November 12, 2017 3:54 am JST

TPP nations reignite multilateral trade hopes as Trump looks on

11-nation agreement could have knock-on effects on future trade deals

SHOTARO TANI, Nikkei staff writer

Japan's Economy Minister Toshimitsu Motegi, right, and Vietnam's Industry and Trade Minister Tran Tuan Anh shake hands at a press conference announcing an agreement in principle for the Trans-Pacific Partnership trade deal in Danang, Vietnam on Nov. 11. © Reuters

DANANG, Vietnam -- Japan's Economy Minister Toshimitsu Motegi echoed the firm intention among the Trans-Pacific Partnership nations to reignite the flame of multilateral trade at a press conference on Nov. 11.

"During the four months of [TPP 11] negotiations, we saw many times the member states clashing over details," he said, after ministers from the 11 participating countries finally reached an agreement in principle on a renegotiated version of the trade pact. "[But] we all shared the determination of establishing a free and fair, 21st century-rule in Asia-Pacific, the center of global growth, and that is why we have been able to reach an agreement."

The accord, reached on the sidelines of the Asia-Pacific Economic Cooperation meeting in Danang, is a major achievement by the so-called "TPP 11". The group worked hard to salvage the TPP after President Donald Trump pulled the U.S. out of the agreement at the start of this year. More significant though, is the fact that the TPP 11 agreed on a new multilateral deal right in front of Trump's eyes. Their decision could very well shape the tone of future global trade negotiations.

Trump's message in Vietnam was clear, making his preference for bilateral trade deals known in his usual straight-talking style. "I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and that will abide by the principles of free and reciprocal trade," he said in his speech at the APEC CEO Summit on Nov. 10. "What we will no longer do is enter into large agreements that tie our hands, surrender our sovereignty, and make meaningful enforcements practically impossible."

Trump regarded the TPP as just such an agreement, and Washington's exit from the pact in January left some of the remaining nations questioning the point of pushing on with negotiations without the U.S. on board. But determination among the member states to establish TPP as a high-standard "trade deal for the 21st century" won out. The new agreement in principle was reached in just four months, an unusually short time for trade negotiations.

Only 20 provisions from the initial 8,000-page TPP were suspended as part of the new agreement. Many of the key elements of the original pact were left untouched, including allowing the free flow of data used in e-commerce transactions and agreements on eliminating tariffs.

"The results reached at Danang will facilitate trade development and promote more effective economic integration," Vietnamese Industry and Trade Minister Tran Tuan Anh said at the Nov. 11 press conference. "All members reached [agreement] on a number of important basic matters such as maintaining a high quality TPP, which meet the benefits and interest of all members".

The member states will look to sign the deal in 2018.

Knock-on effect

The potential economic impact of the new deal is admittedly much smaller without the U.S. - the TPP 11 account for only 13.5% of the world's gross domestic product and 15.2% of global trade volumes, compared to 38.2% and 26.5% with the U.S. on board. But regional firms are welcoming the deal.

"The TPP... is expected to connect Vietnam's textile companies to larger markets," Vu Duc Giang, chairman of Viet Tien Garment and the Vietnam Textile & Apparel Association, said. "[The trade deal] is going to create a more diversified market for many other industries... This is one of the good signs for garment exporters and producers."

Frederick Burke, managing partner at the law firm Baker & McKenzie Vietnam, shares this optimism. "The impact [of the new TPP] will still likely be substantial and that is why businesses in the region who are not from the TPP 11 countries also support it," he said. "A rising tide lifts all boats, and the growth will create opportunities for other trading partners as the TPP 11 economies grow."

The deal also has implications beyond short and long term economic impacts. First and foremost, it breathes new life into multilateral trade negotiations just when the impetus seemed to have been lost after Washington's about turn on TPP. Japan and the Southeast Asian nations were also wary of trade negotiations in Asia becoming a tool in the regional power struggle between the U.S. and China. The new TPP agreement, which does not involve either China or the U.S, gives them a stronger hand in future trade negotiations with the two economic giants.

Added to that, "the agreement on the TPP could have the effect of prompting other trade negotiations to use the deal as a benchmark [for setting rules]," said Keisuke Kobayashi, deputy director of JETRO's Asia and Oceania division.

The first prospective trade negotiation where such a knock-on effect may be evident is the Regional Comprehensive Economic Partnership. The 16 participating nations expect to hold their 21st group discussion on the sidelines of the Association of Southeast Asian Nations meetings in Manila.

The key differences between the TPP and RCEP trade pacts is their scope and their standards. Burke of Baker & McKenzie said that the new TPP -- which the members now call the Comprehensive and Progressive Agreement for Trans-Pacific Partnership -- is still a "progressive agreement reflecting the state of the art in international trade and investment". RCEP on the other hand is a more "traditional" trade agreement, he said.

Countries like Japan and Australia are calling for RCEP to adopt a more progressive stance akin to the TPP in areas like environmental protection. Their hope is that the new agreement on TPP puts pressure on the more reluctant RCEP members.

TPP hurdles ahead

China, a key member of RCEP and now seemingly an advocate of free trade, seems superficially keen on a TPP-like standard. "Openness brings progress while self-seclusion leaves one behind. We, the Asia-Pacific economies, know this too well from our own development experience," said Chinese President Xi Jinping immediately after Trump made his speech. "We should support the multilateral trade in the region...The building of a free trade area of Asia-Pacific is a long-cherished dream of the business community in the region."

But RCEP "is more about China increasing its influence over the rest of Asia" than bringing economic benefits to the region, according to Gareth Leather, senior Asia economist at Capital Economics. As China has already lowered its tariffs on imports from most Asian countries, there is little incentive for the world's second largest economy to open up even further on non-tariff measures.

"We agree to free trade, but it must bring benefits to everyone. RCEP is definitely one way [of doing that]," Sun Xiao, director general of cooperation and development department at the China Chamber of International Commerce, the country's quasi-government organization, said on Nov. 9.

There are also potential hiccups for the CPTPP, which still needs to be ratified domestically by the various member states. Any domestic backlash could again weaken the impetus for multilateral trade. Countries like Canada still have reservations about the agreement in principle that the TPP 11 ministers reached. "There has been a lot of progress made," said Canadian Prime Minister Justin Trudeau in the press conference on Nov. 11, "but there is more work to do."

The strength of the multilateral trade framework will also be put to the test once Trump begins his bilateral negotiations with the Asia-Pacific nations. Pressure will also come from traditional trade deals like RCEP, whose membership shares some overlap with that of the CPTPP. The Asia-Pacific nations may have succeeded in reigniting the multilateral framework flame, but the fight to keep it burning has only just started.

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