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What stands in the way of a Trans-Pacific Partnership deal

April 24, 2015, 9:00 AM UTC


President Obama's National Export Initiative aims to double exports by 2015 to $3.5 trillion based on the idea that every $1 billion in exports supports 6,000 jobs. The U.S. Department of Commerce estimates that at the current annual 16% growth rate, we are on track to hit that mark. Many factors have aided this achievement. The Export-Import Bank, which provides direct trade loans and guarantees, as well as insurance to businesses that export, recently increased its lending cap by 40% to $140 billion. Looking ahead, the President hopes to make progress on free-trade deals passed under the George W. Bush administration; the Trans-Pacific Partnership and WTO negotiations; and increased protection of intellectual property. He has also announced plans to eliminate tax loopholes and pose an immediate tax on profits by U.S. companies overseas. To expand trade opportunities for U.S. firms, Romney also wants to pursue new free trade agreements with nations committed to free enterprise and open markets. But he supports unilateral and multilateral punitive measures to deter unfair practices by China, including undervaluing the yuan to make exports cheaper. He envisions a territorial tax system, which would overturn the current system that requires U.S. businesses to pay income taxes, regardless of where revenues are generated. His goal: to encourage domestic investment of foreign profits and make U.S. companies more competitive in the world market. Reality Check: Most U.S. exporters are small to midsize businesses (with up to 500 employees), not Fortune 500 companies. These enterprises account for about 97% of all exporters and importers, the International Trade Administration reports. Despite the nation's gains, many small business owners face stiff tariffs overseas. They would like to see a more level playing field, especially in China, which is the third largest export market for small and midsize companies.
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The Trans-Pacific Partnership (TPP), a proposed free trade agreement spanning a broad range of countries in the Asia Pacific and the Americas, is now at a critical juncture. The TPP agreement remains a key strategic tool in President Barack Obama’s pivot to Asia, and the stars appear to be aligning.

Last week, a bill was introduced that would give the president “fast-track authority” on the TPP. If that passes, Congress could vote only up or down on the deal, not amend it, giving the president added power to strike an agreement.

The TPP has been years in the making. Its origins can be traced as far back as 2002 to initial discussions between Chile, New Zealand, and Singapore. By 2011, the broad outlines of the agreement were penned by nine nations: Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States. Canada and Mexico joined the TPP negotiations in October 2012 and Japan in April 2013. Altogether, the 12 TPP countries account for $27.8 trillion, or roughly 37.5% of world GDP, and a market of 799 million people.

While most Asia-Pacific countries seek an ambitious agreement, and are firmly committed to making strong progress in the negotiations with the hope of a timely conclusion, the devil is now in the details as each country tries to see that its major concerns are addressed. Progress had stalled in the U.S. as Democratic leaders, such as Harry Reid (D-Nev) voiced concerns about job losses with the TPP. In January 2014, Reid, who was senate majority leader at the time, said, “I’m against fast-track.” The Democrats’ Senate loss in November 2014 actually renewed momentum as a result. On April 16, Senator Orrin Hatch (R-UT), chairman of the Senate Finance Committee, announced he had finally reached an agreement with Sen. Ron Wyden (D-OR) and House Ways and Means Committee Chairman Paul Ryan (R-WI) on legislation to renew Trade Promotion Authority.

Other events have coincided to ratchet up the pressure over the past weeks, in particular China’s finalization of the China-led Asian Infrastructure Investment Bank (AIIB). A number of countries have signed on as AIIB members, including traditional U.S. allies such as the U.K., Australia and South Korea, with the U.S. voicing significant concerns. The U.S., Canada and Japan have stayed on the sidelines. The pressure for the U.S. and Japan to quickly resolve their remaining differences on TPP issues is now at a critical stage, as is the need for President Obama to finalize the deal before the focus shifts to the 2016 election.

The biggest obstacle to concluding the negotiations thus far has been the differences between the U.S. and Japan. Although Canada, Mexico and Japan are the top three U.S. goods trade partners, Japan is the only country in the top three with which the U.S. does not have an existing free trade agreement (FTA).

Challenges have centered on autos and agriculture.

During the negotiations, the U.S. auto industry has pointed to its negligible market share in Japan, which dropped from 1.6% in 1996 to only 0.3% in 2011. The Japan Automobile Manufacturers Association countered by highlighting that 70% of the vehicles Japanese companies sold in the U.S. were built in North America, and that, as of 2011, Japanese automakers had invested $35 billion in U.S. plants, employing 388,000 U.S. workers. The U.S. auto industry and a significant number of members of Congress and the Senate responded by raising concerns about non-tariff barriers and currency manipulation.

Agriculture has been the other key issue. Reducing Japan’s agricultural tariffs is important to the U.S. as well as a number of other countries. The U.S., Australia and Vietnam, for example, have an interest in greater access to Japan’s rice market, which is the most sensitive of all its commodities. Although Japan has strong protectionist sentiments in the agricultural sector, other countries do too, including the United States. Even though the U.S. would like greater access to Japan, it has to keep in mind its other interests. It can’t ask Japan and Canada, which have very high tariffs on dairy, to open their dairy markets without countries like New Zealand and Australia asking the U.S. to do the same.

As in the U.S., the stars appear to be aligning in Japan. Prime Minister Shinzo Abe, a staunch supporter of the TPP negotiations, won a snap election in December 2014. His ruling coalition now has 325 of 475 seats in Japan’s House of Representatives and has the legitimacy to advance the TPP. On December 19, 2014, Akira Amari, Japan’s Minister of Economic Revitalization, said, “Japan and the United States have made a lot of progress. I can’t give you specifics, but I can say that we are close to reaching our goal.”

The big win for U.S. trade with Japan, which is America’s second largest services trade and investment partner, as well as with countries such as Malaysia and Vietnam, may be in the services industry. The U.S. is keen to gain greater access to sectors such as banking, insurance, legal services, and telecommunications and wants the provisions to be as broad as possible so as to capture the greatest value from future entrants. Developing countries, meanwhile, are wary of liberalizing services because of concerns over job losses.

Vietnam poses a unique challenge for more developed TPP countries such as the U.S., which has retained tariffs on goods such as textiles, apparel and footwear for a longer period of time in existing free trade agreemeents. Vietnam could end up being a major winner under a TPP. Being a low-wage country, it is seen as a growing export hub, and the TPP would open up new markets for its products. The TPP negotiations are also grappling with how to deal with state-owned enterprises like those in Vietnam. Resolving these issues could make it easier for more countries, notably China, to join the TPP in the future.

Should the TPP countries reach an agreement, each country will still need to ratify it. Some ratification issues continue to exist for a number of countries. For the U.S., the biggest hurdle to ratification is achieving fast-track authority.

Challenges also appear to exist in Australia,New Zealand and Malaysia. In both Australia and New Zealand, if highly protected sectors in other countries such as agriculture are not opened up, this will be a major stumbling block. In terms of ratification, Graeme Thomson, a former chief negotiator for Australia notes that because the “Australian Government does not command a majority in the Senate, ratification would require support from the opposition Labour Party.” For New Zealand, Daniel Kalderimis, a partner at Chapman Tripp notes, the “main issue for the domestic ratification process will be whether one can point to sufficient market-access gains to justify the potential interference with domestic autonomy in other areas, including IP, procurement and investment.” Malaysia may also encounter resistance to its policy of giving preferential treatment to ethnic Malays in activities such as government procurement and reserving ownership stakes in listed companies .

Sustained progress during the upcoming weeks will be critical to achieving a successful outcome. The first test will come during hearings that have commenced on fast-track authority. A second test will follow shortly, namely during the U.S.-Japan summit to be held on April 28 in Washington. If President Obama can bolster support within the ranks of Congressional Democrats, he can secure the part of his foreign policy agenda that may be the most important for Asia’s leadership.

Shom Sen was the 2014 Jack Wadsworth Fellow at the Asia Society. He previously served as Assistant Deputy Minister at the Ministry of International Trade in the Province of British Columbia, Canada. The views expressed are his own.

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