Submission to the USTR in Support of a Trans-Pacific Partnership Agreement
by C. Fred Bergsten, Peterson Institute for International Economics
and Jeffrey J. Schott, Peterson Institute for International Economics
Paper submitted to the United States Trade Representative on the Trans-Pacific Partnership Agreement
January 25, 2010
© Peterson Institute for International Economics
We strongly support the US government decision to participate in negotiations for a Trans-Pacific Partnership (TPP). Deepening US engagement with countries in the Asia-Pacific region is crucial for the advancement of both US economic and foreign policy interests, and the TPP is the best way to pursue both goals. The US objective should be to reach agreement on a TPP including at least a dozen Asia Pacific countries, including Japan and Korea and at least one major ASEAN country as well as the eight that are currently committed to the initiative, by the time of the APEC Summit to be hosted by the United States in President Obama's home town of Honolulu in late 2011.
In this brief submission, we summarize why the TPP is important for the United States, assess the key US objectives in advancing the TPP talks, and address the major challenges for US policy. We conclude with recommendations regarding the participation in and substantive coverage of the prospective pact.
Why the TPP Is Important
A Trans-Pacific Partnership (TPP) agreement would provide the United States with two main advantages. First, it would increase and enhance US economic engagement in the Asia-Pacific region and, especially, offset discrimination against US exports generated by intra-Asia trade pacts that have proliferated since 2000—with more under negotiation or subject to preparatory studies. Asian regionalism has been driven by several factors:
China propelled the advance of Asian regionalism, starting with its overtures to the Association of South East Asian Nations (ASEAN) on the late 1990s. Japan and Korea emulated the Chinese initiative, leading to the existing array of agreements between the 10-member ASEAN and China, Japan, and Korea (the "10 + 1" pacts), and to expectations that the three major Northeast Asian economies tied to ASEAN would in turn link up with each other in a "10 + 3" accord uniting the northeast and southeast Asian countries into a large Asian trading bloc.
Simply put, key Asian countries have prioritized economic integration within East Asia rather than within the World Trade Organization (WTO) or the Asia-Pacific Economic Cooperation (APEC) forum. Within the next few years, it is likely that the East Asian countries will deepen their economic ties and conclude both a regional trade agreement and a monetary agreement. In addition, Japan has initiated the East Asian Summits, and a new East Asian architecture is in the process of formulation. These countries are well on the way toward creating an Asian bloc, a development that could "draw a line down the Pacific" by discriminating against US exporters and investors and by excluding the United States from important regional economic and security forums.
Such an outcome would have highly adverse effects on the US economy and on US employment. Our rough estimates suggest that an East Asia Free Trade Area could cost the United States at least $25 billion of annual exports immediately, which translates into about 200,000 high-paying jobs. Over time, the discriminatory impact would become much greater as US-based international companies were forced to source more and more of their sales into the rapidly growing Asian markets from their subsidiaries in Asia itself.
Second, a TPP would accomplish important security objectives. Since the beginning of APEC in 1989, many Asian countries have strongly advocated US involvement in the organization in order to ensure continued US economic and military engagement in the region as a balance against Chinese hegemony. Former Prime Minister Lee Kuan Yew of Singapore, on a visit to Washington in late 2009, warned of the risk of increasing Chinese dominance over its Asian neighbors—and decreasing US relevance—should the United States fail to engage economically and politically in the region. Japan, Korea, and the ASEAN countries all seek to maintain active US engagement as a "hedging strategy" against the rise of China. Economic tensions between the United States and China, and the increased risks of Asia-Pacific disintegration due to the advent of Asia-only economic arrangements, underline the need for effective transpacific linkages and institutional ties for security as well as economic reasons.
The TPP could begin to reverse this Asia-only regional trend by reasserting meaningful US economic engagement in Asia and allaying fears about US withdrawal from the region. In both respects, it is important to make progress on the TPP as soon as possible.
US Objectives for the TPP
In his letter to Congressional leaders on December 14, 2009, Ambassador Ron Kirk put forward US ambitions for the TPP negotiations and what the agreement should entail. Two of his points bear emphasis and elaboration.
First, the TPP should "create a potential platform for economic integration across the Asia-Pacific region," expanding US exports and advancing US economic interests with the "fastest growing economies in the world." US officials want to focus talks first on a small core of countries, the original P-4 signatories (Brunei, Chile, New Zealand, Singapore) plus Australia, Peru and Vietnam, in order to establish a baseline for expanding the TPP to others. The additionality from such a pact would derive from (1) adding free trade with three more small countries (Brunei, New Zealand, and Vietnam); (2) upgrading existing US FTAs with Singapore, Australia, Peru, and Chile to incorporate the new US "platinum" standard on labor, environment, intellectual property, and other issues; and (3) harmonizing FTA rulemaking provisions across a larger geographic area to reduce transactions costs.
Note, however, that the current TPP participants are not among the fastest growing economies in the world. Nor are their economies sufficiently large to offer major new opportunities for US traders and investors that go much beyond what we already have under existing FTAs. The US payoff thus depends on extending the TPP to other major economies of the Asia-Pacific region, starting with Canada (and probably Mexico) in the very near future and hopefully adding Japan and Korea within the next year or two.
Second, Ambassador Kirk suggests that the TPP should create a new template for a "high standard, 21st century agreement with a membership and coverage that provides economically significant new market access opportunities for America's workers, farmers, ranchers, service providers, and small businesses." The US vision for the TPP is to produce a "new, improved" FTA that goes beyond the Bush pacts and beyond the changes mandated by the May 2007 compact between the Bush administration and Congressional leaders that augmented the goals for labor, environment, and intellectual property that were subsequently added to the Korea, Peru, and Panama pacts. By definition, it would require more of the four countries in the current TPP talks with which we already have concluded FTAs. The agreement envisioned would update and augment provisions in existing trade pacts and add new obligations on "environmental protection and conservation, transparency, workers' rights and protections, and development."
Challenges for US Policy
A TPP, however, will present a number of challenges for US policy. First is coverage of sensitive sectors like agriculture and labor, on which participating countries—including the United States—will be reluctant to make concessions. New Zealand is a major agricultural producer with which the United States does not already have an FTA; commitments on agriculture with this country will have to be negotiated from scratch and are likely to prove thorny. At some point, the US exemption of sugar in the US-Australia FTA, and incomplete or delayed liberalization for other products, may have to be revisited. The United States will also need to structure obligations to address development concerns of TPP participants with much lower per capita incomes, notably Vietnam.
Another challenge is how to combine the various arrangements that contain binding obligations already in force or under construction among the initial TPP participants, and incrementally broaden the initiative to cover other countries. Existing pacts, however, are a mix of "gold standard" and "partial scope" arrangements; all are replete with exceptions that inhibit deep economic integration. It is not clear how the United States can persuade its existing FTA partners to commit to deeper integration than they already have among themselves without offering significant concessions in return.
We believe the US strategy as currently articulated has two major shortcomings. First, it gives little weight to the foreign policy and security dimension, mentioned above, that has long underpinned US engagement in APEC initiatives. While speaking in Tokyo during his November 2009 trip to Asia, President Obama announced an "unshakeable" commitment to Asian security, particularly on North Korean nuclear proliferation, and added that the US-Japan relationship was the "foundation" of stability in Asia. In order to meet the broad goal of establishing security and engagement in the region, the TPP must be a broad initiative that brings in major players like Japan and Korea. That step will greatly enhance the economic benefits for TPP for the United States as well, so it is clearly a win-win proposition.
Second, the strategy presages little change in US policies unless Congress is willing to accept US reforms in previously "no-go" areas. To be sure, our TPP partners will derive systemic benefits from building a broader Asia-Pacific economic agreement, but they will undertake changes in sensitive domestic policies only with reciprocal actions by the United States.
We believe that the Trans-Pacific Partnership can become a bridge uniting the existing efforts to integrate Asia itself with its own new thrust of uniting the Asia-Pacific region. Hence participation in the TPP should immediately be extended to countries that have already expressed interest, such as Canada and Mexico, and as soon as possible countries that are already engaged bilaterally with the P-4 countries, including Japan, Korea, and ASEAN members such as Malaysia. Such a "linked regionalism" pact could amalgamate current bilateral and subregional agreements (like ASEAN) into a broader Asia-Pacific arrangement.
Major Asian economies such as Japan, Korea, and the ASEAN nations would gain both economically and politically from such an institutional link with the United States. These Asian governments, as mentioned above, want a counterweight to provide insurance against China's rising power. These countries would benefit greatly from arrangements that avoided their ever having to choose between China and the United States. Deepening regional economic integration would be superior in this regard to deepening bilateral integration between the US and major Asian economies since it would be less likely to trigger Chinese pushback.
Japan, as the chair of APEC in 2010, can exercise leadership in the Asia-Pacific region by joining the Trans-Pacific Partnership this year, perhaps after the election for the upper house of its Diet in June. Japan has already initiated talks on Asia-only integration via its proposals for a "10 + 6" arrangement (to include Australia, India, and New Zealand). Participation in the TPP would enable it to balance that initiative with a leadership role in Asia-Pacific integration as well. Such a balanced strategy would help Japan preserve and enhance its transpacific alliance with the United States by forestalling negative Congressional and other US reactions to its emphasizing Asia-only initiatives.
Continued delay in implementing the US-Korea FTA muddies the signal of US intent and commitment to any new regional pact. Asian countries will be reluctant to negotiate an agreement that cannot pass the US Congress. Without a clear sign from the administration and Congress that the United States wants to pursue economic integration with Asian countries, a TPP agreement cannot progress. The TPP initiative should galvanize the Obama administration to move forward expeditiously with the KORUS FTA inter alia to help pave the way for successful TPP talks.
Greater trade liberalization within the TPP framework should begin with issues either not fully covered or exempted from existing FTAs. The substantive agenda should focus first on FTA-plus reforms: "green" development, including promotion of renewable energy and technology transfer; energy security and environmental linkages; and a digital economy agreement. Priority should be given to energy and the environment, which would be a timely means of bridging the gap between developing and developed countries evidenced in Copenhagen, and which could pave the way for cooperation on the broader TPP agenda. Food safety and security, border security, and the digital economy should be included in order to address trade-related challenges of the 21st century.
Countries should then regionalize their current FTA rights and obligations, beginning by harmonizing and cumulating rules of origin. They can navigate "detours" around issue-specific roadblocks on agriculture and labor by focusing on broad rulemaking provisions rather than tariffs and quotas. For example, talks on agriculture might focus first on food security and safety. On labor, negotiators could focus first on implementation of International Labor Organization (ILO) principles and on specific labor services barriers such as visas. Such detours, however, should not lead to granting permanent exceptions or excluding contentious goods or issues as the regional integration process evolves in the coming years.