Sat, 27th May 2017

Anirudh Sethi Report


Trade zones out, tough bargains in for 2017

A reversal in U.S. trade policy could make 2017 the year that efforts to build multinational trade zones crumble, returning the focus to tough, bilateral dealmaking.

In October 2015, officials from 12 nations including the U.S. and Japan gathered in the American city of Atlanta to ink the historic Trans-Pacific Partnership, confident of the dawning of a new age of trade governed by such high-level, multilateral agreements. Yet that dream lies all but dead just over a year later, not least due to Donald Trump’s presidential victory and his pledge to pull the U.S. from the agreement upon taking office Jan. 20.

 Many bilateral free trade agreements, which reduce or abolish tariffs and set rules for trade in goods and services between two nations, have been struck over the years. Multilateral agreements extend this notion to the regional level and improve security in the areas they cover, further greasing the wheels of commerce.

Yet Trump prefers his trade pacts one on one — the better to drive hard bargains, leveraging U.S. economic and diplomatic might to secure the most advantageous terms. Multilateral pacts involve far more careful compromise and require each nation to give and take small concessions rather than pushing for an unambiguous win.

Us first

The president-elect almost certainly will scuttle the TPP, and his approach could put negotiations on ice between the U.S. and European Union for the Transatlantic Trade and Investment Partnership. Trump also could make good on his pledge to renegotiate the North American Free Trade Agreement with Mexico and Canada, as well as hinder talks on the Environmental Goods Agreement, which aims to liberalize trade in environmentally friendly products.

Chances are good that Trump will approach Japan regarding a bilateral trade pact. But America’s stance likely will shift from idealism — creating zones of free and fair trade — to pragmatism focused on selling as many American products overseas as possible if the Commerce Department, rather than the Office of the U.S. Trade Representative, takes control of talks.

“If it comes down to a bilateral pact, we would have to open markets more than under the TPP — we’ll lose for sure,” said an economic expert with experience in Japan’s cabinet. Tokyo can do only so much to prepare. Japan tended to use other countries as buffers to avoid direct conflict with the U.S. during TPP negotiations, such as putting New Zealand between it and Washington to convey demands during negotiations over dairy products. But that tactic would be unavailable in a one-on-one setting.

Trump could even hike tariffs on Japanese goods by tens of percentage points to shore up support for his administration at home, ahead of talks on a Japan-U.S. trade pact. Such a move would be legal if it is within limits set under the World Trade Organization.

New allies

Officials at Japan’s trade ministry in mid-December supported changing tack to focus on pacts with European and Southeast Asian nations. Tokyo hopes to conclude talks swiftly on an economic partnership agreement with the EU as well as the Regional Comprehensive Economic Partnership, which links nations such as Japan and China with the Association of Southeast Asian Nations. This move aims to “put pressure on the U.S. by demonstrating the merits of multilateral deals,” a trade official said.

Japan seems to be shifting from its position of trying to pull China into a broader free trade area by quickly bringing the TPP into force. But neither the EU pact nor the RCEP offers trade quite as free or rules quite as progressive as those under the 12-nation agreement. Even so, reaching a compromise soon on either will be a challenge.

Though it is too soon to tell whether Japan will team with these partners to slow the Trump administration’s trade agenda or fold in the face of an American power play, this year looks certain to be a watershed for the global commercial order.

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