Release of Implications of the Trans-Pacific Partnership for the World Trading System
Unedited Event Transcript
Marcus Noland: Good afternoon. My name is Marcus Noland, I'm the executive vice president and director of studies here at the Peterson Institute for International Economics.
Three scholars were once stranded on a desert island, and they found a can of baked beans. So, the first one was a physicist, and he stepped up and said, "What we should do is gather some firewood and build a fire. Then we can put the can of baked beans in the fire. The heat from the fire will heat up the beans, build pressure in the can, and then it'll explode, and then we can go and gather the baked beans". The second guy was an engineer, and he said, "No, no, no". He says, "What we do is we gather some logs, and we form a fulcrum, and we crush the can, and then we can get the baked beans out". And they turn to the Economist, and they said, "Well, what do you think?" He said, "Let's assume we have a can opener".
Today we're going to assume that we have a can opener. Today we are gathered to talk about a new policy brief that we are releasing called Implications of the Transpacific Partnership for the World Trading System, by Institute senior fellow Jeffrey Schott, research associate Cathleen Cimino-Isaacs, and assisted by research analyst Euijin Jung. Professor Byung-il Choi of Ewha Woman's University will discuss the brief from the Korean, and thus a potential, not current TPP member country perspective. The TPP, as you all know, signed in February of this year is the most comprehensive regional trade deal to date, involving both developed and developing countries. This policy brief that we're releasing this afternoon, assesses how the TPP could shape bilateral and regional trade initiatives in the Asia-Pacific region, and set precedents the new multilateral trade initiatives.
Let me briefly introduce the authors. Jeff Schott is a senior fellow here at Peterson. He has been with the Institute since 1983. He got in on the ground floor. He is the author of numerous studies on trade policy and has led the Institute's research in bilateral and regional free trade agreements, including the 2001 study, Free Trade between Korea and the United States, which literally laid the groundwork, was the blueprint for the subsequent Korea-US free trade agreement, or KORUS. Literally he wrote the book on KORUS, he wrote the how to do it manual. Since 2003, he has been a member of The Trade and Environment Policy Advisory Committee of the US government.
Cathleen Cimino-Isaacs is a research associate here. She has been with the Institute since 2012. She works in economic issues relating to international trade policy and free trade agreement and negotiations. She is the coordinator of both the institutes trade and investment policy watch blog, and multi-author piece on the TPP.
And last but not least, Professor Byung-il Choi of Ewha Woman's University is the former Dean of the Graduate School of International Studies at the Ewha Woman's University. Prior, and if you don't know, Ewha Woman's University is like the Harvard of women's universities in Korea. Korea traditionally had a gender segregated educational system, and Ewha was number one for women. Prior to joining Ewha in 1997, he was a trade negotiator representing the Korean government. Doctor Choi is a member of the National Economic Advisory Council, advising the president of Korea on economic matters. And with that, I will turn the program over to Jeff, who will be followed by Cathleen, then Professor Choi, and then the three of them will come up here to the front and take your questions. So please, Jeff Schott.
Jeff Schott: Okay. Thank you very much, Mark, and thank you all, and especially thanks to Euijin Jung, who contributed importantly to our study, and will be available to answer questions as well, when Cathleen and I are stumped by your questions later on. For those that have participated in our meetings on the TPP, or have viewed, or looked at our work online, you know we think that the TPP is a big deal. And that it has important implications for all the member economies. And we've had studies, and produced two volumes of papers to describe what the TPP does and what it means for the participants in this historic agreement.
The new work we're releasing today is about its implications for not only the member countries, but for participants and for the future of the World Trade Organization. And Mark's introductory remarks require a slight modification, because he was talking about assuming this happens, then it will have these implications, and actually, the TPP has already started affecting thinking and actions on regional economic integration in the Asia-Pacific region, and has been doing that for several years while the agreement was under negotiation. Some countries are thinking about a session after the TPP enters into force, others are assessing what it means for their competitive position in the Asia-Pacific region, and what they need to do to make sure that they keep pace.
Now to be sure, the TPP has not yet been ratified, but it is affecting regional integration efforts in the region. And we focused on several important ones; the trilateral negotiations between China, Japan, and Korea for a free trade agreement, how it affects the 10-member Association of Southeast Asian countries, the ASEAN, how it affects the Pacific alliance, on the western coast rim of Latin America, and how it affects the regional comprehensive economic partnership among 16 countries in Asia, centered on the ASEAN, and six of its most important FTA partners.
Our new analysis also looks at the impact on these initiatives, as well as how TPP reforms could advance broader trade initiatives, the broader free trade area of the Asia-Pacific, which is under discussion, and will be the subject of a report to APEC ministers in November of this year. I think there it's highly likely that TPP will have a big impact on that initiative as it goes forward. A new plurilateral initiative that can build on precedents from the TPP, that I think is also likely in several areas. But in the area of converging with other megaregionals, particularly RCEP, our analysis shows that the convergence is not likely.
Now, to address more clearly Mark's point at the beginning, US implementing legislation for TPP faces significant resistance, but approval is likely once pharmaceutical and currency concerns are addressed. And those discussions are underway, their outcome is uncertain, to be sure. But we have done our analysis based on the expectation that the TPP will pass Congress either in the lame duck session later this year, or early in the next administration. And there are many sceptics that such progress is doable, but given the cost of delay for US strategic and economic interests, it is imperative that the president and congressional leaders find a practical way to get it done, and sooner rather than later. I think the work that we have done here at the Institute on the TPP, showing its major benefits, and also some of its weaknesses, indicates that that -- that there are strong economic and security reasons for the United States to move forward, that compel and merit, certainly merit a positive vote in the Congress.
TPP delay would brand the United States as an unreliable partner, which is just not acceptable given the current political and economic challenges in East Asia. And so that's why we say TPP entry into force is likely, and certainly before Brexit.
Now why is TPP, why does it have such a big impact? This table shows pretty clearly, if you apply comprehensive reforms over a large economic area, you're going to have a significant impact, and that's been the subject of previous meetings we've had here in our previous analysis. But it also, surprisingly, has a very modest, but positive impact overall on non-member countries, in terms of both improvements in real income and trade. But that varies by country. So what you can see is the overall non-TPP numbers are relatively small, perhaps insignificant, but the sign is positive, which is surprising. But there are some countries that have negatives, and not surprisingly, those are countries that are thinking seriously about TPP as a way of mitigating some of the concerns about trade and investment diversion. And indeed, that's why it's important that TPP has an accession clause, and a number of countries are talking about using it, but that only works once the TPP enters into force.
Now let me turn to the regional impacts. And the first is on China, Japan, and Korea, three of the most important partners, economic partners of the United States, in the region. The TPP certainly has motivated the CJK countries to redouble efforts on their trilateral integration. Japan is now an original member of the TPP, Korea is considering membership, China is closely analyzing the terms of the TPP. These three countries already have a trilateral investment pact, which they signed in 2012, and China and Korea concluded their own bilateral free trade agreement at the end of 2015, and talks on a trilateral free trade agreement are under construction. But those talks are proceeding very slowly. Originally we thought that the outcome of the Korea-China pact would incrementally upgrade the content of Chinese trade commitments, but as we concluded in a recent analysis of that Korea-China pact, the weak outcome of the terms of the China-Korea FTA, reduces the prospects for a comprehensive north-east Asia pact. And it does very little to change current policies of those countries, and therefore, it does very little to advance, or upgrade the level of Chinese commitments that could be used as a precedent for broader regional integration.
Then we turn to other integration arrangements, with the TPP impact is more mixed, with regard to ASEAN and the Pacific alliance. In these cases, the TPP could be somewhat disruptive to integration efforts, because some members are in, and some members are out of the TPP, and that could create fissures among countries trying to integrate production across their integration region. In the ASEAN, it's a particular problem, because right now four of the 10 members of ASEAN are in the TPP, three are seriously considering, or looking closely into future accession, and three are well beyond the pale of meeting TPP requirements, the poorest, least developed countries in ASEAN.
So there, I think, what is needed from the TPP countries is to have the door open for accession, for Indonesia, Thailand, and the Philippines, on the same terms as other ASEAN members who are already in. And certainly those countries are more developed than Vietnam, who was already committed to these agreements, and they should receive the same terms. But Cambodia, Laos, and Myanmar are much less developed, and keeping them out would cause significant fissures and distortions within ASEAN that would inhibit their own development, and cause problems within the ASEAN itself. And so we recommend that consideration be given to special arrangements for these LDCs under very limited conditions, so that this special exception is not generalized more broadly. That would have the benefit of bringing these countries in sooner, rather than later, into the TPP, without accepting the full obligations, but in a way that allows them to participate in the growth of the intra-ASEAN integration area. This is spelt out in much more detail in the policy brief, but it is an important component, and has implications, not only for TPP going forward, but for the broader free trade area of the Asia-Pacific.
With regard to the Pacific alliance, the fissure is a little more straightforward. The only country of the four in the Pacific alliance that is not in the TPP is Colombia. And Colombia is already studying closely the possibility of joining TPP, and given the commitments it has already made in the Colombia-US free trade agreement, and other pacts, it already has a solid foundation for moving up to the higher standards of TPP, and that's something that they should move forward. What becomes more sensitive is if other countries join the Pacific alliance going forward, and their consideration has to be given on how to handle that, because that could prove disruptive for ongoing integration arrangements within the Latin American Pacific alliance arrangements.
Next is the RCEP, and here I think you have heard me say on many other occasions, I am rather skeptical of the value of RCEP, more as a broad integration area, because it doesn't really require countries to change their existing policies very much. Because of that, it's not surprising that almost half the RCEP countries are also participating in the TPP. So what happens is, the countries that are interested in advancing economic reform, jointly work in TPP and RCEP, and those that have more difficulties, politically or economically, in moving forward, stay on the slower pace more incremental RCEP initiative. That's fine, they're complementary, they're not competitive, competitors, but the RCEP has been a hard slog, because countries are less like minded, and less alike than the TPP countries. And I expect that going forward, even if the RCEP countries agree to some preliminary deal in the coming months. If that happens, which I think is less probable than the TPP passing the Congress this year, then it would only be the first step on a long, long staircase to a broader economic reform in the RCEP region.
So in this sense, TPP plays a somewhat helpful role in providing a platform for RCEP countries to engage in broader economic reform, while still working within their other RCEP partners. That's particularly important in the ASEAN region, but it's also a way of encouraging China and India to pursue incremental reforms going forward, so that they're better prepared for future integration and efforts. Whether it be a free trade area of the Asia-Pacific, or something else.
And this table basically, in the handout, just shows you the RCEP economic footprint, to compare it with the TPP, and particularly note the human development index as a column, because that shows you the huge discrepancies in levels of development essentially between the rich countries, like Australia, and Singapore, and New Zealand, and the poorer countries. And it's a huge difference among the countries, and indicates why it's been so difficult for RCEP to make meaningful progress over the many years.
My final point is, can TPP lead to an FTAAP? This is the vision that Fred Bergsten originally put forward as chairman of the Eminent Persons Group, more than two decades ago. It's got a different name now, but the concept is the same. And looking at it from the developments of the past 20 years, there seems to be two viable pathways for developing an FTAAP, which are under consideration by the APEC countries, though they're unlikely to be as specific as I'm going to be in the next couple of minutes.
The first is, the US preferred TPP expansion strategy. Basically, you grow the TPP, and right now you have 12. If the country is thinking about accession join, you're up to 16 or 17. If you deal with the problems that need to be dealt with, with the arrangements for the least developed countries, as I recommended, if you deal with the problems of participation by Taiwan and Hong Kong, as we are discussing in a forthcoming policy brief study at the Institute, you would come up with a large, almost FTAAP size arrangement.
The other option is to do something that is more of an umbrella over existing integration arrangements that does not change the terms of those existing arrangements, and that would be to fall back, depending on what China is prepared to do, essentially. If China sees the growth of TPP, and finds the means for meeting its high standards, then you basically have an FTAAP with China that becomes the global standard, and it will be the multilateral standard. But a lot will depend on the timing of US accession, whether it comes sooner, as we expect, or later. The pace of accession of new members, which will influence other countries, because of concerns about trade and investment diversion. And finally, whether China decides to participate in the TPP or not. But the TPP also has broader implications for the trading system, and for that I turn the podium over to Cathleen.
Cathleen Cimino-Isaacs: So now I'll turn to TPP implications for the WTO, and how TPP disciplines will inform future negotiations. Of course, agreements like the TPP have in part been motivated by the frustration over the lack of progress in the WTO, and the relationship of these megaregionals, and regional trade agreements more generally, to the multilateral trading system, has really been at the center of a rigorous debate. There's been a wide literature exploring this topic, the World Economic Forum has done a lot of work. Trade economists, like Richard Baldwin, among others, and on the one hand megaregionals are seen as a good thing, to help tidy up and streamline the number of agreements that have proliferated in the region, sometimes inconsistent agreements, the opportunity to inspire competitive liberalization. On the other hand, there's the concern that these agreements could erode world trade governance, reduce incentives to utilize the WTO in negotiating trade rules.
So, to contribute to this debate, one question we consider, is whether TPP negotiating precedence could help build support for a new agenda. So first, where does the WTO agenda stand? Members made significant progress with important initiatives like the Trade Facilitation Agreement, coming out of Bali in 2013, and this was followed by small, modest package, and in the last year ministerial. But overall WTO members are still in a stalemate over how to fundamentally address the unfinished business of the Doha Round.
So how does TPP relate to this? For first, TPP does reinforce, and to some extent, expand on trading facilitation commitments. For example, the narrow membership of the TPP allowed more specifics on time limit for customs clearance, expedited shipments, etc. So this is certainly an important complement, these commitments are also subject to dispute the settlement as well. But overall, we found in traditional areas, the TPP really offers little innovation to break the ongoing Doha stalemate. For example, members completely avoided the contentious issue of disciplines on domestic agricultural subsidies. There is significant market accessibilization, but still some sensitive sectors in agriculture were insulated from competition, and through continued use of tariff rate quotas.
And in regards to the development agenda, while important to the TPP, it does not particularly break new ground in some of its relevant chapters. In terms of regulatory coherence, we see TPP members commit to transparency requirements, they commit to good core regulatory procedures, but TPP broadly doesn't do much in the way of harmonization or a mutual recognition of regulations. In terms of small and medium-sized enterprises, the chapter itself could have less impact, but SMEs will surely benefit from TPP provisions on e-commerce, trade facilitation, and broadly on the transparency requirements throughout the agreement. So in these respects, we find that there's still several -- there's still much to address regarding these issues in particular.
So in our analysis, we see the practical channel for advancing TPP and megaregional reforms to the multilateral quorum through the expansion of TPP precedents to plurilateral initiatives. So part of the incentive from the Doha stalemate has been leading countries to pursue the plurilateral approach, to advance tariff reforms, to advance new rules, and these are agreements pursued by a subset of WTO members. As you all know, most notably, the expanded information technology agreements, the environmental goods agreements, trade and services, all of which have made progress despite challenges to reaching consensus among its members. And notably, TPP does comprise a significant part of the membership in these deals, in most cases more than a third, and these plurilaterals have really been seen as a favorable way of moving forward new agendas.
And as my colleagues Gary Huffbauer and Jeff Schott have long analyzed and argued, to remain relevant, the WTO must continue to address these new, so-called 21st-century issues that are shaping trade. And in this respect, the TPP does break new ground in a number of important areas that go beyond WTO obligations, and we believe this could provide precedents, or at least a baseline for a broader initiative.
So I have a few illustrative examples here; certainly there's e-commerce, and data flows, with the rise of digital trade, the WTO has been slow to address crosscutting issues, cross-border data flows, intellectual property protection for hardware, software related technologies, cyber security threats. And to some extent, the TPP addresses these issues promoting an open market, the free flow of data, and putting limits on requirements to store and analyze data locally.
Of course, TPP also goes beyond WTO requirements related to state owned enterprises, to help level the playing field with private firms. It helps address what constitutes an SOA, puts constraints on preferences received by governments, makes a major contribution towards transparency. Of course, there's a number of exceptions, and there's room to improve on the TPP chapter, but we believe the baseline has been set. There's investment provisions, beyond the WTO TRIMs agreements, the Trade Related Investment Measures. There is really no multilateral framework addressing cross-border FTI, and megaregionals like the TPP, probably TTIP, offer a logical template to address these issues, like recent US FTAs, and bilateral investment treaties, TPP does retain investor state dispute settlement, which to be sure, has been a controversial issue, particularly in the TTIP talks, transatlantic talks. But the ICS mechanism does improve on past US practice, it respects the right to regulate, and more narrowly defined contentious clauses.
And last, in our illustrative list, our labor and environment policies; the WTO has long avoided these issues in its trading rules framework, due to a lack of consensus, but the TPP really does set the baseline in this area, these provisions are subject to dispute settlement. In particular, TPP disciplines on fishery subsidies, which has been a core issue of the Doha Agenda, could provide important impetus. So that's not to say in these areas, TPP is kind of an end goal, there are several areas that could be improved and expanded on, and that, I think, is the hope in plurilaterals moving forward.
So TPP is not the only megaregional underway, as Jeff has alluded to, that will inform these efforts. Of course, we have the RCEP and the Asia-Pacific, we have the TTIP talks, which remain ongoing, between the US and the EU, and you'll see by this chart, each megaregional really covers a substantial share of the global economy, hence the term megaregional. And together, altogether, they cover an impressive amount of global GDP and trade. So given that coverage, one question has been whether convergence of these pacts could, in essence, revitalize multilateral trade reforms. And in practice, we do see that this kind of convergence would be difficult for the TPP and RCEP. As Jeff discussed, these are the two main initiatives in the Asia-Pacific, and merger of them would be seen as a stepping stone towards the FTAAP. But given TPP higher standards, this kind of convergence would be difficult.
As for TPP and TTIP, based, of course, on similarly high standard comprehensive agendas, for a different reason, convergence would be politically difficult given TTIP's TPP plus ambitions for regulatory cooperation, and that is if they can, in fact, achieve it. One alternative approach is considering whether the European Union could join the TPP in the future, given its pre-existing pacts with TPP members, and one could seemingly ask that same question for the United Kingdom. Of course, this idea has yet to be fully explored, and obviously there are bigger trade policy issues for Europe to deal with in the near term.
So just moving onto our conclusions. In some, as Jeff presented, on balance, we find the net global economic impact of the TPP to largely be positive, but it's clear that the distribution of the benefits among countries varies, and there could be adverse effects, for developing countries in particular. Some Asian countries will face a modest real income and export losses, and this certainly has encouraged them to seek TPP participation. In the Asia-Pacific region overall, TPP could create fissures discussed by Jeff, among ASEAN and Pacific alliance. So again, this is an incentive to develop strategies for early accession of these countries. TPP certainly establishes a comprehensive template for the free trade area of the Asia-Pacific. Again, this depends on several important factors, the pace of ratification, and most importantly perhaps, China's role in this process, whether China will seek to join the TPP.
And last in our view, perhaps a glass half-full view, we find the TPP does contain the seeds of a WTO revival, and that is if members move to adopt some of the more innovative rules, and complement the traditional issues that are under it negotiation, and also complement the momentum that they created in pursuing these plurilateral deals. Thank you.
Byung-il Choi: Good afternoon. It's great to be back to Peterson, especially seeing [inaudible 00:34:36] and Marcus, and Jeff, my long-time friends, especially Wendy, it's great to see you. Well, I'm supposed to provide a Korean, or Asian perspective to the implication of TPP for the world trading system, especially the Korean stations, Korea chose to stay outside of TPP as a founding member. Well, I read this policy brief with great interest, and quite interesting. In general, I agree with most of the analysis, except one thing. I think assumption about earlier ratification is unrealistic, to say the least, because as a former trade negotiator, one thing I learned from the field was that huge gap between aspiration of trade negotiators and domestic politics. And we trade negotiators, we always underestimate the potential of domestic politics, in a negative way.
So having said that, I see three possible roads ahead of TPP, especially in terms of ratification. The first, best possible possibility, kind of with the thinking is early ratification, including the possibility of being ratified [inaudible 00:36:01] accessions, which I don't see happening. And the second possibility is the new ratification, I hope, but as Jeff mentioned in the papers, the cost of non-ratification is too devastating. So perhaps that is going to be the union end. So too dreadful, we don't want to talk about this. So which means we are going to take the second-best possibility, that is certain delay and certain renegotiations, not full-blown renegotiations, but certain renegotiations. Try to address the concern of TPP supporters, especially in the Republican Party, and that will take some time, to be realistic.
So a window of opportunity may be early 2017, but it is going to be too unrealistic, because if history is any guidance, a new incoming US administration, has always been late in appointing USTR. And also there were a lot of study issues, and making implementation bill, and how they can make about the phase, about rhetoric about trade policy, which I'll talk about a bit. So that means, realistically speaking, 2018 is a window of opportunity. But now, you know, in 2018, you have another mid-term election is approaching quite rapidly, some not going to be surprised if TPP might be delayed until 2019.
So 2019, but this is the second-best possibility, but I think that stands a very high likelihood. Because one thing we learned from the Brexit, is we economists or so-called expert, we try to rely on so-called rationality analysis, are focused on numbers and on the margins, but you shouldn't underestimate public opinion, these days driven by theories and frustrations and so on. And a lot of ideas in this paper is driven by a very simple keyword, comparative liberalizations, which is a very fashionable keyword.
And there's an analogy between 1990s, and these days. In 1990 we had seen the creation of NAFTA was kind of accelerating, eventual conclusion, we were around negotiations which is already delayed, and delayed three times. I was negotiating at the time. But I think this case is quite different. That was then, and this is now. Because the 1990s if you look, the US was leading all these negotiations and once consensus was reached among those quad countries, the other thing was kind of transparency exercise. But these days you have very different dynamics; G4 replacing quad, and G4 was very much, you know, the confrontation. The US, EU on one side, and other two champion developing countries on the other side. So they love to fight each other. So I'm going to be very much surprised if TPP is going to lead a new, full-blown, invigorated WTO.
Having said that, let me turn to giving TPP a proper context, because in these days, in the US, a lot of talk about protectionisms. We have seen this before, because in 1992 when NAFTA was negotiated, the Republican Party candidate, Mr. Clinton, he ran campaign, he was going to revisit NAFTA. Actually he did. And in 2008, now the candidate Mr. Obama, he called the KORUS FTA was unfair, and it took another two years to make a full revisit. So we have seen this before. But this time it is different, because now we have two major parties giving so much negative talk about free trade. Quite surprising, because that is coming from the Republican Party. Then that made us to puzzle.
Is it just in campaign politics? Which it is, well, you may say anything during campaigns, but you're going to change your positions once you become an owner of the White House? I don't know. The chance is 50/50. Maybe they're talking about, especially the other side, may be talking protectionism, because of the ideologies and conviction. Then it is going to be too much, too dreadful, so let's not consider this the case.
I think there's a lot of, you know, important content in TPP, we shouldn't miss it. Because as Jeffrey and his colleague analyze in full detail, TPP not only deals with old economy, but it kind of making bridge with the old economy and the new economy by addressing so-called [inaudible 00:41:39] issues, investment issues, competition, and so on. But somehow TPP failed to fully address procurement, because procurement is one of the contest between Brussels and Washington. So if TPP can be linked with TTIP, this procurement issue better be dealt with one way or another.
And when I say new economy, this TPP talks about digital trade issues in context of global value change. So when Mr. Obama was framing TTP, in his battle for seeking fast track, we should be the architect of writing new trade rule for 21st century, he really meant it. So I want to see, at the end of the day, if TPP would say it's true, in domestic politics, even though it is taking certain time, because otherwise the consequences are going to be too much devastating. And as Jeff mentioned, this TPP, it contains a currency clause, non-directive clause because it was attached as part of the joint ministerial statement, but I say this is unprecedented. A trade economist, this is for the first time in any major trade agreement having any reference to a currency, I think Fred has been campaigning about this, and he and I exchanged a very different opinion about this. So let's not go in too deep, but I think that is something quite significant, because to gain support from Capitol Hill, maybe something minimum is going to be in need. But if you ask me, [inaudible 00:43:23] Hatch Act went too far, because I do not really agree with whether or not that act can accomplish anything.
Now I try to talk about the Korean perspective, because you might be interested in what is Korea's positions in the negotiating perspective. Well, as Korean President Park Geun-hye, who came to Washington a year ago, right after TPP was concluded, she made a statement, Korea is going to seek the position, I mean membership in TPP. But unfortunately, it is not going to be her government, but the next incoming government who will be realistically negotiating TPP, assuming TPP is going to be ratified. Which means Korean needs to negotiate Japan. Because Korea had all this bilateral FTA with the help of TPP members except Mexico and Japan. And I'm not -- and that's meaning difficulty negotiating with Mexico, but the more even difficulties with Japan. Because two countries, they had FTA talks in 2003, and 2004, but that was ended in dismal failure mainly because of two things.
First of all, there was a lack of [inaudible 00:44:50] support from the Korean side, because Korean economic structure is Korea is importing a lot of patent coming from Japan, and they're assembled and upgraded, exported to foreign countries. Which means when Korea is assembling more smart phones or flat screen TVs, they need to rely on Japan as an importer. That is a part of international trade. And as if to reflect it, there's a growing trade deficit from Korea vis-a-vis Japan. And Korean companies, they fail to increase their market shares in Japan. So for instance, the Hyundai motors, global top five automobile company, eventually they withdraw from Japan, by complaining [inaudible 00:45:38].
Normally Japan is a very much open country, but foreign companies, they have so much difficult time in penetrating the Japanese market. For instance, Japanese auto market, foreign car, the share is less than 6-7%, if my recollection is right. So there was a lack of domestic support, and also the Japanese side was not quite willing to withdraw so-called nontariff measures. Because Japanese, that tariff rate is already very low except farming sectors, but during those days Japanese was not really interested in negotiating the whole package of farming sectors. So to strike negotiating interest in any FTA, which is going to be very important on the Japanese side, so reluctant to talk about this [inaudible 00:46:33].
Which means negotiating with Japan, especially when it's already a member of TPP, is going to be very much a [inaudible 00:46:40] test for any Korean tough negotiators. But assuming, assuming Korea will eventually become a member of TPP, then the game is going to be very interesting. Because I don't see China will ever become a member of the TPP in the next decade, because of trading labor, trading environment, and so on. But even though, you may say that this is going to provide some menu for reform Xi Jinping government, absolutely they will do that, but it will take certain time.
But that means we'll have a situation that Korea and Japan is a member of TPP with the USA, but you have RCEP and CJK, but if that happens, CJK is going to lose momentum, already that momentum is very weak. Because Japanese all of a sudden, you know, are demanding a lot of high standards in CJK, which is so much for Beijing. And I'll say, as Jeff mentioned very properly, I'll say that even though it isn't one of megaregional FTA talks, but it doesn't have much driving force. Also the level ambition is very much different, they talk about conventional issues. So that means RCEP and CJK are going to fizzle out. Then eventually, TPP is going to be standing alone as the most important mega FTA. Then it is going to create a further interesting situation.
Now you have WTO, and TPP, and one possibility is a TTIP. As I mentioned, I don't see the [inaudible 00:48:21] is really willing to entertain the possibility of joining TPP, because TPP is not about market access the way I understand, it is about regulatory coherence, and TPP doesn't have that element. So the ideal thing is that possible merge of TPP and TTIP will take certain time.
In the meantime, we'll have two very important fragmented aspects of the global trading system. One is obviously WTO, is going to be a bunch of, 163 or 164 or 165 countries, but almost, you know, they cling to old economies and existing trade agreements. So eventually WTO will be boiling down into a settling trade dispute. In the meantime, TPP is going to be the most realistic, maybe one alternative to get things going on.
Another very important fragmentation is, even though that happens, okay, on the second best possible scenario, you as being these people, you will see remarkable lapse between institutional rule and [inaudible 00:49:37] realities. Especially that is going to be presenting a problem in digital economy. Because in digital economy [inaudible 00:49:49] ideas are breaking loose, and advancing by leaps in growth but the negotiator is always very late to post certain language as document. Then that is going to serve the best interests of existing company in the market, at the expense of an innovative entrant and consumers.
So this is exciting time for trade people, not because the whole world is really wanting to embrace free trade, but because they totally revisiting the speed of free trade, but under my projections, even though three will be certain hiccups, the TPP will take certain time to be ratified around 2019, and then we'll have new momentum again. Thank you very much.
Marcus Noland: So we have about 20 minutes the discussion. There will be a roving mic in the front, as soon as Jess -- help out audio challenged staff attach their microphones. And then there is a stand up microphone in the back. So if everyone is hooked up and ready to go, would anybody like to ask the first question? Yes, please? And please introduce yourself and your affiliation.
Audience question: [Inaudible 00:51:45], Korea. Thank you very much for the wonderful explanations, and presentations, and discussion. My first question is about the renegotiation possibility of TPP, as Wendy's here, and as I know that it's almost impossible with the 12 members in TPP. It's not like the bilateral FTA, but it seems like some of us are assuming that it's possible, and so I'd like to hear about that. And another thing is, as we see the Brexit and some other countries here, the election results, one of the rare consensus among economies is the gains from trade, we know that. But the issue is the distribution of the benefits, and Cathleen mentioned that some, you know, the income inequality and benefit distribution issue, but it seems like in the context of the inside and outside problem.
So her recommendation is that the LDC, and some other countries need to join TPP only to get the benefit, but the main focus of the debate these days is about, even for those TPP participants, you know, there could be some benefits that are not equally distributed. So that kind of problem, do we have any kind of explanation or talking points we can persuade the Hill. I mean, it's going to be very, very critical for the ratification of TPP.
Jeff Schott: Let me start on the first one, on the renegotiation prospects. If you listen to what government officials say, understandably, they say there's no basis for renegotiation. Because if you open up the deal, and particularly if you're talking about the pharmaceutical issues with regard to data exclusivity, that creates imbalances, and the entire package could unravel. So that's the reason why the official statements have been we don't, we will not consider renegotiation.
Almost every US free trade agreement has been renegotiated after it was signed, in one form or another. As US and Korean officials know, they went through several iterations of that. In terms of TPP, it's much more complicated, which is the second reason why officials say we don't want to open it up. Because instead of balancing off demands between two partner countries, you have 12 countries that have to re-establish the balance. So there is only, in my view, scope for a very limited opening up of the agreement, if necessary. And that would deal with the issue of currency, because the 12 countries have already accepted a joint declaration of their macroeconomic policy officials, with obligations with regard to transparency, data, disclosure, and other aspects, that was issued in parallel with the TPP agreement, but is not part of the TPP agreement. Those countries have committed that all new members would have to abide by those commitments, but it is not covered by the dispute settlement provisions of the TPP.
Right now, as I understand it, and as that joint declaration has been complemented by US legislation that was enacted in February of this year, none of the 12 TPP countries would be branded a currency manipulator, or would meet the test of a currency manipulator under the terms, under the joint declaration. And therefore, if you added the terms from the joint declaration into the TPP, even if it's covered by dispute settlement provisions, it wouldn't change anything in the near term, but it certainly would be a deterrent against future abuse, which I think is one of the concerns on Capitol Hill.
Now it would change one thing, other countries would have to accept binding up a dispute settlement that is an additional obligation, and some would argue, well, that is unacceptable because that would unbalance the commitments. But you have to weigh then if, even if you accept even partially Professor Choi's analysis, which is reasonable, which I think is too pessimistic, but is reasonable. And I think Marc probably is closer to Professor Choi than to me.
Marcus Noland: Yes, I am in fact.
Jeff Schott: Yes. I think the other TPP countries would look at the perspective options and say, if we can have earlier action by the United States on TPP with the currency deal, then that is a benefit that would over -- you know, because the alternative might be a prolonged delay in TPP implementation, as suggested by Professor Choi. That type of deal might be doable, if it was limited and constrained to that. Once you get into the terms of investor state provisions, into the pharmaceutical provisions, then there are bigger political obstacles in a number of countries, and renegotiation could lead to an unravelling of the deal.
So that's how I see a limited renegotiation as possible, and that could happen sooner or later. Certainly there would have to be some coordination, but it is something that I should note that Secretary Clinton has emphasized as one of the major concerns with the TPP, and the reason why she's against it. So there has been the comment that both political parties, the leaders of both -- not the leaders of both political parties, the presumptive candidates from both political parties are against TPP.
That is more for Secretary Clinton, I think she has caveated that by saying the TPP needed to be improved. Mr. Trump, I think, would have a more meat axe approach to the agreement. So I'm hopeful that TPP actually could work its way through the Congress this year. I recognize there is less than a 50/50 chance of that happening and that I'm more optimistic than many people, but if not, I think there is a strong argument for the next administration to move forward sooner, rather than later.
Marcus Noland: Any comment on the distribution issue?
Cathleen Cimino-Isaacs: Sure, I'll add, just on your, of course, super important point that you bring up. I think our kind of broader lens is looking at on a global scale, sort of the trade diversion versus trade creation consequences, and the distributive effects around the globe. Certainly within countries that distribution issue is a critical one. It's widely known that the benefits from trade agreements are quite widespread. The costs are quite concentrated, but these adjustment costs are important and that's been elevated in the debate, in the United States in particular.
You know, Peterson analyses have addressed this issue, and the impact on the labor market and find that the benefits outweigh the costs. Of course, that's not solace to disaffected workers and the population that suffer the brunt of increased competition, and so I think that the silver lining is how contentious the debate is over TPP, globalization more broadly, is that this issue will be addressed more seriously. The United States has really lagged behind other countries in addressing this issue, so I think you're right to point out that, for the overall success of the TPP, this kind of adjustment issue needs serious attention.
Jeff Schott: Bob Vastine.
Bob Vastine: Thank you, I'm Bob Vastine with the Georgetown Center for Business and Public Policy. My comment has to do with the relationship between the WTO and the TPP. It really surprises me to hear the TPP holds so little in addition as a guide, as an inspiration for WTO work. You know, the TPP, Dr. Cimino, has a massive concentration of effort on trading services, to an extent that's never been seen before. There is much in the TPP that is new, and relevant, and in an ideal world, might be transferable to WTO, but I personally think that's impossible.
Because, as a veteran of the WTO negotiations, since 1966, and I know many others have been connected with the Doha Round longer than that, or were, hi Wendy, we learned, I learned that the WTO has become dysfunctional by its constitutional nature. It consists of two many countries, 160 more countries, including the major countries that refuse to play. Mainly India, still, and Brazil, and China to some extent. So agreement in a large-scale, on issues as broad, let's say, as trade and services, exceptionally complex, it would be almost impossible in that format. So let's leave the Doha Round alone. Can we please finally put a stake in the heart of the Doha Round?
Jeff Schott: Well Bob, I think you're really off base, because the Doha Round isn't the issue. The issue is the viability of the WTO as a negotiating forum, and they're two different things, and the viability of the WTO as a negotiating forum is much more important. The Doha Round, as it has been pursued for the past 15 years, is not viable, and is demonstrably so very little, if anything, has progressed since 2008. So that's eight years now since the July breakdown of the Doha Round agreement just on the verge -- the Doha Round talks, just on the verge of conclusion.
That point, you're right, but what has happened since then is progress, as you noted in the various regional arrangements. On services, it is going to be very difficult to translate the gains from TPP to the WTO, unless you have broader participation by the key emerging markets; China, India, and Brazil. China wants to be in the TiSA, but has been blocked by the United States, because the United States negotiators feel that China will seek a very low-level incremental deal as a start, and will not produce the policy to reform that is been expected at the start of the TiSA negotiations. So China remains out, India remains out, Brazil, we don't know whether they'll change their policy under the new government as it evolves in the coming months.
So what we're saying here on the TPP is that there are precedents in the TPP. This is exactly what you said. There are precedents, the TPP provides the best global model to date, it clearly can be improved, it didn't include enough liberalization, but the rulemaking is advanced, and that serves as precedence for broader regional initiatives that hopefully can provide the seeds for an expanded WTO agenda. So you may disagree with me, but I think I was just supporting your argument.
Marcus Noland: So we are coming very close to the closing time. Wendy Cutler has been waiting to be recognized, and we have one gentleman at the back. So we'll take these two questions. You can make any closing comments you want in response to these two questions, or anything else you've heard, and then we'll bring it to an end. So, Wendy.
Wendy Cutler: Thank you very much. Two quick questions; first for Doctor Choi. Do you think Korea made a mistake by not joining TPP earlier when Japan joined? I mean, there were many people in this town that really thought Korea would put its hand up when Japan put its hand up. And now that the realities are sinking in for what TPP accession may hold for Korea, particularly with respect to Japan, and frankly with respect to benefits that could derive from TPP, do you think that if we could turn the clock back, Korea may have made a different decision?
And for Jeff, I just wanted to see if you could elaborate a little more on your suggestion that the three ASEAN least developed countries, perhaps have different terms of accession for TPP. Are you talking about longer transition periods, or you're talking about opting out of obligations? And if it's the latter, what would be the implications for India, and even China, if they sought to put their hand up for the TPP in the future? Thanks.
Marcus Noland: And at the back.
Audience question: [Inaudible 01:07:13] Korean Embassy in Washington DC. I heard from Jeff about some possible effects on the TPP on the regional economy integrations and the WTO. And Professor Choi talked about more pessimistic scenarios, and I just want to know if the TPP, I mean US TPP policies are slowed down, so people, the passage of the TPP [inaudible 01:07:41] is not happening because of [inaudible 01:07:43] negative implications to the regional economy integrations [inaudible 01:07:51] or TTIP, or possibly [inaudible 01:07:53]. And also, two days ago the chairman, Bob [inaudible 01:07:58], of the foreign [inaudible 01:07:59] committee, he mentioned that the TPP, in case the TPP is [inaudible 01:08:05], the United States should prepare another option to have bilateral [inaudible 01:08:11] with South Asian countries. What is your opinion on that comment?
Marcus Noland: So any final comments on these questions, or anything else?
Byung-il Choi: Well, regarding Wendy's question, did Korea make a mistake, well I've been consistent in this issue. I have a lot of my opinion [inaudible 01:08:36]. I think since Japan decided to join the TPP, since early 2013, I urged the Korean government to see the big picture, because it is going to be a lot of huge, you know, mega FTA having so much implication as Japan were analyzed. But somehow the Korean government missed the opportunity for various reasons. I don't think it is a good venue to discuss further details, so that opportunity is missed. Then, if we can turn back again, also file a trade negotiating, I wouldn't hesitate to take any occasion to be a member of TPP.
Regarding the question from the gentleman from the back; Plan B, for instance, making a bilateral FTA with Japan, between US and Japan. I think that is a more important priority for Washington, instead of rushing to ASEAN countries to create an ASEAN-US FTA, but those two things can be taking place at the same time. And Jeff labelled me as pessimistic, but I try to be realistic. So I'm telling you from my personal reflection, and also history, so try calling me realistic, not pessimistic.
Cathleen Cimino-Isaacs: I would just add to the question of the negative implications, I certainly think if TPP weren't to succeed, or move forward, there'd certainly be, I think it would put a halt to a lot of the progress that's been made in addressing these so-called 21st-century issues. There's a lot of pessimism surrounding RCEP and some of the other initiatives, that are lower ambition and I think that there would be a lower base for standards moving forward, and that would significantly set back a lot of the progress that's been made. We saw how contentious and difficult it was to achieve the TPP, and so I think that outcome would be quite detrimental.
Jeff Schott: Okay, the final word from me is first, when I said pessimistic, I meant it more relative to me, and I didn't mean that your views aren't realistic, and thoughtful. I'm just more hopeful. With regard to how to deal with the poorest countries in ASEAN, I mention this because this is a major concern of all the countries in APEC. What do you do to ensure inclusive growth to ensure that the poorest countries are not marginalized? And so if you have a regime that largely expands the time period for economic reform, that allows them to continue in the integration regime, and benefit from the common rules of origin, the incentives to investment that come from being a part of the bigger club, that I think will help note of faster development in the poor ASEAN countries.
But you were right in asking is this open-ended, and does this lead to the special and differential treatment distortions that were so prevalent during the first decades of the post-war trading system, and the answer is you have to limit it. It has to be small, least developed countries. It can't be big least developed countries, because there's just too much distortions that are built into the system if you do that. And so if you design it that way, and with perhaps staged negotiations over time to increase the level of entity coverage for government procurement and for reductions and the exceptions on state-owned enterprises lists and things like that, then you might be able to find a solution. It's something that needs to be looked at over the next few years.
The final point is on Plan B, and unfortunately, if TPP goes down, or is substantially blocked, there is no political base for going forward with countries in the region, and so while US-Japan makes the most sense from an economic perspective, there'd be no political constituency for doing that. Having Japan in the TPP was a way of getting broader benefits for the United States, and bringing in broader political support than would occur in a simple bilateral negotiation, which I don't think would have been viable, even if economically desirable.
And so that turns to the question that everyone is talking about over the past couple of weeks, what about US-UK? And Senator Hatch issued a -- promoted a declaration in the Senate, a resolution in the Senate, I think yesterday, about the importance of having bilateral negotiations with the UK. I don't think any of this has been well thought through on our side, and certainly it hasn't been well thought through on the British side, given the articles that have been written by new members of the British Cabinet.
So that's not going to happen soon, because the British don't have the authority. But this is something that the Institute, I'm sure, will be doing more detailed research on, to provide a clear and sound analysis for governments, thinking about the possibility of other arrangements with Europe going forward. But I'll leave it at that, at this point.
Marcus Noland: Well, I'd like to thank you all for coming out this afternoon to participate in our release event for our new policy brief, Implications of the Transpacific Partnership for the World Trading System. I don't know about you, but I feel like I learned a lot. I learned something about TPP, I learned something about Korean realistic skepticism, and I learned that Bob Vastine started negotiating trade agreements while he was in elementary school. So please join me in thanking our three speakers for an interesting and stimulating discussion. Meeting adjourned.
The Peterson Institute for International Economics released the Policy Brief Implications of the Trans-Pacific Partnership for the World Trading System, by Institute Senior Fellow Jeffrey J. Schott, Research Associate Cathleen Cimino-Isaacs, and Research Analyst Euijin Jung, on July 14, 2016. Professor Byung-il Choi of Ewha Womans University will discuss the Brief from a Korean perspective—and thus from a potential, not current, Trans-Pacific Parternship (TPP) member country view.
The TPP, signed in February 2016, is the most comprehensive regional trade deal to date involving both developed and developing countries. This Policy Brief assesses how the TPP could shape bilateral and regional trade initiatives in the Asia-Pacific region and set precedents for new multilateral trade initiatives.
Schott has been with the Institute since 1983. He is the author of numerous studies on trade policy and has led the Institute's research in bilateral and regional free trade agreements, including his 2001 study, Free Trade between Korea and the United States?, which laid the groundwork for the Korea-US Free Trade Agreement (KORUS). Since January 2003, he has been a member of the Trade and Environment Policy Advisory Committee of the US government.
Cimino-Isaacs, research associate, has been with the Peterson Institute since 2012. She works on economic issues relating to international trade policy and free trade agreement negotiations. She is the coordinator of both the Institute's Trade and Investment Policy Watch blog and multi-author precinct on the TPP.
Choi is a professor at and former dean of the Graduate School of International Studies (GSIS) at Ewha Womans University. Prior to joining the Ewha GSIS in 1997, he was a trade negotiator representing the Korean government. Choi is a member of the National Economic Advisory Council, advising the president of Korea on economic matters.