FINANCIAL TIMES
24-11-16

Geopolitical role of trade deals is often overdramatised

Trump ditching TPP agreement will be a missed opportunity, not a catastrophe

Alan Beattie

When leaders from throughout the Asia-Pacific region met in Lima last weekend, one topic dominated the gathering: Donald Trump’s threat to ditch the 12-nation Trans-Pacific Partnership (TPP).

The president-elect says he will begin his administration by serving notice of US withdrawal from the trade deal, which he labels a “disaster for our country”. His plans have stoked fears throughout the region that the era of Washington’s hegemony over trade — and its geopolitical influence more generally— is coming to an end. In Lima, a clearly delighted China signalled it was more than happy to take over as the main driver of trade policy.

But while Mr Trump could do serious damage with another of his threats — huge import tariffs on China and Mexico — history suggests the importance of bilateral or regional deals in shaping world trade is often overstated. Nor does it appear that trade agreements are necessarily a cause rather than a consequence of geopolitical influence.

The fear that a state-of-the-art US model will be replaced by an inferior Chinese system of rules looks overdone. Beijing does not have an extensive rival set of laws to propagate. Its favoured trade pact, the Regional Comprehensive Economic Partnership, is known to negotiators as “the stapler”. It does little more than gather together existing bilateral and regional agreements and has little content beyond cuts in goods tariffs.

The “China model” is not a new and disturbing diversion from a move towards deeper economic integration: it is essentially the status quo. If TPP does fail, the US will have fumbled a chance to liberalise some trade in services and restrain state-owned enterprises from distorting markets. But that is a missed opportunity, not a catastrophe.

More generally, eliding the difference between official agreements and real cross-border commerce in goods and services leads to overestimating the importance of what officials say as opposed to what business people do.

The rapid integration of Asian markets over the past 25 years, often to join US-oriented supply chains, was driven mainly by technical improvements in communication and digitisation, not formal reciprocal bilateral or regional trade pacts. The US has signed no significant trade deal in Asia since the Uruguay Round of multilateral talks was completed in 1994, apart from bilaterals with South Korea and Singapore. Its influence has come from American businesses and consumers, not bureaucrats.

Instead, the most important liberalisation was a wave of unilateral tariff cutting by emerging economies in the early 1990s, followed by a voluntary open agreement on information technology goods, not a conventional trade deal. Governments that want to open their markets will continue to do so, even without the TPP to coerce them.

As for the geopolitical role of trade deals, they may act as symbolic consummations of a foreign policy relationship, but do not necessarily deepen ties by themselves. For example, Washington showed solidarity with market-oriented Mexican governments in the late 1980s and early 1990s by including Mexico in the North American Free Trade Agreement. Two decades later, Nafta is not visibly bolstering ties. Instead, it has — perhaps unfairly — become a reviled symbol of American deindustrialisation, frequently denounced by Mr Trump.

This is not to downplay concerns about the US’s future in the Asia Pacific. If the US decides to draw back from its security role in the region, it would undermine the country’s prestige as the “indispensable nation”. But that is almost entirely unconnected with whether a particular trade deal succeeds or not. There are many other worries about Mr Trump’s trade policies — notably his calls for tariffs that could set off destructive trade wars. But the history of trade pacts as an instrument of foreign policy suggests that the US’s role in Asia —and Chinese ambitions to replace it — will be determined by far more than just TPP.