USA’s withdrawal from TPP: Questions & Answers

Keeping his election campaign promise, US President Donald Trump signed the presidential memorandum to withdraw from Trans Pacific Partnership on his very first day in office (23 January). This article presents an overview of developments.

What is origin of TPP and what is impact of US withdrawal from it ?

TPP began its journey in 2005 when three countries viz. Chile, New Zealand and Singapore came together and created a free trade agreement called Trans-Pacific Strategic Economic Partnership or TPSEP. Later Brunei joined them and it was now also known as P4. From 2010 onwards, there were continuous (but often secret and opaque) discussions to make it a wider Trans-Pacific Partnership (TPP). The TPP negotiations were steered forward by former US President Barack Obama, who thought it a way to balance China’s rising influence in Asia.

In October 2015, an agreement was finally reached towards TPP as largest trade liberalization pact since WTO. However, TPP was yet to come into force.

As per its legislation, TPP can come to force when each of the 12 members ratifies it. However, if all members don’t ratify within 2 years, then at least six states (accounting for 85% of the total GDP of its members). Thus, withdrawal of United States leads to collapse of TPP because it alone shares more than half of GDP of all these 12 countries.

Post US withdrawal, the survival of TPP depends on two things. First, the other countries (if they wish to take it forward on smaller scale) will need to amend its legislation, so that it may come into force without US participation. Second, the other countries should see some meaning of a TPP without US. Japan’s PM Shinjo Abe has already said that TPP is meaningless without US. We note that Japan is the only country to have ratified the TPP.

What are the salient features of TPP and why Trump promised to withdraw from it?

TPP was to be essentially a Free Trade Area that among other things, sought to lower the trade barriers among  its members, establish a common framework for intellectual property, enforce standards for labour and environment law, and establish an investor-state dispute settlement mechanism. Its objective was to liberalize trade in nearly all goods and services by eliminating tariff and non-tariff barriers to create a unified market (like Europe). For example, it promised to provide cheaper access to US for Japanese car makers and cheaper access to US vehicle makers in Vietnam and Malaysia.

TPP was hailed as the biggest trade deal in history and also the most sophisticated deal ever negotiated in the history. Obama viewed TPP as a fundamental part of the US’s strategic “pivot to Asia”.

Abandoning the TPP was a key part of Donald Trump’s election campaign. Trump favoured bilateral trade deals instead of multinational pacts. Opponents of TPP in US viewed the pact to favour big business and other countries at the cost of American jobs. They view TPP to intensify competition between countries’ labour forces.

What can be possible implications for China?

China has viewed TPP as a potential threat and ploy devised by the US to tighten its grip over its Asian trading partners. Since US has abandoned TPP, some analysts say that other members may run to China to make TPP efective. Some others call it a boon for China. Although it is yet to be seen which way TPP goes but one things seems to be clear that even if China is in board, it is not going to give much advantage to TPP because that would still mean higher tariffs in US market, something which had lured them since beginning in TPP.

Is US withdrawal return of protectionism?

This question is not easy to answer.  A cursory look at the agreement reveals that US idea to withdraw from TPP is to protect the US jobs and industries, so it brings back protectionism. Similarly, the countries in South East Asia such as Vietnam say that now they need to brace themselves for tighter trade controls in United States. In media, TPP has always been projected as a Free Trade Area.

However, going in details reveals something opposite. TPP negotiations included elaborate yet mostly secretive negotiations on intellectual property rights, foreign investments, environment and labor related matters; government and private enterprise, government procurement, technical barriers to Trade (TBT), transparency and regulatory coherence. The deal was to put more and more protectionist barriers in the form of stronger copyright and patent related laws, which would ultimately help the drug companies and corporate.

What would have been TPP implications over India and how the current developments affect India?

Major part of India’s exports belong to services and a deal such as TPP would have its negative implications for the country. If TPP is in place with India outside it, surely India loses competitive access to US markets for its several products and services. For example, Indian garment business would have faced a tough time as Vietnam would have been given a zero-duty access for textiles in the US. Indian exporters would have been forced to pay 14-30% duties. Similarly, yarn and fabric exports from India to countries like Vietnam would have been affected. This is because the provisions of TPP require clothing to be made from yarn and fabric manufactured in one of the member countries to qualify for duty-free access.

However, India has always focussed more on bilateral trade agreements under the WTO framework rather than showing its interest in mega trade deals like TPP. We have such agreements with Japan, Malaysia, Singapore, South Korea and doing negotiations with US, Australia, Canada and New Zealand. To some extent, these would dilute the ill-effects of TPP. However, since TPP is almost dead, no such potential problems loom large at the moment.

What should India do?

It is yet to be seen which way TPP goes.  In the meantime, India should work towards these three things:

1. strengthening its bilateral trade relations with various countries.
2. strengthening the WTO and its multilateral framework, which is facing challenges and needs support from countries like India.

Thirdly, it can also work towards early conclusion of Regional Comprehensive Economic Partnership (RCEP).