Following an event hosted by Georgetown University’s Mortara Center for International Studies, the Georgetown Journal of International Affairs sat down with Dr. Marc Busch, a member of the Industry Trade Advisory Committee on Standards and Technical Trade Barriers for the U.S. Trade Representative and the U.S. Department of Commerce, to discuss the Trans Pacific Partnership and how it relates to the future of international trade politics.
GJIA: What challenges does the United States now face in finalizing the Trans Pacific Partnership (TPP) and getting approval for the deal by U.S. policy makers?
MB: The greatest challenge facing the U.S. is selling the deal to a trade-reluctant Congress torn between those on the Democratic side, who don't necessarily believe in international trade, and those on the Republican side, who may feel that President Obama has overstepped his instructions under Trade Promotion Authority (TPA), or don’t want to see him get the credit for a legacy deal. That is always going to be a problem with selling an agreement this complicated to the American people. Moreover, the current political environment is not exactly one in which we would expect elected officials, who are leery talking about trade under the best of circumstances, to debate the issue. The run up to 2016 will not help in this regard.
GJIA: Does China have any interest in joining the TPP? If so, what prevented them from entering the first round of negotiations?
MB: China isn’t ready for the TPP at the moment, and the deal would have certainly complicated things greatly for Chinese politics. The number I’m hearing is that China is about five years out from joining the pact. It’s going to require a lot of effort on China’s part to get its own act together, at a time when economic growth within the country has been slowing and domestic tensions regarding economic issues have been bubbling to the surface.
Had China been an original member, it is doubtful that we would be having this conversation today. A deal inclusive of China would have caused too much political blowback. The question is how everything will work in five years, when China, the world’s second largest economy, will be faced with a take-it-or-leave-it-offer. You can’t reopen the deal and renegotiate it without re-ratifying it. Will China deem it appropriate for the world’s second largest economy to simply accede to a fait accompli? Japan gave us a little bit of an indication as to how hard that’s going to be: Japan, the world’s third largest economy, was very late to the TPP game, but had a year of preparatory work done by the time it joined in the process. China will have to start its preparatory work soon too.
In five years, politics in China and the United States may well make today’s conflict look pedestrian. It will test the political will of our leaders in a way that today’s run-up to TPP has not. That is because China is such a fundamental supplier of goods, and eventually services, to the U.S. market, whereas the United States already has bilateral trade agreements with practically all of the TPP members. Japan is the big pickup for the United States in this deal, as our fourth largest trade partner. After that, Malaysia is the second big pick up, but it ranks only 24th on the list of the largest U.S. trade partners. If the TPP is a complicated deal now, China will turn up the temperature on the politics of this agreement immeasurably.
With the current pivot to Asia and efforts to constrain China, perhaps the political discussion in five years time will be more about foreign policy than economics. All trade deals have a foreign policy dimension to them — maybe that will be the big sell for U.S. politicians to pursue Chinese membership in five years.
GJIA: What are the domestic challenges and considerations that both Japan and China have in modernizing their economies to meet new international standards?
MB: China has many tariffs and is increasingly using nontariff barriers to protect domestic industries. Japan has a very protected agricultural sector, and “Abenomics” still faces challenges. But think about the opportunities for China. It is now exporting more branded goods than it has in the past. China is no longer just a supplier of inputs. The banking system in China has been a notorious challenge, and the country has opted for an indigenous solution, instead of entirely outsourcing its banking infrastructure to the United States and the European Union. Furthermore, as services seem limitless, especially now in the digital age, e-commerce and questions about cloud computing are becoming increasingly important parts of trade deals. It’s hard to be an entrepreneur in 2015 without cloud computing, but there has been a lot of pushback against it over privacy issues and things that are beginning to sound, as in the case of South Korea and retail banking, like a disguised restriction on trade. It is important that domestic reform proceeds quickly and in-line with Chinese and Japanese objectives, so both can better balance their offensive and defensive interests.
GJIA: How can simplifying rules of origin help the United States?
MB: First of all, rules of origin are one of the least interesting parts of a trade deal, but they are also one of the most important parts of TPP. They define the product as having a country of origin, even though the inputs are sourced from a global supply chain.
What, for example, is a U.S. car? Is an iPhone an American good? What defines a Singaporean shoe? To qualify for Super-MFN, governments negotiate rules of origin to answer these questions. The rules vary by product, but also by agreement. It would be simpler to have one set of rules of origin across TPP than for exporters to have to worry about differences across 11 bilateral trade deals. The WTO doesn’t help in this regard; the multilateral institution recognizes that differences across rules of origin present a problem, but unless governments harmonize, there’s no simple answer. In this regard, one hope is that TPP will solve the “noodle bowl” problem of having Asia divided by countless different rules of origin.
GJIA: What is competitive liberalization and how does it relate to the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership (TTIP)?
MB: The idea behind competitive liberalization is that the United States isn’t in a vacuum. Our trade partners are signing preferential trade deals left and right. The European Union has signed them with Canada, India, and other countries that aren’t even on the U.S. radar screen. The intuition behind competitive liberalization is that countries need to match each other’s Super-MFN market access. Otherwise, their exporters are at a competitive disadvantage with respect to their rivals. In this race for Super-MFN, Singapore and Chile lead the way. They want foreign direct investment (FDI), and what better way to attract FDI than to advertise yourself as an export platform to the world? Chile, for example, already has Super-MFN with China.
The United States is losing ground to other countries in this race for Super-MFN. Part of what the Obama administration has to remind the American people is that, if we are not part of this race, a lot of U.S. companies won’t be able to compete with their European rivals. Under these circumstances, the risk is that “footloose capital” will move to jurisdictions that have more Super-MFN.
Dr. Marc Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service at Georgetown University. He is an expert on international trade policy and law. He serves as a member of the Industry Trade Advisory Committee on Standards and Technical Trade Barriers for the U.S. Trade Representative and the U.S. Department of Commerce. In the past, he has addressed a wide variety of governments and international institutions, including the Advisory Centre on WTO Law, the Swedish International Development Cooperation Agency, the World Bank, and the United Nations, and he has testified before the U.S. Congress on Boeing-Airbus litigation.