President Donald Trump’s protectionist leanings led to the US pulling out of the Trans-Pacific Partnership, forcing the remaining 11 members of the unfulfilled pact to forge ahead with a new agreement, the Comprehensive and Progressive Trans-Pacific Partnership. With multilateralism under threat globally, many are looking to the newly minted CPTPP to help champion an open, liberal, rules-based trading system.
With Donald Trump as President-Elect having promised to pull the US out of the Trans-Pacific Partnership (TPP) on taking office, the writing was on the wall for what at the time had the potential to become the biggest regional free trade pact in history, one that would have accounted for nearly 40% of the global economy.
The 12-nation trade deal, the TPP, was the centrepiece of former President Barack Obama’s strategic pivot to Asia policy but Trump, after signing an executive order pulling out of the deal soon after taking office in January 2017, made clear his view that the pact posed a big threat to US jobs: “It’s a great thing for the American worker what we just did.”
And it wasn’t just Trump that had deep misgivings about the TPP – unions in the US as well Hillary Clinton and Bernie Sanders, the two Democrats who lost to Trump in the race to the White House, were also set against it. Like Trump, they too feared the deal would accelerate US decline in manufacturing, lead to lower wages and increase inequality.
Despite the clear heads-up Trump had given, and equally clear evidence of wider anti-TPP sentiment in the US, the reality of being dumped by the stroke of Trump’s pen was still a massive body blow for the other 11 TPP partners, comprising Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Japan’s Prime Minister Shinzō Abe, for instance, had already warned that a TPP without the US – and its market of 250m consumers – would be “meaningless“.
The TPP-11, however, have picked themselves up and dusted themselves down, forging ahead without the US. The US-light bloc, now snappily called the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), officially came into being in December 2018. Soon after, the revised agreement was implemented by six of the TPP-11: Canada, Australia, Mexico, New Zealand, Japan and Singapore. In January, Vietnam also formally implemented the deal.
Also in January, the CPTPP members held their first ministerial-level talks in Tokyo and promptly opened the doors for wider membership: “There is a temptation toward protectionism, but we must not rewind the clock,“Shinzō Abe said. “For all countries that resonate with our philosophy and are ready to accept the TPP-11’s high standards, the door is open. I expect participation from many countries seeking free and fair trade.“Countries and regions ranging from Thailand and Taiwan to Colombia and the Brexit-challenged UK have already expressed interest in joining the CPTPP.
Counting the cost of US blowout
While the CPTPP has some way to go before it can match the potential of the original TPP – it will account for 13.4% or US$10.2trn of the world’s GDP versus the original TPP’s combined 36% or US$29trn – it still amounts to a huge new trading bloc covering 500m people, one that will ultimately see the removal of 95% of the pre-agreement tariffs on trade between participating countries. The first six nations to ratify the agreement alone represent 90% of the group’s total output and 322m people.
The CPTPP agreement itself is largely the same as for the TPP with the exception of some provisions relating to intellectual property and investor-state dispute settlement, which were previously important demands for US participation in the TPP.
One widely cited analysis of CPTPP by the Peterson Institute for International Economics (PIIE) indicates that every current member of the CPTPP deal will be a net beneficiary in economic terms. Once fully ratified and implemented, PIIE estimates CPTPP could boost trade for members by around 6%, adding 1% cent to their real incomes by 2030.
At the same time, in terms of trade metrics at least, the US looks to the biggest loser, with PIIE estimating that its real income under the original TPP would have increased by US$131bn annually, or 0.5% of GDP. Furthermore, under the new CPTPP deal, the US not only forgoes these gains but also loses an additional US$2bn in income because US firms will be disadvantaged in the TPP markets.
With the Asia region responsible for the bulk of its profits, HSBC has kept a close eye on TPP and its morphing to CPTPP. Douglas Lippoldt, Chief Trade Economist, HSBC, says CPTPP is “a big deal” even without the US, not only due to its scale but also its open architecture, one designed to accommodate additional members, periodic reviews and updates.
He adds: “The CPTPP’s 30 chapters deliver deep liberalisation in goods, services and trade-related investment. Services are liberalised and investors assured national and most-favoured nation treatment. This leading-edge agreement addresses 21st century challenges in areas such as e-commerce, telecommunication and data issues, including privacy and free flow of data. It also tackles social concerns including the environment, labour, inclusive trade and unfair competition.”
Lippoldt says developing countries such as Vietnam, Peru and Malaysia stand to gain most from the pact in terms of growth, with exports increasing by more than 8.5%, while developed members such as Canada, Australia and New Zealand are likely to see exports rise by between 4% and 5.8%. Developing countries can also look forward to the greatest proportional real-income gains.
He believes the improved competitiveness from increased market openness under the CPTPP framework may also help the members to benefit more fully from engagement in other trade initiatives in the region, such as China’s Belt & Road Initiative or the Regional Comprehensive Economic Partnership under negotiation between ASEAN and six of its free-trade agreement partners.
Indeed, at the regional level, Asia Pacific seems especially intent on keeping the free trade banner flying high, with several other free trade agreements concluded or under negotiation including the Indonesia-Australia Comprehensive Economic Partnership Agreement; the Australia-Hong Kong Free Trade Agreement; and the China-Japan-Korea Free Trade Agreement. And earlier this year both Japan and Singapore signed bilateral deals with the European Union, the largest trade bloc in the world. Vietnam, Australia, Indonesia and New Zealand are all also looking to strike a deal with the EU on bilateral basis.
Lippoldt says that, as it stands, it is not only the US that stands to face net losses, albeit modest ones, by not p\articipating in CPTPP. Non-members like China, Korea, Taiwan and Thailand also stand exposed to losses, as some trade is diverted to bloc members. Still, there is the real possibility that at some point in the future some of these countries, including China and Thailand, will reconsider membership. Recently there have even been noises from Washington that President Trump would reconsider joining if there was a better deal to be had.
He says: “In the face of rising protectionist sentiment, CPTPP sends a positive signal in favour of market openness and trade liberalisation. The economic rewards reaped by its members may yet entice other countries in the neighbourhood to join rather than face losses by staying out.”