Ira Shapiro Global Strategies, LLC

Thoughts on the Trans-Pacific Partnership (TPP) Negotiations

1. Introduction and Personal Statement

It is likely that the first six months of 2015 will decide the fate of the Trans-Pacific Partnership (TPP) negotiation.  Will the TPP realize the potential that its supporters see: a high standard, 21st century trade agreement which allows the United States to be part of the economic integration of the Asia-Pacific, the most dynamic region in the world, and to offer a rules—based trade alternative to China’s state capitalism?  Or will TPP fall short, either because it is unable to bridge the differences in interest between its 12 diverse members, or the traditional trade problems between the U.S. and Japan, or the contentious politics of trade on Capitol Hill?  Will TPP become the most far-reaching trade agreement since the Uruguay Round, or will it become a smaller version of the Doha Round, in which the participating nations repeatedly fail to reach agreement, while refusing to acknowledge defeat because they have invested so much time?

In my view, the stakes could not be much higher.  This is the most important moment in world trade in more than 20 years—truly, in James Baker’s memorable phrase, “a defining moment.”   It is a particularly critical juncture for the United States, Japan, and the U.S.-Japan partnership, since the TPP became the most consequential trade negotiation in 20 years only after the decision of Japan to enter the negotiation.

Because I believe TPP to be so important, I will be posting a series of blogs making the arguments in favor of TPP.   The limits of my ability as a prognosticator should be stated up front.  I am not a “cleared adviser,” which means that I have no access to negotiating texts.  I have to rely on press accounts of the negotiation, insights that I gain from talking to other interested members of the trade community, and my own background as a trade negotiator and a former Senate staffer.   I have domestic and foreign clients, but none of my current clients  have retained me to work on TPP.   I am the chairman of the National Association of Japan-America Societies (NAJAS), which sensitizes me to the impact of TPP on the U.S.-Japan relationship.  I firmly believe that if the TPP negotiation fails, the big losers are Japan and the United States, and the only big winner is China.  And as a Democrat, I have a special concern that opposition within my party could have a decisive effect in producing a bad outcome for the United States.

2. Origins of the TPP:  The Quest for a Meaningful, but Attainable, Agreement

The TPP began more than a decade ago as a small negotiation between Singapore, Brunei, Chile and New Zealand, four small nations which shared a commitment to free trade.  It gained size and gathered modest momentum when the United States joined the negotiation, and Australia, Vietnam, and Peru became involved.  It became a significant negotiation with the addition of Malaysia, and then Canada and Mexico in 2012.  After the landslide election of Shinzo Abe to be Prime Minister, Japan made the decision to enter TPP.  With Japan’s entry, TPP, which a former U.S. trade official had called “a frolic and a detour,” had become the most consequential trade negotiation since the completion of the Uruguay Round in 1993.  With Japan in, the TPP included two of the world’s three largest economies and fully 40% of the world’s GDP.  Japan’s entry was, in the parlance of American politics, a “game changer.”

The evolution of TPP reflects a response to a chaotic and unsatisfying time in global trade negotiations.  On the one hand, the Doha Round of multilateral trade negotiations, launched in the aftermath of 9/11 in 2001, had repeatedly failed at every juncture.  (I once said that “the Doha Round was born under a dark star, and never had a good day.”).  Although the negotiators, led by WTO Director General Pascal Lamy, were loath to admit it, the central premise of a global round—“the single undertaking,”  by which nothing was agreed to until everything was agreed to by every country—had become completely unworkable.  At the same time, most, if not all of the trading nations, showed great interest in negotiating free trade agreements with their preferred trading partners.   So even as Doha bogged down hopelessly, the nations of the world were constantly embroiled in negotiating hundreds of small trade agreements, creating what Professor Jagdish Bhagwadi famously referred to as “a spaghetti bowl” of conflicting agreements and different rules.

The United States was particularly sensitive to the schizophrenic system of trade negotiations.  Along with the EU, the U.S. has been the traditional leader of the multilateral trading system, so the failure of the Doha Round represented a major setback for the U.S. and Europe.  Spurred by USTR Robert Zoellick’s notion of “competitive liberalization,” the U.S. negotiated a serious of small free trade agreements around the world, particularly in the Middle East and Latin America.  The merits of these agreements, economically and geo-politically, could be defended, but several of them generated fierce controversy, and Congress became increasingly unwilling to approve the agreements that the Bush administration had negotiated.  Starting in 2007, the Congress simply refused to take up FTAs that had been negotiated with Colombia, Korea and Panama.   For the United States, both possible paths toward expanded trade—multilateral negotiations, or small, discrete free trade agreements—had run aground by 2011.

3. The United States and Japan:  A Striking Convergence of Interests

As recently as 2011, Japan was mired in deflation and facing the challenge recovering from the unprecedented catastrophe in Tohoku.  At the same time, the United States, locked in partisan gridlock, constantly to the edge of government shutdowns or default, had called a virtual “time out” in trade negotiations.    Yet within a short time, the situation changed dramatically, and Japan and the United States find themselves cast in leadership roles in a major joint project which could determine the architecture in which trade occurs in the most dynamic economic region of the world.

For Japan, being part of the TPP negotiation has become a fundamental part of its global economic strategy, its hopes for domestic structural reform, and its ability to compete with China, Korea and the rising nations of ASEAN.   Since late 2011, when Japan saw Korea enter into free trade agreements with the U.S. and the EU, Japanese leaders in business and government have seen the country’s entry into the TPP negotiation in almost existential terms.  Prime Minister Noda grasped the importance of TPP for Japan, but his DPJ government was too weak to bring about Japan’s entry.  Prime Minister Abe moved boldly within months of taking office, confounding observers by using his political capital to bring Japan into the TPP negotiation even before the Upper House election in 2013.

At the same time, the United States faced the very real risk of standing on the sidelines while the Asia Pacific region integrated economically without it.  The U.S. faced the possibility of its position in Asia eroding, in the face of a rising China, flush with resources, offering aid, investment and an alternative economic model to the countries of the region.  President Obama saw the danger and responded to it, making TPP the economic centerpiece of the “rebalance” toward Asia.   Obama picked one of his most trusted advisers and closest friends, Michael Froman, to be the U.S. Trade Representative, and Ambassador Froman quickly committed America its most ambitious trade negotiating agenda since 1993, starting with the TPP.  After the 2014 elections, President Obama became increasingly vocal about the importance of TPP, making it clear that he was committed to it despite the degree of opposition within the Democratic Party.

4. The Politics of Trade in Japan and the United States

But having recognized their joint interests in TPP, Japan and the United States must complete their bilateral market access agreement which is the critical first step to concluding the TPP.     A recent Pew Research Survey of global attitudes found that Japan and the United States ranked dead last among APEC countries in support of global trade.   Both Prime Minister Abe and President Obama will have to overcome strong skepticism in their countries about the value of trade agreements and the fear that trade will cost jobs.

Prime Minister Abe stands in better position to do this.  He has twice gone the voters after stating his commitment to TPP, and twice won a mandate, comfortably.  He recognizes that TPP provides the most impetus for his third arrow of structural reform, particularly reform of the agricultural sector.  He recognizes that after Japan entered the TPP negotiations, Korea quickly indicated its interest in joining the negotiation.  China, which had previously ridiculed the effort, began to take it quite seriously—both as a competitive challenge, and, possibly, as a prod to its own economic reform.   Unquestionably, TPP faces political opposition in Japan, but the opposition probably sounds louder than it is, echoing in a consensus-based society unaccustomed to disagreements over trade.

A realistic concern for the Abe government is whether President Obama can overcome the political obstacles that loom between completing the negotiation and getting it approved by Congress.  The U.S. has a formidable anti-trade movement with two wings.  The economic wing, spearheaded by the labor movement, contends that trade agreements cause job losses, exacerbate economic inequality, and suppress wages.  The NGO wing contends that trade agreements undercut our ability to legislate and regulate to protect health, safety and the environment.   Influenced by those views, held by some of their strongest supporters, the Democratic Party, particularly in the House of Representatives, has been hostile to trade agreements since the NAFTA, which won Congressional approval only after a bitter battle.

Observers in Japan see a weakened President, whose party has lost control of both Houses of Congress, and whose interest in Asia is constantly threatened by multiple crises elsewhere in the world.  Japanese commentators understandably wonder whether Obama has the political power to sell the results of a trade agreement to a Congress composed of Republicans who despise him and Democrats who dislike trade.  They question whether he can do it without having Trade Promotion Authority, which in the U.S. system, represents the essential accommodation between the President and Congress needed to approve trade negotiations.  And listening to the cacophony, from a distance, it sometimes appears that the opponents to TPP and its potential supporters share a hostility to Japan.

For example, for a year, Japanese and U.S. negotiators have been trying to reach a market access agreement, but have been unable to resolve the two most sensitive areas—agriculture and autos.   In the U.S., agricultural exporters—particularly the pork and beef industries— are strongly pro-trade; their support is indispensable to securing congressional approval of trade agreements.  Yet in TPP, the pork industry has repeatedly said that if Japan cannot agree to go to zero on tariffs than it should be excluded from the TPP.  They take this absolutist position, despite the fact that Japan is already the number one market in the world for U.S. pork and U.S. beef.

Autos and auto parts have traditionally been the flash point in U.S.-Japan trade relations.  For the past year, GM, Ford and Chrysler—the “big 3”—along with the United Auto Workers have stated their opposition to the TPP, because of Japan’s closed auto market, unless the agreement contains binding and enforceable rules against currency manipulation.    There is no doubt that currency manipulation, particularly, but not only, by China, undercuts the benefits of trade agreements.  Nor is there any doubt that the International Monetary Fund (IMF), which has responsibility for addressing this problem, has failed completely, as Fred Bergsten of the Peterson Institute has pointed out.  Using the TPP negotiation to make possible meaningful action against nations that manipulate their currency is certainly an idea worth trying, although the Ministry of Finance, the U.S. Treasury Department and other TPP nations balk at including such provisions in a trade agreement.

But it is completely unpersuasive for the U.S. auto industry and its congressional supporters to talk about the Japanese auto market as if it were 1985, rather than 2015.  Over the past 30 years, Japanese auto makers have moved an enormous amount of production to the North America, because of the advantages of localized production and because of the U.S. government pressure to do so.  Toyota, Honda and Nissan have been important parts of the U.S. economy and manufacturing revival, their competition has spurred the Big 3 to make better cars, and the U.S. has secured its position as one of the best places in the world to manufacture cars.   Honda North America will be a net exporter from the United States this year, and almost a million cars will be exported from the U.S. overall.  Given the global operations and aspirations of the Big 3, they should be strong supporters of the TPP, which will lower trade barriers in many of their target markets, rather than using their considerable political clout to prevent an agreement.

Japan, and other TPP nations, find it troubling that the Congress has not given President Obama the authority to negotiate trade agreements which will be guaranteed an up or down vote without amendments.    We understand why the TPP nations would feel more comfortable if Congress had given the President Trade Promotion Authority (TPA) as it is now known.  But the value of TPA should not be overestimated.  Many members of Congress hate “fast track”—whatever name it is given.  No amount of consultation satisfies them, and they are fundamentally uncomfortable giving up the right that legislators ordinarily have to offer amendments to the matter before them.  For that reason, Congress denied Bill Clinton negotiating authority for the last six years of his presidency, during a time of booming prosperity.  When negotiating authority has been granted, Congress has repeatedly demonstrated its willingness to revisit key provisions of the trade agreements that are presumably unamendable.  Mexico, Korea, and Colombia can attest to that from bitter experience.

If TPA does not provide an absolute guarantee that an agreement reached will not be re-opened, what can?  The agreement, if reached, will involve 12 nations, making it much harder to re-negotiate than a simple bilateral deal.  The agreement, once completed, will have the full support of the Obama administration and key members of the Republican majority on Capitol Hill.  But above all, the agreement will be seen for what it is: the economic centerpiece of the U.S. position in the Asia-Pacific, and the rules-based alternative to China’s state capitalism that the U.S., Japan, Canada, Australia and Mexico and seven other nations are offering.   That is higher ground on which the trade battle should be fought on Capitol Hill than the “process” argument of whether to grant trade promotion authority.

Many in the Washington business community criticize President Obama for being insufficiently committed to the trade agenda.   The criticism is unjustified.  Despite the daunting challenge of taking on many of his strongest Democratic supporters, Obama has committed the United States to the most ambitious trade agenda in 20 years, starting with TPP.   Just days after the disastrous mid-term election, Obama came to Asia and reached a landmark deal with China on climate change, and Michael Froman,  his indefatigable trade representative, provided the leadership to get both the Information Technology Agreement (ITA) and the Trade Facilitation Agreement (TFA) back on track.   These actions show a president who understands the importance of trade to the economic strength of the United States, and is committed to completing trade agreements as part of his legacy.  We are confident that if a strong agreement can be reached, Congress will agree with the President that it is in the national interest.