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.

As Douglas Irwin said, if “truth” is the first to be sacrificed in the war, then “free trade” will be the scapegoat in the populist electoral politics. The most recent examples are the Brexit and the U.S. withdrawal from the Trans Pacific Partnership (TPP-12). While the British government is facing contentious negotiations with the EU, the United States under President Trump’s “America First” trade policy will be less supportive of outward-looking policy and more assertive on U.S. national interest.

Trade deficit in any country is fundamentally a sectoral imbalance in the macroeconomy between domestic saving and investment—as well as that between tax revenue and government spending. U.S. Commerce Department data shows that the percentage of manufactures in total GDP after the financial crisis of 2008 is rather flat around 12 percent with minor fluctuations within one percentage point between 2008 and 2015 periods. The estimated millions of manufacturing jobs lost since then are due to automation of production process. Hence, it is “technology” and not “trade” that caused the loss of manufacturing jobs for American people.

Bilateral vs Multilateral Trade Accords

President Trump prefers “bilateral” to “multilateral” trade deals. Other than domestic political consideration of fulfilling his campaign rhetoric, the probable rationale is the asymmetrical power between the United States and most of its trading partners; bilateral trade agreements would allow the dominant country, such as the United States, which has bargaining chips to bring its power advantages, to secure a trade deal that is more aligned to its own interests rather than those of the relatively weaker partner country.

Deepening bilateralism, if fully implemented, can plausibly lead to a hub-and-spoke relation centered on the dominant “hub” power. Moreover, it could generate a domino effect on other nonmember states to join the bandwagon of multiple free-trade agreements (FTAs) to avoid being an outlier. The other aspect of bilateral trade deal is the competitive liberalization among those trading partners who wish to benefit from preferential trade agreement from the “hub.”

To what extent would multiple bilateral trade deals affect the landscape of the trade regime in the Asia-Pacific region? In general, the broader the framework within which trade can take place, the greater will be the scope for division of labor and the higher the gains from international trade. But bilateral trade deals can’t grapple all the gains from a multilateral trade agreement, and they will unhelpfully cut across global and regional supply chains.

From geoeconomic perspective, the America First policy is blinded by the U.S. role in the Asia-Pacific region and global-trade system, not to mention that the geostrategic role that the United States has had in the region as a Pacific power under which much of the regional peace and stability relies. As Johnathan Stromseth and Ryan Hass have argued that “without an affirmative economic agenda for the region that takes into account the integrated nature of Asian supply chains, Washington will lose influence in Asia, no matter how many U.S. aircraft carriers operate in the region.” Though Japan will take the lead to push the TPP without the United States, the Comprehensive and Progressive Trans Pacific Partnership (CPTTP) agreement, the Asian drama is now just like “Hamlet without the Prince.”

As the largest center of production networks in the global economy, East Asia has much at stake in the push back by the United States against an open, global rules-based trading system underneath the current trading framework. No doubt that many Asian countries are very nervous about the trade policy undertaken by the Trump administration amid the parallel development from China’s “One Belt, One Road” initiative and its establishment of Asian Infrastructure Development Bank.

Four Pillars for the America First Policy

Under the America First trade policy, the United States Trade Representative lists four major components for the U.S. trade policy initiatives:

1. Defending National Sovereignty over Trade Policy

2. Strictly Enforcing U.S. Trade Laws

3. Using Leverage to Open Foreign Markets

4. Negotiating New and Better Trade Deals

These four pillars, if fully executed, could generate, at least two major legacies on the trading framework; the first one is the different “rules of origin” under various trade accords, and even different rules in different sectors within the same trade pact. That is the “spaghetti bowel” phenomenon which led to the low utilization rate of FTAs; a survey from Asian Development Bank showed that the utilization of FTA among the signatory in Asian countries such as Korea and Singapore is less than 25 percent because the administration cost of complying with the different “rules of origin” specified by the trade accord is higher than the marginal benefits of the FTAs signed.

The second is that multiple bilateral trade accords are no substitute for multilateral ones for regional economic integration. This is one reason why the original TPP-12 is intended to be the most comprehensive and integrated trade accord to link Asia and the Pacific states with those on the other side of the Pacific Ocean. Similar rationale is for the five ASEAN + 1 FTAs (ASEAN + Australia and New Zealand, China, India, Korea and Japan) to merge into a unified trade accord as the Regional Comprehensive Economic Partnership (RCEP).

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?

If the Trump administration does not get the fast track authority act renewed and lets it slip away, then there is the possibility that none of the bilateral trade pacts will be negotiated. Many trade dependent countries in Asia Pacific-most of them are U.S. long-term allies, which have long aspired to sign the bilateral trade pact with the United States may lose their confidence in the U.S. leadership in the region. They may seek alternative paths in pursuing their trade and development.

There are two likely emerging trade blocs in the Asia-Pacific region in the near future; The “Hamlet without the prince” (CPTPP) is still the second best trade accord for many signatory as well for those countries which wish to join. After freezing the twenty clause of the original TPP which are mostly demanded by the United States on the intellectual property rights, investor-state dispute settlement (ISDS) mechanism, the CPTPP still is the highest quality trade accord ever. The China-led Regional Comprehensive Economic Partnership (RCEP) is more on liberalization on commodity trade, much less on the service trade, labor and environmental standard, which are WTO-extra. From the perspectives of developing countries, they may be better off by joining RCEP than the CPTPP.

As Christopher Dent at the University of Leeds has noted: if both CPTPP and RCEP are inked in the near future, then both trade blocs could be either Coca-Cola vs Pepsi if they are similar (a more or less even split of agreement utilization and influence between them prevails), or Microsoft vs Apple if they are different (depending on which agreement sets the “network standard” of trade/commerce rules and economic diplomacy in the Asia-Pacific). Given that there are seven overlapping member states in both trade blocs—Japan, Australia, Brunei, Malaysia, Singapore, Vietnam and New Zealand—there could be two different layers of trade liberalization in the Asia Pacific region in the near future. Which trade bloc will lead to the Free Trade Area of the Asia Pacific aspired by the APEC? It all depends on whether Japan or China takes the lead with a declining role of the United States to write the rules of trade regime in the region, and whether CPTPP or RCEP will expand their memberships for those outliers. Under such circumstances, no one will know for sure where the America First policy will stand.

Peter C.Y. Chow is professor of Economics at City University of New York. He would like to acknowledge constructive comments from Dan Ciuriak and Christopher Dent on an earlier version of this article.

Image: 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