have free-trade arrangements with its trading partners.

But free-trade arrangements have other, more political dimensions.  Beyond the direct economic benefits of more international trade, its advocates often cite those benefits as valuable to often (but not always) restrain political differences—eschewing conflict for material wellbeing.  Certainly that was a major rationale behind the formation of the European Common Market after World War II that eventually became the European Union.  An extension of such reasoning is that countries mutually benefiting from trade are more likely to develop similar outlooks and, thus, become potential allies.  During the Cold War, American influence on the Asia-Pacific periphery can be said to have been enhanced as a result of the redirection of the region’s trade away from the mainland behemoths of China and the Soviet Union, which had closed themselves off (fearing the corrupting influence of capitalism) and due to the generally open market (and willing consumers) of the United States.

But with the end of the Cold War and China’s rise, the region’s economic interests are reverting to their traditional patterns.  And in that light, one can see the TPP as in the American national interest to ensure America’s position and relevance in the Asia-Pacific region.  But the TPP is not the region’s only free-trade arrangement in play.  ASEAN began such efforts in the early 1990s with a free-trade agreement among its member countries.  And today, China, Japan, and South Korea are pursuing a separate a trilateral free-trade agreement.  Though not in direct competition with the TPP, such a trilateral arrangement would surely benefit China by opening two big markets to Chinese goods (and thereby reducing its dependence on the American and European markets) and tempering the impact of the TPP.  Japan and South Korea also hope to benefit from greater access to China’s market and to ease the competitive pressures from ASEAN-based companies operating under an ASEAN-China free-trade agreement signed in 2002.

Meanwhile, China has promoted trade talks through the Regional Comprehensive Economic Partnership (RCEP), which comprises ASEAN and the six countries that already have free-trade agreements with it, including Australia, China, India, Japan, New Zealand, and South Korea.  If concluded, the RCEP would embrace 3.4 billion people and a combined GDP of $21.4 trillion.  By comparison, the TTP’s twelve countries would encompass 790 million people and a combined GDP of $27.5 trillion.  That is why it was so important for the TPP to include Japan, with its 127 million people and the world’s third largest economy.

The TPP has proceeded at a fairly fast pace.  The twelve-country partnership has taken less than three years to reach its present point.  In contrast, the three-county North American Free Trade Agreement took eight years to bring to fruition.  Indeed, many issues can surface to delay negotiations, even non-economic ones.  The free-trade talks among China, Japan, and South Korea recently stalled when Chinese officials delayed the next round of negotiations, nominally citing scheduling conflicts, but more widely seen as a signal of Chinese displeasure over Japan’s handling of a territorial row between the two countries.

International trade and finance are in the process of rearranging themselves.  Early in April, China inked an agreement with Australia that allowed each other’s currencies to be directly converted, without the intermediate need for the U.S. dollar.  It marks the third such agreement for China and another step away from the U.S. dollar as the medium of international trade.  A decline in the international use of the U.S. dollar in trade should not be discounted, since the dollar’s universal usage not only makes it easier for American companies to compete overseas, but also indirectly lowers American interest rates and boosts American economic growth at home.  It is another facet in a wider trade competition among countries.  While the TPP may compel some segments of American industry to change after their tariff protections are lowered, in the longer run it will hopefully maintain not only America’s economic competitiveness, but also its security interests in the Asia-Pacific.