While America Slept…

...the world got busy on trade...

Sep 20, 2021

The U.S. is excluded from Asia’s major trade deals

Large trade deals in Asia involving a number of countries — including CPTPP and RCEP — as well as the important EU-Japan free trade accord exclude the U.S. Japan is party to all three of these agreements. A wise move. These deals lower barriers to trade and increase prosperity for the countries involved.

China, whose economy dwarfs Japan’s, leads one of the mega-regional trade groups (RCEP); and — breaking news — as of last week, China officially applied to join the other one (CPTPP). These two groups together would represent about 35% of global output. If China joins, its leadership position in Asia would be strengthened.

Time for an end to the “Angry U.S.” thing, friends. No more tantrums. Time for action.

Joe Biden is not responsible for any of this, as Trump and Bernie are the ones who wrought this mess, with their opposition to:

TPP (the proposed U.S.-led trade deal with 11 other Asia-Pacific countries, put forth by Obama, now excluding the U.S. and called CPTPP);
TTIP (the proposed U.S.-EU trade deal, also initiated by Obama and shelved by Trump, pushing the EU to close a deal with Japan in 2019); and,
The WTO, which Trump hobbled by not approving adjudicators to the Dispute Settlement Mechanism (DSM), a move Biden has chosen not to reverse.

Apologies for the alphabet soup, folks. Unavoidable.

This post was going to be about how to fix the WTO, but it has been overtaken by events. In the wake of the announcement last week of the Australia-U.K.-U.S. security deal (AUKUS), which provides nuclear subs to Australia, a move that angered both Beijing and Paris, Beijing has just applied to join the CP-TPP.

You really can’t write better fiction than this. China has applied to join a trade deal (TPP) initiated by the U.S. but that Trump pulled out of, and which was designed by Obama to exclude China, not the U.S.

The thinking in the Obama administration was that ultimately TPP could cajole China into following U.S. rules on trade and economic policy — that is, on IP protections, government subsidies and procurement, anti-trust, etc. Then, and only then, China would join. Now, the U.S. is out and China is applying to get in.

Since Bernie launched his broadside against TPP in 2015 when he was primarying Hillary, the left and the right in the U.S. have hobbled the nation’s global leadership position. China has since signed RCEP with 14 other Asian nations that it dominates. Seven of them, including Japan, were already in CP-TPP. Without the U.S. in TPP to counterbalance China, what we have in these deals is a recipe for Chinese dominance. (See chart below from Brookings.)

China in, America out

From Brookings through WEForum. Figures are country GDPs.

RCEP still needs to be ratified by a quorum of countries. So far, three have ratified it, including China, Japan and Singapore. The target rollout date is Jan. 1, 2022, but there appears to be some foot-dragging. They need 5 more ASEAN countries (in SE Asia). They also need at least one of Korea, Australia and New Zealand to ratify. They should be able to do this, but who knows what lobbying pressures are in the works both from China and the U.S., especially given the AUKUS announcement last week.

So, what has the U.S. been doing on trade?

What was accomplished under Trump? Team Trump basically changed the wrapping paper on NAFTA and called it USMCA, so that Trump could say he is the consummate dealmaker. Team Trump did negotiate access for U.S. farmers to Japan, as well as a digital agreement, but this was very modest compared to other bilateral deals, such as the EU-Japan FTA. During the Trump administration, a joint “trilateral” statement from the U.S., EU and Japan was issued in 2020 calling for a hard line on government subsidies — in perhaps one of Trump’s modest achievements.

Nevertheless, Trump undermined multilateral action by hobbling the WTO and starting a trade war with China that the PIIE has estimated could cost the world ~$300 billion in lost output by 2030. China would be hit hardest by the trade war, but the U.S. would also stand to lose nearly $25 billion, not including a loss of $12 billion due to pulling out of TPP. Previously, it had been estimated that the U.S. would gain ~$77 billion in output over ten years from being a member of TPP.

And, Joe? “America is back” rings hollow for allies who feel they were not consulted ahead of major foreign policy moves — e.g., the Afghanistan pullout and AUKUS. Biden has soft-pedaled on trade cooperation, as it is not popular politically and most U.S. administrations remain protectionist in their first terms. Besides, he’s busy.

From PIIE March 2020, p. 20.

A way forward on trade

To reassert its leadership, the U.S. should:

Deploy muscular multilateralism like Obama did, in place of the aggressive bilateralism of Trump. Engage with the world’s largest trading nations on the issues important to the U.S. Obama initiated 25 complaints with the WTO’s DSM, more than any other country during his administration, 16 of which were against China. Of the latter, the U.S. won 7 cases — on subsidies of aircraft and agriculture, as well as duties on steel. Obama also rejected judges for the DSM’s Appellate Body which reviews decisions on disputes. He did so because of judicial overreach, sending a message about U.S. concerns, which the EU has since said have merit. But, his administration ultimately allowed the Body to be fully staffed, rather than dismantling it like Trump did. The Obama approach is what can be called “muscular multilateralism”. The U.S. should return to this. The EU, and other likeminded nations, need to back up the U.S. more in its muscular multilateralism for this to work. See the PIIE chart above which shows how little other countries backed the U.S. in its complaints against China.
Take charge by accepting the EU’s invitation to agree on a program for WTO reform. The EU took the opportunity of the change of government in the U.S. in 2021 to reach out for a transatlantic agreement on global trade rules. The EU for the first time conveyed its agreement with key U.S. grievances like overreach by adjudicators and the need for flexibility on trade remedies. An opening was likewise created by the June U.S.-EU agreement to drop the nearly 2-decades long Boeing-Airbus civilian aircraft dispute. As for Japan, it was part of Trump’s trilateral effort and has a free trade deal with the EU, so should be pulled in as soon as the U.S. and EU reach agreement, as should Canada in order to reprise what was once called the “Quad”. This was the U.S.-EU-Japan-Canada group formed during the Uruguay Round of trade negotiations in 1993 that led to the creation of the WTO. Japan can be a key lever for muscular multilateralism in Asia.
Pound out the outlines of an agreement in the two months before the 12th WTO Ministerial Conference (MC-12) beginning Nov. 30, when 164 trade ministers descend on Geneva. There, present WTO members with a united position on the part of the Quad.
Agree to strengthen all three WTO functions — legislative, executive and judicial — per Amb. Wolff’s remarks at American University this summer (and others): find mechanisms for plurilateral agreements (agreements of fewer than 164 members) either inside or outside the WTO — ending single member veto; empower the DG (executive) to propose rules changes, intervene to resolve disputes short of the DSM, and to oversee active reporting on trade practices globally in order to increase transparency; tighten DSM rules to avoid legislating from the bench; and, rebalance access to trade remedies (e.g. countervailing duties and other protections against surging imports) to provide greater flexibility for members, by ensuring that the DSM only issues rulings when remedies violate WTO rules. Clearly, more power given to smaller groups of members to legislate changes (rather than just done unanimously), and to the DG to intervene to resolve conflicts, would relieve pressure on the DSM to legislate from the bench.
Roll out a Quad view on key issues: on climate aspects of trade (including use of carbon border adjustments); liberalization of services trade; IP protections; e-commerce; trade aspects of the pandemic; and state involvement (through subsidies, government procurement, regulation, anti-trust).
Follow up on MC-12 by building agreement on the Quad program, stepwise in concentric circles of members. Once the Quad is in agreement on reforms, move next to those countries that agree with the Joint Statement Initiatives (JSI), which allow plurilateral groups (i.e. <164 members) to reach agreements. Pro-JSI countries include: Australia, Singapore, NZ, Switzerland, Colombia and Uruguay. JSI is a practice opposed by some members (e.g. India and South Africa), because they argue that smaller groups reaching agreements violates the WTO. Such objections hamstring action and could ultimately cause the WTO to fail.
Consult on the Quad’s program with an increasing number of leading “emerging market” countries, including Mexico, Brazil, Russia, India, South Africa, Indonesia, Nigeria and China, tweaking rules when possible. Buy in from EM countries is indispensable, so discussion and give and take are essential. A critical and diverse mass of countries is ultimately required to reform the WTO.
Engage bilaterally with China; at a minimum, to resist further protectionism; potentially, to walk back tariffs already in place; and hopefully, to engage in market-opening measures. Bilateral progress on U.S.-China relations could provide impetus to a broader agreement within the WTO. Recent deterioration in U.S. rhetoric toward China on trade should be reversed, which in no way suggests that the USG refrain from calling on the Chinese government to end practices such as treatment of the Uyghur people. Penalizing “non-market” economies, such as China, should be rescinded as part of any agreement on reforms. Likewise, developing country status, which accrues benefits, should be reserved only for the poorest nations.
The U.S. should rejoin TPP and resuscitate TTIP, using these agreements as a platform to engage with the China-led RCEP and with other large EM countries like India. While avoiding a “spaghetti bowl” of trade agreements, the mega-regionals with TPP-style rules can ultimately pressure other WTO members to follow rules. If the strategy of building consensus through plurilateral groups within the WTO fails, then the U.S. should not hesitate to act in concert with likeminded allies outside the WTO. But, the excessive use of bilateral FTAs should be avoided, so that the spaghetti dinner remains contained.