The Trans-Pacific Partnership agreement was supposed to have been completed last year. Not only was the self-imposed deadline missed, but the next ministerial meeting has been postponed and no new date has been announced.
It was always an ambitious goal. It would cover twelve countries initially (US, Japan,Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Brunei, Malaysia and Vietnam) that account for about 40% of the world’s GDP. It intends to go well beyond past trade agreements to include controversial issues like preferential treatment of state-owned enterprises and other government procurement issues and intellectual property rights.
What it in effect does, from one level of analysis, is to marry the old Trans-Pacific Strategic Economic Partnership (2005 agreement between Brunei, Chile, Singapore and New Zealand) to NAFTA (US, Mexico and Canada) and it throws in Japan, Australia and Peru for good measure). For the US, it compliments the Obama Administration’s Asian Pivot.
Japan’s Prime Minister Abe was initially not very supportive, but he came around. In fact, Japanese officials now seem to be more ardent supporters than the Obama Administration and have made little secret of the fact that it has been disappointed with the US effort. And the US position just got more complicated.
The US Congress is attaching new conditions to its willingness to consider granting Obama, fast-track authority (“trade promotion authority), which allows the executive branch to negotiate a trade agreement and gives Congress 90-days to review it with an accept/reject vote. For all the important trade agreements reached through Republican and Democrat Administrations, the president was granted such authority.
In particular, the bill that authorizes Obama that has been proposed in a bipartisan fashion raises the significance of foreign exchange manipulation to a “principal negotiating objective”. Previously it had been simply an objective.
There has been growing Congressional frustration with the executive branch’s conduct of currency policy that at least goes back into the Bush Administration The Treasury’s semi-annual report has not cited any country for manipulating its currency for more a decade, which seems to defy logic, given vast amount of reserve amassed and the frequency of intervention. Last year, a letter seeking greater enforcement was signed by 60 Senators and 230 Representatives.
From a trade perspective, the ideal solution is for other countries to adopt best practices in the foreign exchange market as agreed up by the IMF and G20. In lieu of this, companies (and their lobbying arms) either want to penalize the companies the benefit, or in some other way made whole, or as Fred Bergsten at the Peter G. Peterson Institute for International Economics advocates, counter the foreign central bank intervention with offsetting intervention by the US.
The only thing worse that not getting trade promotion authority, would be to get it with such conditions attached that make it less likely for parliaments of other countries to accept it. Not securing TPA would likely signal the end of the TPP, but securing a strict conditionality could also jeopardize it, especially, as US negotiators, who have the biggest market to open further for others, has seen by many others to be, using its size to make demands rather than truly negotiate.
Investors should monitor two things. The first is when the TPP negotiations resume and the enthusiasm by the US. Second is the progress toward granting Obama trade promotion authority.
Japan is working hard to improve trade and investment ties to the ASEAN countries. It would continue to do so even if TPP negotiations fail. Still, Prime Minister Abe is likely counting of the some of the changes that would be required to further strengthen the third and most elusive arrow (structural reform) of Abenomics. If TPP fails, some of the smaller countries would be forgoing an early opportunity to be on the cutting edge.
However, arguably, the US stands to lose the most by the failure of TPP. China is not included in the original negotiators (either is South Korea, which has indicated it would joining), and would give it the opportunity to form an alternative bloc. It would be embarrassing for the US and would raise questions what the Asian Pivot really means. It would hollow out the dream of American political and economic leaders that the 21st century is America’s Pacific Century.
This piece is cross-posted from Marc to Market with permission.