As Washington DC is consumed by debates over our economic relationship with China, it is worth pausing to recognize that the Trans-Pacific Partnership (TPP), which the Obama Administration was in the process of finalizing at the end of 2016, provided an excellent toolkit for addressing some of the most vexing trade-related problems the United States faces today in dealing with Beijing. TPP on its own may not have left the United States in a very different material position with regards to trade with China as COVID-19 hit. But it would have provided the President with much more leverage than he possesses today.
Consider the ambition of the intended agreement, as well as the geopolitical heft that it would have carried, had the United States been a part of it. TPP was supposed to bring together 12 economies accounting for 13.4 percent of global gross domestic product ($13.5 trillion): besides the United States, Japan, Australia, New Zealand, Vietnam, Singapore, Malaysia, Brunei, Canada, Mexico, Chile. and Peru were putative signatories. The agreement would have significantly expanded market access for U.S. exporters, creating the world’s third-largest free trade area after NAFTA and the European Single Market. It would have sent a strong message of U.S. commitment to mutually beneficial economic relationships to the fastest growing economic area in the world. But perhaps most importantly, it would have communicated to China that its increasingly sharp-elbowed rise would be strongly checked in its own back yard.
Critically, from a strategic perspective, TPP would have added strict rules for state-owned enterprises (SOEs)—a first in any trade agreement. The rules prohibited government subsidies to SOE’s in many cases. They required disclosure of all SOE’s on a public website and of SOE annual revenues, percentage of government ownership, and names of government officials in SOE management. (Without such facts, companies damaged by unfair SOE competition cannot mount a challenge against the offending firm.) TPP also required SOEs to make commercial sales and purchases on the basis of lowest price and regardless of the nationality of bidders. To understand what’s at stake, remember that China’s SOEs now comprise more than one-third of the world’s 50 largest firms.
It is precisely such restraints on state capitalism that the Trump Administration, with support from Congress and the business community, sought for “Phase One” of the U.S.-China trade deal. Indeed, Trump’s trade negotiators thought highly enough of TPP’s SOE disciplines that they bargained for and won their entire inclusion in the revised NAFTA deal (”USMCA”). (The new NAFTA also includes word-for-word TPP provisions on labor, the environment, small and medium-sized businesses, and exchange rates.) China, of course, declined to be cooperative on the question of SOEs. Beijing, however, hates to be isolated, so the adoption of TPP’s SOE rules by large economies in China’s neighborhood would have plausibly led to at least a closer consideration of the proposal.
After Trump’s abrupt withdrawal from TPP three days after his inauguration, the eleven remaining countries concluded an agreement without the United States. This re-named Comprehensive and Progressive TPP retained most of the same provisions and gave Japan, Australia, and other strong regional competitors precisely the same market access the U.S. had bargained for but had left at the table, leaving American companies out in the cold. The consequences were not trivial. The U.S. wheat industry trade foresaw major losses to its 53 percent market share in Japan. The U.S. beef industry expected significant market share declines in Japan, its largest export market, since Japan’s tariff on beef from Australia would be reduced by 27.5 percent.
Trump himself had second thoughts about TPP: one year after ordering U.S. withdrawal, in a January 2018 interview he announced interest in rejoining the TPP if it were a “substantially better deal” for the United States. In April 2018, after the 11 members signed up, he told the White House National Economic Council Director and the U.S. Trade Representative to look into joining the new deal.
So while it is impossible to guess how the 2020 elections will play out, in view of potential gains from TPP, one can be cautiously hopeful about the possibility for a close review of an American return to TPP. A Biden Administration, while paying due attention to ongoing concerns in industrial states, may explore such a strategy. But even should Trump be re-elected a deal could be conceivable. Trump’s own realization that the TPP could both provide tangible benefits to key American businesses, as well as the growing imperative of finding new levers for pressuring Beijing, could provide the necessary impetus.