During Donald Trump’s first 100 days as U.S. president, one of his first moves was to withdraw from what was poised to be a landmark trade deal with 11 other countries across the Pacific Rim. Now the president’s nominee to be U.S. Trade Representative, Robert Lighthizer, says the U.S. may not be pulling away from leadership in the region, suggesting that some of the promises of the Trans-Pacific Partnership (TPP) may still be realized. The first trade action taken by the Trump Administration was to withdraw American participation in the 12-nation Trans Pacific Partnership (TPP).
The President’s nominee to be the U.S. Trade Representative, Robert Lighthizer, in written answers to questions from Senate Finance Committee members, stated that the United States is not abdicating leadership in the region:”The Trump Administration intends to play a strong leadership role in the Asia Pacific, including through active negotiation of bilateral agreements and other initiatives,” Lighthizer wrote, answering questions from the Senate Finance Committee.
His remarks bring a sigh of relief for anyone who still believes in free trade, but the question is how is that best done?
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There were 12 countries that negotiated TPP, and six others expressed an interest in joining – Indonesia, Korea, Taiwan, Thailand, Malaysia, and Colombia. TPP was to have an open architecture, and still others might have eventually joined.
Pursuing bilateral agreements is a course that has distinct limits. One reason is that the ultimate objective of trade negotiations is to set the rules for world trade. Bilateral agreements are an extraordinarily inefficient way to do this. Each of America’s partners in a series of separate bilateral agreements will have at least some specific ideas on how to craft rules. Accumulating a stack of agreements with differing rules is very unlikely to achieve a coherent outcome for global trade.
Secondly, as a practical matter, getting any trade agreement approved by Congress is a heavy lift. It would be optimistic to think that it would be possible to get more than one agreement approved by Congress in each two-year session of Congress. This has in fact been the average – 15 free trade agreements over the last 32 years.
Third, negotiators need trade-offs that come from having more than one other country at the table. It is like a poker game. If there are only two players, the pot is not large enough. The game may not be worth it. Smaller, developing countries often have high tariff rates and trade-restrictive regulations. America has export interests with these countries, but has a low tariff rate. America by itself may not have enough to offer to attract these countries to the table.
Fourth, bilateral agreements need to avoid free riders, so they include a requirement that to qualify the benefits of the agreement, a product must originate in a signatory country, meaning it must have a minimum amount of content from the two parties to the agreement. This requires businesses to engage in substantial record keeping and customs officials to require proof that these “rules of origin” are lived up to.
The burden of paperwork will often outweigh the tariff saving from qualifying products for duty-free treatment under an agreement. But add a lot of paper work and the trade agreements simply get ignored. This is especially true for small and medium sized companies. With growing e-commerce over the web supported by express delivery, this is will be an increasing share of world trade.
To avoid these shortcoming, regional agreements are considered as the most practical path forward. That is, however, not an option if the President says it is not. Under the U.S. constitution, the President has the foreign affairs power and he is free to choose the way he wants to structure trade negotiations, unless Congress requires a broader approach, and it has not done so. So until the President decides otherwise, bilateral negotiations are going to be the primary tool of the new Administration. Faced with this reality, it is time to think creatively about how U.S. negotiators should proceed. This is especially urgent because there are a large number of international trade negotiations underway, none of which include the United States. These agreements have one common element — they will discriminate against American goods and possibly services. There is already one very large 16-country negotiation led by China with a target of wrapping up this fall.
Were it not for the Trump “bilateral agreements only” doctrine, the logical path forward would be for U.S. negotiators to take the parts of TPP that the Administration is willing to acknowledge are good, add some further provisions that it and the Congress want, and invite not only the original TPP parties back to the table and invite others that expressed an interest in joining TPP to come in as well. It would be a Trump Pacific Partnership (new TPP). While this might be an approach a majority in Congress and the private sector might support, it is distinctly not something the Administration appears to be willing to contemplate.
There is a logical alternative. Japan was a strong partner of the United States in crafting the rules contained in TPP. Japan Prime Minister Shinzo Abe’s government might be sounded out as to its willingness to enter into a bilateral agreement meeting the criteria stated above – a bilateral agreement with the best of TPP with suggested upgrades arrived at in consultation with the Congress and interested domestic parties. A U.S.-Japan bilateral could be designed as the core agreement that other nations would be invited to join. Any additional country wishing to join would have to agree to the core agreement plus, as warranted, agreeing to additional elements that might be required in individual cases. These could be separate bilateral agreements. In approving the core agreement, Congress could stipulate conditions for additional countries seeking to join the deal, so as to make a series of accessions more feasible.
Japan and the United States account for 20% of the world economy. If the renegotiation of NAFTA is undertaken with the idea of joining it to a U.S.-Japan bilateral agreement, this would bring in another 3.5% of global production. Australia and New Zealand would bring the total up to a quarter of the world economy. Other countries would no doubt come along. Not a bad start toward creating better rules and better than any China-led alternative.
One thing is for sure: If America stands on the sidelines, it is going to see its trade interests seriously damaged. America needs to have a positive negotiating agenda. It also needs to get its lead trade negotiators in place. The Congress needs to act as soon as possible to confirm Robert Lighthizer as U.S. Trade Representative, the nation’s chief negotiator under law. In addition, the key subcabinet positions in his agency as well as at Commerce, State, Agriculture, and Treasury need to be filled.
Alan Wolff is a senior counsel with Dentons. He is chairman of the National Foreign Trade Council and served as a senior trade negotiator in prior Republican and Democratic administrations.