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Trump’s Free Trade Turn

 5 min read / 

American politics, lately, appears to be anything but short of headlines. While certainly not every story is front page material, one consequence of such an accelerated news cycle is that some otherwise noteworthy developments pass by without receiving due attention. One such instance would be President Trump apparently having revised his attitude toward the Trans-Pacific Partnership (TPP) last week. Candidate Trump vigorously opposed the multilateral free trade agreement. One of his campaign pledges, Trump then ordered to discontinue the US involvement in the negation process shortly after having assumed office in January 2017. In terms of international trade, the recent headlines coming out of the White House have predominantly dealt with the proposed and imposed tariffs on aluminium and steel, with a rhetoric of winning and losing.

For now, Trump merely requested his team of economic advisers around newly-appointed director Larry Kudlow to revisit the final deal, whether concrete political actions would indeed follow or not remains uncertain for now. The overall tone, however, has shifted.

What is the TPP?

Officially signed on 8 March 2018, the TPP is a supra-regional, multilateral free trade agreement between 11 countries on both sides of the Pacific Ocean. The TPP aims to establish a common, market-oriented regulatory framework while largely eliminating both trade and investment barriers between its member states. The agreement is both deep and comprehensive, which is remarkable given the unusual diversity of its signatories, ranging from low- to high-income economies, from manufacturing-based to service economies and countries primarily capitalising on natural resource exports. The TPP will cover both trading goods and services. In achieving greater economic integration, it will also target issues surrounding intellectual property rights, digitisation and sustainability. Allowing for less restricted trade is expected to result in mutual economic performance gains as consumers, as well as producers, would access greater varieties of goods and services at lower prices. Economies restructure while firms benefit from international specialisation and previously inaccessible collaboration opportunities become profitable.

Would the US benefit?

On an aggregate level, the benefits from joining the TPP would likely outweigh the drawbacks of doing so. Still, certain parts of the US economy would become exposed to increased, in fact superior, international competition, meaning some parts of the US economy might lose out.

One common fear is that entering the TPP puts severe pressure on US manufacturing jobs. A study from Tufts University found an estimated 448,000 American jobs were likely to be cut by 2025 if the US entered the TPP as planned. However, forecasting the exact effects of trade agreements can culminate in entirely different results, depending on what the underlying assumptions are.

Another study, led by the United States International Trade Commission (USICT), projects that even on an aggregate level, the US labour market would benefit, adding 128,000 jobs by 2032 compared to the baseline scenario for no TPP participation. Still, 128,000 new jobs translate to an increase of merely 0.07%, and while primarily the agriculture (+ 0.5%) and the service sector (+ 0.1%) gain, output in manufacturing and resource extraction would indeed fall slightly (- 0.1%). Overall, real GDP would increase by an additional 0.15% if the US were to enter the TPP.

The impact projected by the USITC study, though positive, appears somewhat subdued. This may have two reasons. First, for the US, the TPP would mean only minor improvements to the trade relations with Canada and Mexico since the in 1994 ratified trilateral trade bloc NAFTA already eliminated the vast majority of trade and investment barriers. Second, the US has trade agreements with four other TPP nations. Overall, about 80% of US imports from the 11 TPP member states are duty-free already. More integrated commercial ties to Japan, still the fourth largest bilateral trading partner, would spark the most significant impact.

The USITC study still projects both exports and imports with current TPP member states to grow noticeably from entering the partnership, in excess of 18.7% and 10.4% respectively. In total, over 11,000 single tariffs imposed on US sales abroad would be eliminated. Supported by the Peterson Insitute for International Economics, Petri and Plummer (2016) estimate an even larger impact from entering the TPP compared to the USITC study. The US would become more competitive and according to their model, aggregate US exports would grow by an additional 9.1% until 2030. This would translate to an additional  $357bn worth of US goods and services being sold abroad, which would be a significant gain indeed.

Beyond economic reasons, the US, by staying out of the TPP, risk losing further regional influence to China. Although not off the table, it is rather unlikely that China enters the TPP at any point in the near future as major reforms, especially on state-owned enterprises, would need to be implemented first. President Trump asking his advisers to revisit the final deal on the TPP now comes at a time of still ongoing dissents over trade conditions with China. In the meantime, while China may not be part of the TPP, it will enter the Regional Comprehensive Economic Partnerships (RCEP) alongside ASEAN member states as well as India, South Korea, Japan, Australia and New Zealand. Occasionally labelled as an ‘alternative’ pact to the TPP, the RCEP is scheduled to be signed in November 2018.

A Sign, Not a Promise

So far, all speculation builds on an indication merely. President Trump merely tweeted and no concrete policy action has followed. Overall, it is unlikely to see the US reentering and ratifying the terms of the TPP anytime soon. The free trade agreement, in its current form, has been agreed to among the other nations. For the US to reenter the partnership, new rounds of negotiations would need to take place. Still, the message is a positive one, whether further steps will follow remains to be seen.

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