January 24, 2017

What Trump's TPP Withdrawal Means For India

The following article originally appeared in NDTV on January 24, 2017. 

In one of his first acts upon assuming office, Donald Trump signed a presidential memorandum confirming the U.S. withdrawal from the Trans-Pacific Partnership (TPP). This move did not come as a surprise. As a presidential candidate, Trump had vociferously campaigned against what he described as bad or unfair trade agreements that the United States had signed onto, claiming that they had led to the loss of American jobs. Among his targets of criticism were the North American Free Trade Agreement (NAFTA) of 1994 and the United States accepting China into the World Trade Organisation in 2001. But Trump had reserved particular opprobrium for TPP, which was successfully agreed only last February and was awaiting ratification.

TPP is a weighty and complex agreement negotiated painstakingly by 12 countries: the United States, Canada, Mexico, Peru, and Chile in the Americas, and Japan, Australia, Vietnam, Malaysia, Singapore, Brunei, and New Zealand in the Asia-Pacific. Together, they comprise almost 40 percent of the world's gross domestic product. The rationale for many negotiating members was to re-engage the United States as a trading partner and - by collectively raising standards - balance what were sometimes one-sided trade relationships with China. A TPP minus America, even if that were possible (ratification by the United States was necessary for its entry into force), makes it far less attractive for most members.

There are several common misconceptions about TPP. One is that it is simply a trade agreement, when it is actually much more than that. Not only does TPP slash tariffs, it contains anti-corruption measures, intellectual property obligations, human rights and child labour conditions, and environmental commitments. As a result, neither India nor China would have been ready to sign on. Comparisons that are often drawn in India with the proposed Regional Comprehensive Economic Partnership (RCEP) - which includes China and India, but excludes the United States - are not entirely apt. Countries that are party to both negotiations - Japan, Australia, Malaysia, Singapore, Brunei, Vietnam, and New Zealand - do not see one as a replacement for the other.

A second misconception is that TPP is directed against China and India. This is only partly true. Officials from TPP countries would often reiterate that China and India were hypothetically welcome to join TPP at a later stage, as long as they met its conditions, knowing full well that this could not happen in the short-term, if ever. China's entry would offset many of its comparative advantages, while India's would probably have required (among other things) a much higher stage of development. While TPP is anti-China only in that it made the United States and Japan much more competitive with fellow members, it was anti-India only in that it reflected a frustration with New Delhi's obduracy on trade negotiations at the WTO. While many in New Delhi portrayed TPP as a punitive measure, India's exclusion was, at most, collateral damage.

That said, both China and India would have been disadvantaged by TPP's entry into force, although not significantly. According to projections made in a working paper by the Petersen Institute for International Economics, the impact of TPP for both China ($9-20 billion) and India ($2-6 billion) would have been about 0.1% of GDP by 2030. South Korea and Thailand, by contrast, would have been much more significantly affected, by as much as 0.4% and 0.8% of GDP, respectively.

A third misconception, and one that Trump exploited, is that TPP would lead to a loss of U.S. jobs. The rationale Trump has given for withdrawing from TPP is that it disadvantaged American industry, workers, and wages, and that he believes in dealing "directly with individual countries on a one-on-one (bilateral) basis in negotiating future trade deals."

This is not entirely convincing. American industry has disagreed with Trump's assessment, calling TPP  "America's best chance to ensure the United States isn't stuck on the outside - looking in - as Asia-Pacific nations pursue new trade accords among themselves." Moreover, according to the Petersen Institute study, TPP would have led to only a 0.1% increase in U.S. labour market churn and added 9% to U.S. exports by 2030. But rather than try to sell the economic benefits in a less-than-conducive American political environment, the administration of Barack Obama tried to project it as a national security imperative, with  U.S. Secretary of Defense Ashton Carter saying that "passing TPP is as important to me as another aircraft carrier." Trump's advisors argued, convincingly, that TPP did nothing to curb China's assertiveness in the Asia-Pacific.

It is hard to see who exactly benefits from the United States' withdrawal from TPP. Certainly, U.S. industry and other TPP members will be disappointed. Indeed, this could be seen as a massive self-goal for the United States. Trump's decision has already been criticized by some American political leaders, including fellow members of the Republican Party. Trump will gain credibility with some of his base by actually fulfilling one of his more contentious campaign promises, but that base is weak to begin with, and unless there are tangible gains in manufacturing jobs (due to other factors), the electoral impact is likely to be negligible.

Nor will China or India derive significant benefits from the demise of TPP, other than a short-term respite. The urgency to complete RCEP will now diminish, and it is possible that greater complacency will set in regarding the need to rethink trade in a more protectionist global environment. TPP - while no boon for India - offered the best hope for a more openly competitive international trade order from which India, with its competitive wages and underutilized potential, still has possibly the most to gain. This sentiment was echoed by Prime Minister Narendra Modi in New Delhi only last week. "Walls within nations, a sentiment against trade and migration, and rising parochial and protectionist attitudes across the globe are...in stark evidence," he said. "The result: globalization gains are at risk and economic gains are no longer easy to come by." All in all, Trump's withdrawal from TPP will likely be remembered as a significant step in the slide towards a more protectionist world.