Free trade devotees and grand strategists see an opportunity for the US to rejoin the Trans-Pacific Partnership (TPP) trade agreement after the election in November. The idea is that this would get the country back on the right track while creating an enormous economic bulwark against China.
But the political hurdles are too high; the potential for argument rather than cooperation with allies, too great; and the US economy, too far out of balance for this to work.
US President Donald Trump recently told The Economic Club of New York that:
We will make America into the manufacturing superpower of the world, ending reliance on China once and for all…. We will keep taxes low for companies that move jobs to America, and we’ll impose steep tariffs on any company that leaves. They want to leave? They want to make our product and then sell it back after firing everybody? Not going to happen. They will be tariffed.
Many CEO’s and economists might be tarrif-ied, but a great number of Americans – perhaps a large majority – agree with Trump. It is not a partisan issue. The link between globalization and unemployment has become a hot button for Democrats as well as Republicans
Presidential candidate Joe Biden has called tariffs “the greatest negotiating tool in the history of our country.”
And if Biden’s advisers recommended easing up on China in order to make progress in trade negotiations, Democrats in Congress might not go along.
Senator Ron Wyden of Oregon, the top-ranking Democrat on the Senate Finance Committee, says:
I’ll work closely with a Biden administration to review the tariffs, one-by-one. But when you have trade cheats ripping off American workers, you use every tool in the toolbox, including tariffs.
Clearly, there is bipartisan support for the use of tariffs against China – or any other country perceived to be using mercantilist practices to steal American jobs.
The problem with the TPP is that manufacturing has been migrating from China not to the United States but to Southeast Asia. Wages are lower there and much of the industrial infrastructure is already in place thanks to decades of investment by the Japanese, Koreans, Europeans and Americans.
Japanese, Koreans and also Chinese companies have moved production from China to Southeast Asia in response to rising Chinese wages. Japanese companies have also moved due to anti-Japanese riots in China. In 2019, Samsung stopped assembling cell phones in China. It now makes most of its cell phones in Vietnam.
The trend has been accelerated by American tariffs on products made in China and by Covid-19, which has exposed over-reliance on China for medical supplies and led to the diversification of supply chains.
Vietnam’s growing popularity as an export base has caused its trade surplus with the US to rise by about 50% since Trump took office, from $38 billion to more than $55 billion.
This in turn has triggered an investigation into potential currency manipulation and other Vietnamese policies and practices that the United States Trade Representative finds questionable.
This runs counter to the strategy of decoupling from China, but does strike a blow at a member of what Trump calls the “job-killing Trans-Pacific Partnership.”
Even if a Biden administration wanted to back off, it is hard to imagine American voters sitting still for a 50% increase in Vietnam’s trade surplus, even if China’s surplus is declining.
And it isn’t declining by much. In the nine months to September, China’s exports to the US were up 1.8% year-on-year while its imports from the U.S. were up 2.8%, according to Chinese government data. China’s trade surplus with the US for the nine-month period was almost $220 billion.
For the month of September alone, China reported a 13.2% year-on-year increase in total imports and a 9.9% increase in total exports – an impressive demonstration of China’s recovery from Covid-19, but not much of an advertisement for American economic sanctions.
In July, the US recorded its largest monthly trade deficit in 12 years, according to data from the Commerce Department.
So where does this leave US policy toward the TPP?
Wendy Cutler, vice president of the Asia Society Policy Institute, addressed the subject in a report entitled “Reengaging the Asia-Pacific on Trade: A TPP Roadmap for the Next U.S. Administration,” which was published by ASPI at the end of September.
Cutler is an experienced diplomat and trade negotiator who served as acting deputy US trade representative responsible for the Trans-Pacific Partnership agreement and chief negotiator for the US-Korea (Korus) Free Trade Agreement.
After stating that “the case for US participation in the TPP has only become more compelling as the political and economic importance of the Asia-Pacific region has grown and concerns about Beijing’s economic model have mounted,” she asks the question:
But is there a path for the United States to return to the TPP or to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which the 11 remaining countries finalized without the United States?
Noting that the other parties to the TPP negotiations and current members of the CPTPP would welcome the return of the US, but not if US negotiators demanded extensive revisions to the agreement, she recommends the following:
First, start small, with “a limited, sector-specific Asia-Pacific trade deal with the CPTPP members, and perhaps other countries, to set high standards, rebuild trust, and build momentum.”
Pursue new and urgent topics such as digital trade, trade in medical and other essential products, and the relationship between trade and the environment.
”Invest in competitiveness and adjustment at home” in order to “take the pressure off trade agreements to achieve goals they are not designed to tackle, such as ensuring more equitable income distribution.”
“Develop and prioritize concrete proposals for US reengagement with the CPTPP based on input from business, labor, and civil society groups throughout the country, as well as Congress,” and
“Consult with the CPTPP members to understand their limits, priorities, and concerns around US reengagement.”
The last two points may seem unnecessary to mention, but if they had been followed, the original TPP might not have been shot down and the other parties to the agreement would probably not be so wary of American pressure tactics and unreliability.
A multilateral digital trade agreement is both the most important in terms of economic trends and, given the progress made so far, the most likely to succeed.
The Japan-US Digital Trade Agreement was signed in October 2019. Singapore, New Zealand and Chile signed a Digital Economy Partnership Agreement (DEPA) last January. The Singapore-Australia Digital Economy Agreement (SADEA) was signed in August. Negotiations aimed at a Korea-Singapore Digital Partnership Agreement (KSDPA) negotiations were launched in June.
Among others, the USTR’s “Fact Sheet on US-Japan Digital Trade Agreement” notes the following key outcomes:
- Prohibiting application of customs duties to digital products distributed electronically, such as e-books, videos, music, software, and games.
- Ensuring non-discriminatory treatment of digital products, including coverage of tax measures.
- Ensuring that data can be transferred across borders, by all suppliers, including financial service suppliers.
- Facilitating digital transactions by permitting the use of electronic authentication and electronic signatures, while protecting consumers’ and businesses’ confidential information and guaranteeing that enforceable consumer protections are applied to the digital marketplace.
- Protecting against forced disclosure of proprietary computer source code and algorithms.
These are things with regard to which the US is at no competitive disadvantage and that are likely to create rather than eliminate jobs. They are also of greater strategic importance than, say, tariffs on dairy products and beef, which were sticking points in the TPP negotiations.
As for ordinary trade in manufactured goods, Joe Biden has written that he would “not enter into any new trade agreements until we have invested in Americans and equipped them to succeed in the global economy.”
Biden has a point. Many economists believe that trade deficits don’t matter and are fond of saying that no one wins a trade war, but let’s ask: Why are Japan, Germany, South Korea and China so attached to their trade surpluses?
a. Because they don’t understand economics?
b. Because their corrupt leaders reject economic freedom?
c. Because trade surpluses bring them large benefits?
Obviously, the answer is c.
A few decades ago, these countries were poor. Now they are rich and have surpassed the US in many industries. Their trade surpluses were built on a combination of hard work, devotion to education, sustained investment, protectionism and industrial policy, at first aided by relatively low wages but no longer requiring them today.
Trade surpluses facilitate the building of economies of scale, increasing profitability and cash flow that can be reinvested to make industry more competitive.
Persistent trade deficits, on the other hand, lead to the hollowing out of industry and the loss of acquired skills. The US last ran a trade surplus in 1975, according to data from the World Bank.
Recognizing the limits of free trade, therefore, is simply common sense.
The previous articles in this series, “Today’s free trader is yesterday’s IP thief” and “How China came to champion free trade” describe how countries that have gained competitiveness through protectionism turn to free trade when it becomes advantageous to do so. Britain, the US and China have all followed this path.
By the same token, a country that has lost competitiveness due to free trade with mercantilist rivals may need to backtrack in order not to lose everything. In this case, the most efficient and economically sound policy is the application of tariffs, which simply change price signals.
Faced with deindustrialization, a shortage of well-paying jobs, gross inequality, and serious social problems stemming from poverty and economic instability, the much-criticized American political system is getting one thing right: It is time for practical solutions, not academic idealism.
The US should not try to rejoin the TPP until it has put its own house in order.
Scott Foster is an analyst with Lightstream Research, Tokyo.