How Washington Will Lose Its Influence in Asia

A pro-Trump rally participant wears a U.S. flag during the Southern California Make America Great Again march in support of President Trump, the military and first responders at Bolsa Chica State Beach in Huntington Beach, California, U.S. March 25, 2017. REUTERS/Patrick T. Fallon

There is no guarantee that President Trump will ask Congress to renew the Trade Protection Authority Act before it expires.

If the United States will maintain its leadership in the APEC in pushing the Free Trade Area in the Asia Pacific, then the withdrawal from the TPP is a terrible policy mistake. One reason that Japan takes the lead to push the CPTPP is waiting for the Sleeping Beauty to wake up in the near future. That is why only about twenty clauses of the original text of the TPP are frozen, rather than being scrapped in the CPTPP.

Make It or Break It on the Renegotiations of NAFTA

There are several rounds of renegotiations of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. While it is too risky to predict its final outcome, there are several indications which will help us understand the situation. First of all, Canada has signed a “Comprehensive Economic and Trade Agreement (CETA) with European Union (EU) and negotiated with China for a similar FTA, though the deal didn’t work out during the visit to China by Prime Minister Justin Trudeau in November 2017. Canada took advantage of the United States leaving the TPP to change the terms of the bargain in the CPTPP; Canadian stand is understandable because she had come late to the TPP-12 negotiations in 2012 and had to accept the negotiating results up to that point, not all of them are in her favor; One thing that Canada wanted to change was the “cultural exemption,” which mainly means the requirement for Canadian content in the media.

But, model simulations from Canadian economist Dan Ciuriak and his associates show that not only Canada, but also three other Pacific States, i.e. Chile, Peru and Mexico will benefit more from the TPP without the United States than from the original TPP-12.

Economic interdependency between Canada and the United States may leave less leverage for the Trump administration to demand much more than what the original NAFTA has made. There are several items on the agenda of negotiations table such as a five-year termination, an opt-out investor-state dispute settlement (ISDS) system, the rule of origin on auto parts. Secretary Wilbur Ross showed the blue-red map of the electoral votes to President Trump that many of his die-hard constituents in the red dotted states were against the dismantling of the NAFTA.

Trade structure between Mexico and the United States is very different from that between China and the United States; while China’s exports to the United States are predominantly final consumption goods (though a great deal of U.S. imports from China such as iPhone have more U.S. content than Chinese), much of Mexican exports to the United States is mainly in intermediates with parts and components accounting the most. In other words, the negative impacts of U.S. imports from Mexico is much less than that from China. Therefore, relatively speaking, President Trump may be able to take a strong stand on China economically, but he has much less economic rationale to impose tariff on import from Mexico. More important, Mexico will have a national election on July 1, 2018. It is hard for any incumbent to make serious trade concession prior to election in any democratic countries.

Claude Barfield at the American Enterprise Institute predicted that the chances that the United States, Canada and Mexico will reach agreement for an update of NAFTA are no more than 50–50. U.S. Trade Representative Robert Lighthizer failed to reassure Democratic members of the Senate Finance Committee that he could prevent a NAFTA withdrawal in early December, 2017. Will President Trump be able to say “take it or leave it” to Canada and Mexico?

The sunset clause of the Trade Promotion Authority Act

Under the Trade Promotion Authority Act (TPA) signed by President Obama in June 2015, the Congress authorizes the U.S. president to engage in trade negotiation. With the due process of prior notice, consultation before and during the trade negotiation, the Congress can only have a straight up or down vote, without amendments. Without the TPA, the Congress could theoretically ratify any signed trade deal article by article. In fact, the procedure is so complicated that no trade deal can be ratified under such circumstance.

The TPA has a sunset clause which will phase out in three years after it went into effect on July 1, 2015. So, after July 1, 2018, the TPA will be phased out unless the president requests the Congress to extend/renew it and both House and Senate approve it.

Given the inconsistency of the incumbent administration in many of its trade policies, and the fact the TPA was a policy initiated by the previous administration, there is no guarantee that President Trump will ask Congress to renew the TPA before it expires.

Moreover, the TPA was persistently demanded by other TPP members to show U.S. commitment for the trade accord before they could agree to wrap up the final deal. When TPA was ratified in June 2015, three quarters of the “yes” votes were from the Republican Senators and Congressmen. The anti-trade rhetoric since the 2016 general elections has made it difficult even for those pro-trade members of the Congress to support any bills for trade agreements. Now that a Republican president is undertaking an inward looking America First trade policy, and the trade skeptics Democrats are aiming to retake the control of the House in November, 2018 elections, it is very risky to assume that the TPA will be automatically renewed next year.

The incumbent party usually won’t do too well in the mid-term elections in any countries, especially for the United States because all the 435 members of the Congress are subject to re-elections in November 2018. Testing voters’ appetite on any trade deal is not a wise political gambit for the Republican administration at all.

Who Will Write the Trade Rules?