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US withdrawal from Trans-Pacific Partnership

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Following widespread criticism of the Trans-Pacific Partnership (TPP) during the US Primary and Presidential election campaigns, it was perhaps no surprise that one of Donald Trump’s first steps as President was to take executive action to withdraw the US from the trade deal. TPP was seen by many as one of the most significant and ambitious free-trade agreements in history. However, it was widely criticised across the US political spectrum, with some of the critics saying that it favoured large corporations at the expense of American jobs and the environment.

The US’ withdrawal on 23 January 2017 does not only impact the US, it also has the effect of terminating the agreement in its current form for the other 11 participating countries.

What is TPP?

TPP is a comprehensive free-trade agreement entered into between 12 countries1 , representing together approximately 40% of the world’s economy and 800 million people.

Following seven years of negotiations, TPP was finally agreed in February 2016, and was widely expected to increase exports and trade between participating countries by removing tariff and non-tariff barriers, making those markets more accessible on a reciprocal basis. For some, TPP represented a watershed moment for trade liberalisation across the Asia region and would have covered a significant proportion of the goods and services traded between member countries. The result would have been to immediately remove trade tariffs on the majority of US-manufactured goods and agricultural products.

The final terms of TPP included broad provisions relating to environmental standards, labour standards, workers’ rights, the influence of state-owned enterprises, trade disputes, e-commerce policies, intellectual property protection and anti-corruption measures. In this respect, TPP was seen as a particularly significant achievement given the conflicting legal, regulatory and policy positions between the participating countries in these areas.

For TPP to come into force, at least six signatories with 85% of the total combined GDP of the member countries would have to ratify it. To date, only Japan has ratified the agreement. As the US alone represents over 60% of the combined GDP, it is not possible for the agreement to be implemented in its current form now that the US has withdrawn. President Trump’s executive action therefore not only confirms the US’ withdrawal from TPP, it also has the effect of rendering the agreement void in its current form for all other participating countries.

What does this mean for trade?

TPP was at the heart of President Obama’s “pivot to Asia” during his time in office, a strategy seen by many as aimed at restricting China’s growing economic and political influence in Asia. The US’ withdrawal is therefore good news for China as the focus is now expected to turn to the Regional Comprehensive Economic Partnership (RCEP)2 , a trade pact proposed by China that would create one of the world’s largest free-trade areas across South and East Asia.

President Xi Jinping’s speech at the Davos Economic Forum on 17 January 2017 suggests China might be ready to take the lead in global free trade. Together with “One Belt, One Road” – a Chinese initiative to improve the PRC’s cooperation and connectivity with economies in Asia, Eastern Europe, the Middle East and East Africa - RCEP might give China a real chance to do so.

In respect of the US, the extent to which it will seek alternative bilateral trade agreements with Asian economies is currently unclear. As the new US administration develops its economic policy, we should get a clearer picture as to whether protectionism will trump trade liberalisation.

[1]  In addition to the US the other signatories are: Australia, Brunei, Canada, Chile, Japan, New Zealand, Malaysia, Mexico, Peru, Singapore and Vietnam.

[1]  The proposed members of RCEP would be, in addition to China: Australia, Brunei, Cambodia, India, Indonesia, Japan, Laos, Malaysia, Myanmar (Burma), New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam (making up approximately 46% of the global population and 24% of global GDP).