Talking Trade blog
TPP: Plan B if the United States can’t get the agreement ratified
Published 10 August 2016
So what happens if the Trans-Pacific Partnership (TPP) trade agreement is not approved by the United States Congress?
In short, the TPP as it currently stands dies.
The damage to US interests is much greater than simply the loss of years of work putting together a complex agreement with a network of committed partners spanning the Pacific. The United States will lose credibility and forfeit global leadership in designing future trade and economic arrangements.
The economic impact is compounded by geopolitics, a dimension of the TPP that led US Defense Secretary Ash Carter to say TPP was more important to him than another aircraft carrier. Even when solely looking at the economic dimension the damage to the United States is substantial and irrevocable; to look at the geostrategic dimensions would be simply to strengthen the imperative for the United States of passing TPP.
American companies will be at a competitive disadvantage since they will not get preferential access to major markets. The consequences of failure are stark, important and long-lasting.
Start with the collapse of the TPP agreement. This trade agreement contains twelve partners: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The negotiations were concluded in late 2015 and signed by trade ministers on February 5, 2016.
The agreement has now entered the ratification stage. Each member state has to complete whatever domestic procedures are necessary to bring domestic laws, regulations and processes into alignment with TPP commitments so the agreement can smoothly enter into force. Most of the pledges in this sprawling, comprehensive agreement start on the very first day.
The TPP text (Chapter 30.5) provides rules for how the agreement can take effect. The most straightforward process is for all 12 members to complete their domestic procedures within two years. If so, the TPP will automatically come into force for all members on April 5, 2018.
If, however, not all 12 countries are finished so quickly, the agreement requires that the United States and Japan plus at least four other countries are ready before the deal can begin.
Hence, the TPP requires that the Americans be included—one way or the other—before the agreement can enter into force.
If Congress does not vote in favor of the implementing legislation needed to enact the TPP at the domestic level, the TPP cannot go forward even if all other 11 countries are ready and willing to start.
There are many ironies attached to a possible non-endorsement of the TPP by the United States. But surely chief among them is the fact that the TPP itself is so heavily weighted towards American interests.
The entire document—from the very first page to the very last page—was largely drafted by the US team. Nearly every commitment was driven by American imperatives to get final approval from Congress. Every other TPP member had to repeatedly step across their own “red lines” to do things that could be extremely difficult or politically unpopular to get the TPP finished.
The United States, quite frankly, had to make far fewer sacrifices than the rest.
Yet, in spite of a final document that is so clearly dominated by American demands, Congress stands poised to reject the final package.
What happens next? The remaining TPP members will not just pass a version of the existing deal. It was too heavily driven by US interests and, absent the pressure from the US and the promise of the American market, makes little sense for the rest to push through those unpopular reforms.
Failure to pass an agreement so very clearly in US interests will do considerable damage to American credibility.
Singapore’s Prime Minister, Lee Hsien Loong, in America last week spoke candidly about the TPP: "For America's friends and partners, ratifying the TPP is a litmus test of credibility and seriousness of purpose. We need to know that agreements will be upheld and that Asia can depend on America. Your ratification of TPP will therefore be a clear statement of your commitment and confidence in our region.”
Not approving the TPP (or sticking the deal in the freezer for years) will seriously damage the US’s ability to do deals with the current partners like Japan, Australia, and Vietnam who have taken on often considerable domestic political heat over the nearly five years of negotiations from their own constituents over this agreement.
The Abe government in Japan, for instance, has staked a great deal on the TPP, including creating an entirely new ministerial position outside of all existing bureaucratic organizations to get this trade agreement done. The government has taken on strongly entrenched domestic interest groups and pushed hard for painful domestic level reforms in areas like agriculture.
After more than 30 years of frequently contested bilateral negotiations in areas like autos or opening services markets, the United States had finally gotten results through the TPP in many key areas.
These gains will all disappear if the TPP fails. And Japan will not try again with the Americans for likely at least a generation.
The damage will not stop with current TPP parties. Anyone else foolish enough to consider engaging with the United States in trade talks will think very long and hard about starting talks. After all, they’ve seen how years of hard work to get an agreement skewed towards the United States can still be scuppered by the US itself.
Political leaders won’t risk it; and even if they wanted to, whether they could justify the resources required to negotiate a deal when the outcome might go the way of the TPP is another question entirely.
The failure of the TPP on top of past problems with US bilateral deals (like long delays in ratification with Colombia and Panama and even renegotiation of a completed agreement with South Korea) will likely wreck chances of new, meaningful agreements with trade partners.
Dented American credibility is also going to be a problem in multilateral settings. While the United States has been engaged in TPP, it has not been especially enthusiastic about pushing an agenda forward at the World Trade Organization (WTO). If the TPP now goes down in flames, returning to the WTO will also be problematic.
If the US is not leading on trade, who will do so? Nature abhors a vacuum. Two obvious candidates are the Chinese, who have hitherto been relatively quiet on the trade front, and the European Union (EU).
A discredited United States, however, shifts things up on the regional and global stage. Suddenly, China has renewed incentives to promote trade activities, especially in Asia, and even in the WTO. The European Union has been busy working on a series of trade agreements in Asia as well. It has concluded deals with Singapore and Vietnam and is pushing on with Indonesia and India.
Both China and the EU use trade templates that do not match American models. Neither provides the kind of preferences to American companies, of course, that US trade agreements like the TPP would have granted.
As a result, American companies are increasingly likely to find themselves shut out of out many benefits across Asia and possibly beyond. Tariff levels, which are higher in foreign markets than in the United States, will not fall for American companies trying to export goods. Services markets will not be opened. Investments will not be opened or protected to the same extent that other FTA partners and competitor firms receive in key markets in the region.
The kinds of standards for food and food safety, labeling, protection and enforcement of intellectual property rights may be quite different (or even nonexistent) in these other types of trade agreements.
American companies have become quite used to setting the de-facto standards for many types of products. These benign conditions cannot be taken for granted.
What is ultimately at stake in ratifying TPP is not just the benefits of TPP itself, but also the United States’ ability to trade and to remain competitive globally. Having invested across decades in building tall and sturdy ladders to cross into foreign markets, the United States now stands at the very top of the biggest one yet crafted and ponders leaping off backwards instead.
Let us hope that more rational heads prevail. Plan B in the event of TPP failure for the United States is not a pleasant option.
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