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Opinion: Japan needs US to return to CPTPP to expand trade pact

Jeffrey J. Schott, Senior Fellow at the Peterson Institute for International Economics (Photo courtesy of the institute)

When it comes to free trade agreements, bigger is better. The broader the liberalization of trade and investment, and the larger the size of the integrated market, the greater the potential that the pact will spur additional economic growth in its member economies.

    No surprise then that one of the first things discussed in January 2019 by the new members of the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CPTPP) was the procedure for admitting new members. Talks with potential candidates initially were deferred while Brunei, Chile, Malaysia, and Peru debated and delayed CPTPP ratification. But after two years patience has worn thin and Japan and others now have put out the welcome mat for new members. One country, the United Kingdom, formally applied for membership in late January 2021; many others have expressed interest in joining the club, including South Korea, Taiwan... and China. And the United States may seek to re-engage with CPTPP countries if the original deal can be augmented.

    For the United Kingdom, the process seems straightforward. CPTPP accession would supplement the terms of the recent UK-Japan pact and extend trade preferences to those CPTPP members with which the UK does not already have a free trade agreement (FTA). But nothing is simple in trade negotiations: prospective members must accept both the existing rules and negotiate market access commitments that set how fast UK tariffs and other import restrictions will be phased out. Some CPTPP members will demand specific UK concessions on agriculture and other issues before allowing it to pass the entry gate.

    For South Korea, CPTPP accession also seems easy since the deal was built on the robust foundation of the South Korea-U.S. FTA; Seoul applied most CPTPP obligations long ago. Moreover, South Korea has signed the Regional Comprehensive Economic Partnership (RCEP) so already has substantial liberalization commitments to seven of the CPTPP countries, including Japan, that are parties to both pacts. The key question is how much more South Korea will be asked to contribute in terms of tariff cuts and reforms of nontariff measures affecting trade in industrial and farm goods.

    Taiwan has been excluded from most intra-Asian trade pacts for political reasons, threatening the participation by its firms in regional supply chains. CPTPP's door is open to countries as well as separate customs territories, so Taiwan is eligible for membership and has been aligning its laws and regulations to CPTPP requirements to prepare for prospective CPTPP negotiations. But inviting Taiwan to negotiate accession would likely provoke harsh rebukes and possible trade retaliation by China. With the United States out of the pact, none of the CPTPP countries are likely to pick this fight with China.

    How serious is Chinese interest in the CPTPP? President Xi Jinping publicly stated that China is considering participation; Chinese experts have been studying the treaty text for years to assess what economic reforms would be required to meet CPTPP obligations.These studies reveal that Chinese reforms, especially on investment policy, have narrowed the gap between Chinese practice and CPTPP best practice. But in critical areas such as labor, data flows and data privacy, and support for state-owned enterprises, China still falls far short of the mark. Fundamental changes would be required for China to comply with existing CPTPP obligations. More likely, China will defer CPTPP talks in the short run while it implements RCEP and pursues trilateral trade talks with Japan and South Korea.

    But what if China asked to join with a lengthy transition period before fulfilling those obligations, or sought during accession negotiations to water down the requirements for all CPTPP members? CPTPP members have committed to maintain the high standards of the current text but no one in the CPTPP wants to say "no" to China given the importance of bilateral trade and investment relations.

    Chinese accession was not an immediate concern when the United States was in the original accord. U.S. officials clearly said China was not ready to join, so accession was a distant prospect. China's current interest is an important reason why CPTPP needs the United States to rejoin the club.

    But will the United States reconsider CPTPP? U.S. real income gains would be substantial, about $130 billion greater in 2030 than without the deal. Even so, the original pact was never politically popular. And President Biden's immediate priorities focus on blunting the COVID-19 pandemic and strengthening the domestic economy; trade negotiations are well down the list.

    If US officials decide to return to the negotiating table, they likely will do so only if the overall deal is renegotiated. That is what Trump did with the North American free trade pact, which also was the target of high-octane political criticism. The pact was reopened, augmented with CPTPP innovations and a dose of auto protectionism, and rebranded as the U.S.-Mexico-Canada agreement (USMCA). Most of the NAFTA survived intact and the new deal is now subject to bipartisan acclaim.

    Could the Biden administration follow the same script in revisiting the CPTPP and propose negotiations to "build it back better?" Like the NAFTA rebuild, the strategy would not require a major renovation and would leave most of the existing pact in place. Provisions covering digital trade, currency practices, and environmental policies could benefit from updates included in the USMCA. The Biden team likely would also argue for a new chapter on trade and climate change. The most controversial change would involve expanding obligations on labor practices and enforcement procedures, putting pressure on Vietnam and Malaysia to accelerate the pace of implementation of labor market reforms in their economies.

    Developments in the Asia-Pacific region could provoke a policy reset sooner rather than later. U.S. trade policy needs to counter China's new trade pacts that discriminate against U.S. trading interests in the region. Chinese pressure against Taiwan has prompted calls in Congress to deepen support for Taiwan. In both cases, U.S. participation in a new Asia-Pacific pact would protect US economic interests and counter growing Chinese influence in the region. China undoubtedly would protest loudly but less belligerently than if U.S. officials pursued a bilateral FTA with Taiwan.

    How should the CPTPP countries proceed? For the rest of 2021, until the pandemic abates and growth revives, CPTPP members should only pursue scoping talks with prospective new members to gauge how each candidate meets the pact's comprehensive requirements and the key market access reforms that each will need to pursue. By early 2022, the CPTPP could then decide whether to negotiate individually with each country that has formally applied for membership or to group all applicants together in a joint negotiation; both options are permitted under CPTPP rules.

    Setting a deliberative timetable would serve two important objectives. First, new accession negotiations could accelerate CPTPP ratification debates in the four laggard countries since none of them would be able to negotiate with prospective new members until they ratify and become full Parties to the CPTPP. Second, launching accession negotiations in 2022 would provide time for U.S. officials to coordinate with their Asia-Pacific allies on a strategy for augmenting the current deal in ways that would accommodate U.S. participation as well as others willing and able to implement and enforce the high standards of a comprehensive trade pact.

    Japan and the other CPTPP countries need the United States to return to the pact, even though it may require negotiating additional commitments to economic reform beyond the current CPTPP requirements. That is a price well worth paying to ensure continued strong U.S. engagement in the region and partnership in managing complex relationships with China.

    (By Jeffrey J. Schott, Senior Fellow at Peterson Institute for International Economics)

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