The Isolationist Pivot – What Abandoning TPP Means for US Foreign Policy

With the stroke of a pen, President Donald Trump officially reneged on the United States’ commitment to the Trans-Pacific Partnership (TPP), undoing a decade-long diplomatic effort to consolidate US leadership in the Pacific region. By discarding the agreement without any consideration for the long-term repercussions, the president signaled that the skepticism and vitriol manifested towards international agreements throughout his campaign are indeed part of his policy agenda – even if this means disappointing traditional allies and disregarding pre-existing international commitments. In eschewing the agreement, Trump not only repudiated the Obama administration’s commitment to multilateralism but also broke a long-standing bipartisan consensus around the benefits of free trade.

Given the strong sentiments manifested against the trade deal from populists on both the left and the right during the 2016 presidential campaign, defending the TPP has been a political non-starter for any elected official hoping for reelection. Even Republican legislators, who were expected to cooperate with President Obama to pass the deal during the lame-duck session, have since distanced themselves from it. Moreover, the consolidation of public opinion against the TPP has made any discussion of the issue an intellectual minefield.

As a result, little consideration has been given to the costs that the United States will incur by abandoning the deal. Similarly, while a fair amount has been said about the economic impact of the deal, discussion of its geopolitical consequences has not constituted any significant portion of the conversation. Yet when both aspects of the deal are taken into consideration, revoking the United States’ commitment to the TPP may be a move that President Trump will come to regret.

The Basics of TPP

The TPP is a Regional Trade Agreement (RTA), designed to institutionalize a set of common economic guidelines and liberalize trade between 12 Pacific-Rim economies, the most substantial of which are the United States and Japan. If ratified, the TPP would create a single market in the Pacific Region similar to the EU. In order for the treaty to go into effect, it requires ratification by at least six countries, the combined GDP of which represents 85 percent of the total GDP of all nations in the agreement – making it impossible for the deal to survive without US and Japanese support.

Many expected the treaty to be a boon for US exporters because it would cut more than 18,000 individual taxes and tariffs - uniformly reducing trade barriers across the region. From the perspective of the average producer, international trade agreements diminish monopolistic power in domestic markets, generate savings that can be later used for investment, and promote the shift of factor endowments to more productive ventures. The TPP would also provide greater economies of scale for US companies, given their new access to a broader pool of consumers in Asia. The lower unitary cost of production would allow US companies to better compete in export markets, sell more products and also lower domestic prices for locally produced and consumed goods. According to the Peterson Institute for International Economics, the president’s signing the TPP would result in a 9.1 percent increase in US exports by 2030. This would add more than $244 billion to the nation’s GDP over that time period.

The agreement would also have harmonized labor and environmental standards across the region and promoted a common set of guidelines to regulate competition, investment, and intellectual property rights. Property rights are of particular interest to the United States in regards to its economic contest with China. Despite the fact that China will overcome the United States as the world’s largest economy by the end of the decade, the US maintains a significant advantage when it comes to per capita purchasing power (PPP) and technology and innovation. Maintaining this advantageous status quo relies, in part, on enforcing intellectual property rights both domestically and abroad; the TPP would have ensured the enforcement of American property rights in China’s backyard.

Although critics on the left have argued that the TPP would lead to a “race to the bottom” for American labor standards, the deal would actually provide more developed countries with the leverage to promote higher labor standards across the board. For example, countries like Brunei, Vietnam, and Malaysia were required to improve their labor laws before they would be allowed to join the agreement. Moreover, the agreement’s mechanism for the settlement of disputes establishes similar enforcement capabilities as those used by the World Trade Organization to ensure a strict level of compliance with the stipulations of the agreement.

President Obama’s Path to the 21st Century

Significantly, the TPP was meant to outline the path forward for US global leadership in the 21st century. In addition to pushing a strong commitment to international cooperation, the Obama administration saw a shift in focus areas as central to maintaining the United States’ standing in the world. In the eyes of President Obama, developing regions like East Asia and Latin America merited more attention than traditional hotspots in Europe and the Middle East. With this in mind, the TPP was designed with three strategic objectives: first,  to develop a common international trade and regulations regime to ensure that the gains from globalization continue; second, to increase US influence in the rapidly growing region of East Asia; and third, to use the bargaining power of the TPP bloc to set the global economic agenda and prevent China from usurping leadership from the US.

In the context of an interconnected and globalized world, the only way to ensure positive outcomes is by embracing a multilateral approach to international relations. This is particularly true in international economic relations, as economies are no longer local but instead increasingly interdependent. According to statistics from the World Bank, the trade of goods and services today accounts for 57.9 percent of global GDP, up from only 24.9 percent  in 1960. During this same period, global GDP per capita has risen from $449 in 1960 to $9,995 in 2015, while US GDP per capita has risen from $3,007 in 1960 to $55,836 in 2015.

Although correlation does not always imply causation, 90 percent of economists agree that free trade is beneficial for general economic welfare.This is more than just theoretical accord, but a consensus supported by a vast range of robust empirical studies . As national and regional economies have become increasingly specialized based on the abundance of their factor endowments, the production of goods and services has increased, global prices have fallen, and the surplus received by consumers has grown. In sum, trade allows countries to achieve higher real incomes than they otherwise would in a closed economy. The positive effects of economic openness are best evidenced by the “catch-up effect” seen in developing countries, which have experienced an average GDP per capita growth rate above 3 percent since 1990.

Trade also generates positive externalities at the international level beyond simply the economic gains generated through comparative advantage. Exposure to other economies allows for the greater exchange of ideas through communication and travel. For example, one of the least discussed but perhaps most important externalities of NAFTA was the democratization of Mexico as a result of increased economic and political linkages with the US economy.

The strategic provision of material incentives – income, in the case of trade – can go a long way in promoting normative objectives like democracy, demilitarization, and environmental regulations. From a diplomatic perspective, with the passage of the TPP, the United States, Canada, and Japan would have much stronger ways to pressure other TPP countries into improving their democratic institutions, such as threatening to limit trade if authoritarian governments emerged.

Contextualizing the Asia Pivot

The importance of Asia as a whole in contemporary international affairs cannot be stressed enough. Current geopolitical issues, such as the conflicts over military establishments in the South China Sea and the growing threat of North Korean aggression, are a mere preview of what lies ahead. By 2030, Asia is expected to “have surpassed North America and Europe combined in terms of global power, based upon GDP, population size, military spending, and technological investment”. Moreover, according to estimates by the consultancy firm KPMG, between 54 and 66 percent of the global “middle-class” – more than 3.2 billion people – will be concentrated in the region in the coming years, due to its large share of population and economic growth. Soon, China will be the most populous and largest economy in the globe, posing a significant challenge to the United States’ status as sole superpower.

With these realities in mind, it becomes evident why President Obama’s Pivot to Asia was so crucial and why the TPP was hailed as its central pillar. Additionally, from a national perspective, the United States has clear economic interests in the agreement. With nearly 45 percent of current US exports going to TPP countries, there is a clear need for improved market access, trade facilitation, and guidelines for trade with these countries. On the other hand, due to the fast-paced change that is expected to occur in Asia during the next two decades and the tensions that will emerge with China, US presence as a balancing force to ensure regional stability is essential.

Although President Trump and his advisors have apparently not yet come to terms with this reality, the only way to achieve a much-needed balance is by prioritizing economic power over military might.

When combined, the GDP of the 12 countries of the TPP bloc account for 40 percent of global GDP, substantially more than China’s 16 percent. Similarly, in terms of trade volume, TPP countries account for $9.6 trillion in trade, more than twice as much as China’s $4.3 trillion. Uniting this much economic activity under a common set of standards would provide the TPP bloc with an advantage over China by defining world markets through standards dictated by the United States.

The institutionalization of certain trade practices under the TPP would preserve the liberal international order – led by the United States and its allies – that has dictated global affairs since the end of the Second World War. As David Lake explains in British and American Hegemony Compared, international institutions rather than sheer power buttress the current international regime. International organizations like the International Monetary Fund, the World Trade Organization, and the World Bank provide a legal liability framework, reduce transaction costs, and provide information and transparency throughout the globe. These organizations strengthen the norms of reciprocity and multilateralism, which not only make cooperative equilibriums durable but also make them less costly to maintain. The TPP would be another institution in this mold, focused on promoting economic openness and stability in the Pacific region.

As the central economy of the TPP, the United States would continue to enjoy the power of setting the agenda in the global economy. Additionally, the TPP has the potential to revive broader trade negotiations in the World Trade Organization, which stalled after the collapse of the Doha round. With TPP members representing such a large share of global GDP, the luxury of not abidingby TPP standards will eventually come at too high a price for other countries to continue, forcing them to either join the TPP, create other overlapping agreements, or revive the Doha round.

“We Don’t Win Anymore” – President Trump

Throughout his campaign and during his first month in office, Donald Trump has railed against Chinese economic practices as a threat to the United States’ wellbeing,  promising to impose heavier tariffs on imports. Although Trump’s flippant attitude towards China certainly raises concerns about possible conflicts down the road, from a policy perspective, Trump’s isolationism hands China a golden opportunity to augment its international influence. Immediately after Trump’s victory, China moved to rekindle the Regional Comprehensive Economic Partnership (RCEP) – a deal that would rival the TPP.

The RCEP includes seven TPP members and would have the same objectives of trade integration and common regulation. Nevertheless, the RCEP would also include China and India while excluding the United States, Mexico, Canada, Chile, and Peru. If the RCEP is ratified by member countries, it would be China, not the United States, dictating the economic regulations and standards of the Pacific region. This would not only diminish US leadership in the region but also divert trade from the United States to China.

The RCEP would also lack the environmental and labor regulations included in the TPP and would not have a common intellectual property right regime with the United States. Moreover, Chinese exporters would have more favorable access to Asian markets than would US exporters – significantly jeopardizing American exporting industries. According to estimates by the Council of Economic Advisors, nearly $225 billion in exports would go to RCEP, rather than TPP, members. Additionally, nearly five million jobs and 162,000 export businesses would be put at risk for trade diversion to China.  

The consequences of withdrawing from the TPP have grander geopolitical consequences as well. Because China is vying with the United States for the role of leading world power, forging strategic alliances with China’s neighbors would hold in check any possible revisionist tendencies. Greater economic integration between the United States and countries in the Pacific region would mean an implicit US security commitment in the region and so would serve as a deterrent if China overstepped any boundaries.

Although security and economic concerns are often viewed separately from one another, they frequently overlap. Being at the helm of as large an economic trade bloc as  the TPP would generate spillover benefits for the United States in terms of both setting international norms and ensuring international security.

Although only a little over a month has elapsed since the president’s inauguration, the abandonment of the TPP offers particular insight into the central tenets of the fledgling administration’s foreign policy. The first of these is a clear disregard for the “Foreign–Policy Establishment” – the group of intellectuals, bureaucrats, and practitioners concentrated in academic institutions and think tanks – that has for decades been at the heart of American foreign policymaking. Instead, a small group of ideological advisors continue to push “America First” as the only guiding principle of the administration’s foreign policy agenda. There is also a clear commitment to fulfilling far-fetched campaign promises, even if it means effectively reducing US international influence. Finally, we see that unilateralism and preferential treatment have replaced the multilateralism that has been the core of American diplomacy for decades. This is best reflected in Trump’s promises to create bilateral agreements with Japan and the UK, in lieu of regional pacts.  

During his time in office, President Barack Obama made it clear that American power and prosperity result from American leadership in the international community and the durable partnerships that the country makes with its allies; the TPP was central to the Obama administration’s Pivot to Asia. Nonetheless, President Trump has made it clear that he intends to be the diametrical opposition of his predecessor.

From an economic perspective, the reduction of tradeis expected to increase consumer costs, limit market access in the Pacific region for exporters, and increase the risk of trade diversion from the United States to China. From a geopolitical perspective, US influence in the region will be significantly reduced.  China will now have an advantage over the United States by pushing for the establishment of the RCEP as a means of dictating regional trade policy. It may still be too early to fully understand the consequences of President Trump’s abandonment of the TPP. However, if President Trump continues to implement his firebrand style of isolationism, the United States may soon find itself with limited influence in a global and political axis that is gradually tilting towards Asia.