President-elect Joe Biden will have his hands full once he takes office in January. A lot of people are curious about whether he will invest political capital in trying to alter some of the income tax provisions introduced by the Tax Cuts and Jobs Act. Trying to prognosticate which bits of TCJA might be targeted for repeal or reform has become a favorite pastime of the tax community, judging from the large number of webinars on the topic.
This article suggests there are bigger fish to fry regarding a different category of taxes — tariffs. Rather than fixate on the TCJA, we should be asking what Biden intends to do about repairing our frayed trade relationships. That effort should include fixing the WTO’s dispute settlement system and forging new trade deals, especially in the Asia-Pacific region. The Trans-Pacific Partnership (TPP) stands out as unfinished business. Reviving it would be no easy task, and could carry domestic political risks. But that doesn’t make it a bad idea.
A country’s trade policy isn’t just about raising revenue from imports and creating new opportunities for exports. It encompasses broader geopolitical relationships. If poorly managed, the U.S. trade stance will forfeit critical turf to China and strain relations with our strategic allies. If well managed, trade can reassert U.S. influence. Given a choice between abandonment and ambition, we should select the latter.
Pivot to Asia, Revisited
Remember when the term “pivot to Asia” was all the talk in Washington? It said that China’s expansionist tendencies require a U.S. counterbalance. The Chinese Belt and Road Initiative (BRI) is a prime example of the kind of project that gave U.S. foreign policy experts heartburn. The BRI has been likened to China’s version of the Marshall Plan, though the comparison doesn’t do the BRI justice. It is a multiyear overseas infrastructure and development project that will inevitably cause the roughly 70 beneficiary nations to move closer to Beijing’s sphere of influence.1
The pivot to Asia was part of the Obama administration’s response, which placed an emphasis on strategic trade relationships. It made the TPP a desirable thing, beyond estimated benefits for the U.S. economy. Once ratified and fully implemented, trade expansion would have increased U.S. exports by $357 billion per year and added 0.5 percent to GDP, according to some estimates.2
The TPP would have lowered tariff and non-tariff barriers among its 12 signatory nations: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. President Obama signed the instrument in February 2016. It included several provisions that U.S. negotiators specifically demanded, at the behest of the U.S. business community. These included favorable terms for Big Pharma in the form of patent protections for biologics.3 The TPP also included investor-state dispute settlement (ISDS) procedures.
Typically, multilateral trade agreements are premised on the idea that only signatory nations can bring infringement proceedings or other formal complaints when a grievance occurs. That leaves corporate actors on the outside looking in, although they can appeal to their national trade authorities to advance any dispute that suits their economic interest. Still, the petitioner or claimant must be the country, never a private corporation. ISDS changes that, giving private firms the ability to directly bring infringement disputes before the appropriate adjudicatory bodies.
The Obama administration was initially lukewarm on ISDS clauses, but eventually instructed U.S. trade negotiators to require that they be included in the text of the TPP. That was for the sake of gaining political traction among Republicans in the U.S. Senate. In the end, the effort to appease GOP lawmakers backfired. The Republicans never came on board, and in the process the TPP lost support among Democrats, especially those with close trade union ties. Their objection was that the agreement skewed too far in the direction of corporate interests relative to consumers and workers. Some Democrats also complained that the TPP’s environmental protections were too weak.
By the time of the 2016 presidential elections, the TPP had become semi-toxic. It was as if the pent-up angst over the perceived ills of the North American Free Trade Agreement had been channeled and directed at the TPP. Both candidates, Donald Trump and Hillary Clinton, publicly criticized the pending trade deal throughout the campaign — although Trump did so more vigorously. In the case of Clinton, her rejection of the TPP was seen as a way to distance herself from NAFTA, signed by her husband in the 1990s. Later, as president, Trump withdrew the United States from the TPP in January 2017.
You may have figured out by now that I’m a proponent of free trade and economic globalization. I never thought NAFTA was so bad, and I think the TPP would have served our national interests quite well. The practical reality, however, is that 2016 was just a rotten time to be promoting a multilateral trade deal. Based on this year’s election results, not much has changed. Biden may have won, but the general skepticism toward multilateral trade pacts continues to hang around. Biden is certainly mindful of this. He may reengage with the WTO in due time, but he seems to be in no rush.4
Expect the same pattern with the punitive tariffs the United States imposes on imported steel and aluminum, dubiously justified under section 232 (the national security provision) of the Trade Expansion Act of 1962.5 Those tariffs will eventually be traded away for unrelated trade concessions, but Biden hasn’t made their elimination a priority — and he might remain silent on the question of whether the claimed national security threat was an appropriate maneuver. Biden knows all too well that the country’s largest labor union, the AFL-CIO, supported most of Trump’s tariffs. So did some members of his own party, such as Sen. Sherrod Brown of Ohio. When asked about his views on U.S. trade relationships, Biden’s stock answer has been to “build it back better.” Like most good slogans, the statement is sufficiently vague to allow flexibility in how things are addressed down the road.
What would a free-trade proponent whisper in Biden’s ear regarding a second flirtation with the TPP?6 The person would start by reminding Biden that 95 percent of our prospective customers live overseas. Next, the person would point out that the U.S. withdrawal from the TPP was enthusiastically celebrated in Beijing. Nothing makes China happier than when the United States veers toward economic isolationism. To reconsider the TPP is to rethink a U.S. retreat.7
At least some of the people inside the Biden administration will be keenly aware of this. Biden’s nominee for secretary of state, Antony Blinken, was a formative influencer behind the pivot to Asia a decade ago. Above all, whoever Biden appoints to serve as the next United States trade representative (USTR) must be highly skilled at persuasion.
RCEP Spells Fear
The substance of the TPP changed after the United States pulled out. The remaining 11 countries removed several provisions that had been included at Washington’s insistence. That included protections for biologics and ISDS procedures. To underscore these revisions, they rebranded the pact as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Membership in the CPTPP is not intended to be static. The Republic of China (Taiwan) has expressed a desire to join the pact and already has taken the initial steps toward conforming its regulatory regime to comply with requirements for market access. Admission to the CPTPP would be a major step for Taiwan, which is often precluded from joining multilateral organizations because of opposition from China.
As mentioned, China rejoiced when the United States abandoned the TPP. It responded by reaching out to a parallel trade agreement, known as the Regional Comprehensive Economic Partnership (RCEP), which was formed years earlier at the urging of the Indonesian government. The RCEP bloc includes the 10 nations that make up the Association of Southeast Asian Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Additionally, the RCEP includes five of the so-called plus-six nations that sometimes collaborate with ASEAN: Australia, China, Japan, New Zealand, and South Korea. The only plus-six member that stayed out of the RCEP is India.
The RCEP treaty was signed only weeks ago, on November 15. It didn’t attract much media attention because of competing headlines, but the RCEP is a big deal. The inclusion of economic powerhouses like China, Japan, and South Korea makes it a force to be reckoned with. Its members account for 30 percent of the world’s population and roughly 30 percent of global GDP. Strictly speaking, it’s the world’s largest trade pact — surpassing both the EU and NAFTA’s successor, the United States-Mexico-Canada Agreement (USMCA).
The RCEP calls for the elimination of 90 percent of tariffs among member states over the next 20 years. It also provides for common rules on e-commerce and intellectual property. It has rules-of-origin designations that will promote regional investment to the exclusion of non-RCEP countries.
Between the concurrent rise of the BRI and the RCEP, China is doubling down on integrating its economic interests with countries throughout the region. It has nothing to lose and everything to gain by partnering with these neighbors — including several traditional U.S. allies. The result will be that each of the affected economies will grow closer to China’s orbit, and further away from the United States.
There’s an overlap between the CPTPP nations and the RCEP nations. The primary difference is China’s presence in the latter accord. Perhaps the main reason for Biden to put his support behind the TPP (now subsumed by the CPTPP) is that it provides these countries with an alternative to reliance on Chinese supply chains. Were Taiwan added to the mix, the CPTPP might be poised to steal the RCEP’s thunder. The presence of Taiwan would effectively block China from ever considering joining the CPTPP.
Last month, Chinese President Xi Jinping surprised observers when he announced that China was open to joining the CPTPP. That effectively sets up a race between China and Taiwan to see who can get there first.
What’s the downside of the United States and Taiwan acting in lock-step to join the CPTPP, thereby keeping China out? In a word, the optics are bad. Who knows what the composition of the U.S. Senate will be in the future, but ratification would be a challenge under any scenario. Republicans will want biologics and ISDS back on the table; Democrats will want climate change issues to be addressed, because the pact lacks a chapter on environmental protections. It’s possible we’d see the same dynamics that played out with the original TPP in 2016, in which neither party wanted to be seen as supporting ratification. The job of the next USTR will be to convince our elected officials that international trade are not dirty words.
The Art of the Trade Deal
We find ourselves in an era in which any trade deal is a tough sell. This is despite persuasive economic arguments about international trade being beneficial to all participants. It’s a non-zero-sum game. More trade means more opportunity, more growth, and more jobs. But critics have done a fine job of casting doubt on that linkage.
Somehow President Trump managed to get the USMCA approved with bipartisan congressional support.8 That experience shows that a trade deal can succeed, even in a hostile environment. Could the USMCA serve as a role model for how future trade deals should be promoted? Perhaps not, because the context is entirely different. Because the USMCA was replacing NAFTA, it didn’t need to be perfect — it needed only to be better than its predecessor. That’s not the case with the CPTPP, which has no predecessor. It would need to be pitched as an improvement to the status quo, which requires convincing the public that reciprocal reductions in tariffs are good policy, and irrespective of tariffs, there are noneconomic reasons for the United States to reassert its global influence.
FOOTNOTES
1 In case you’re wondering, the “belt” refers to a Silk Road economic corridor that would extend, by land, across the central Asian republics. The “road” refers to a maritime equivalent that would use and expand shipping lanes across the South China Sea and the Indian Ocean to access markets in South Asia, Africa, and the Middle East.
2 These estimates are based on the analysis of economists Peter Petri and Michael Plumber, with the Peterson Institute for International Economics. A separate analysis conducted by the U.S. International Trade Commission estimated that the TPP would add 128,000 full-time jobs to the U.S. economy. The World Bank concluded that the TPP would increase workers’ wages in all signatory countries, although the U.S. wage increases would be small compared to those in other countries — primarily because U.S. wages were relatively high to begin with. A study by Tufts University, however, predicted that the TPP would cause job losses in the United States, Canada, and Japan.
3 The term “biologics” generally refers to a distinct category of drugs and treatment therapies derived from biological sources rather than chemical sources. Biologics promise great benefits to patients and great profits to pharmaceutical firms, which have invested heavily in their research and development.
4 Robert Goulder, “How (and Why) the United States Paralyzed the WTO,” Tax Notes Int’l, Dec. 9, 2019, p. 947.
5 Goulder, “Tariffs as Taxes: Trump Gets His Border Adjustment After All,” Tax Notes Int’l, Mar. 26, 2018, p. 1339.
6 For a more comprehensive analysis of why the imposition of trade barriers is a bad idea, see Kimberly A. Clausing, Open: The Progressive Case for Free Trade, Immigration, and Global Capital (2019). For related analysis, see Goulder, “Reason in a Time of Revolt: The Case for Not Blowing Things Up,” Tax Notes Int’l, Mar. 11, 2019, p. 1131.
7 For related analysis, see Jeffrey J. Schott, “Rebuild the Trans-Pacific Partnership Back Better,” Peterson Institute for International Economics, Trade and Investment Policy Watch blog, Nov. 30, 2020.
8 Goulder, “Hello USMCA, Haven’t We Met Before?” Tax Notes Int’l, Dec. 23, 2019, p. 1169.
END FOOTNOTES