Pacific trade deal may fail as capitalism means different things in the US and Asia

Workers in Japan protest against the TPP. EPA

Despite the positive spin that has accompanied negotiations over the Trans-Pacific Partnership (TPP), reaching an agreement that would satisfy all 12 partners was always going to be difficult.

The TPP originated with an agreement among four of Asia-Pacific’s smallest economies – Brunei, New Zealand, Chile and Singapore. It was later taken over by the world’s largest economy, with President Obama folding it into his “Asian pivot”. It also includes resource exporters, Australia, Canada and Peru and exporters of manufactured goods, Japan, Malaysia, Mexico and Vietnam.

But of all the obvious divisions among the 12 TPP participants it is the clash of capitalisms that is the most difficult to overcome. The Anglo-American participants, especially the US, firmly believe in a market-led approach to economic growth. The Asian partners – notably Japan, Malaysia, Singapore and Vietnam – however, achieved much of their remarkable economic success by relying on a state-guided approach to economic development. These competing visions of how to advance economic growth affect nearly every one of the many issues that need to be negotiated – tariff elimination, reductions in non-tariff barriers, investment safeguards, protecting intellectual property rights and so on.

Clearly the leaders of the Asian partners hoped that by joining the TPP negotiations they would gain access to the US market and force their own economies into further economic liberalisation without arousing too much opposition. But they have become trapped between the rigidity of the US negotiating position and increasing resentment at home as the details of the secret negotiations have been made available. Influential domestic coalitions have been keen to defend successful state-interventionist economic strategies and have become fearful that TPP proposals would undermine critical policies designed to maintain social harmony.

It is not just Japan with its powerful agricultural lobby that is standing in the way of an agreement. More generally, leading political figures and well-connected social and business groups within the Asian partners have expressed concerns about restrictions on the crucial role of state-owned enterprises in their economies, opening up government procurement, and the consequences for state-run programs of the intellectual property provisions. In Malaysia for example, former PM Mahathir Mohamad and opposition leader Anwar Ibrahim, sworn political enemies, have both come out strongly against the TPP.

A good deal of antagonism has also been aroused by the investor-state dispute settlement (ISDS) mechanism which, it is argued, gives multinational corporations far too much power over the state. Indeed, recent reports indicate that the Indonesian government has decided to terminate its bilateral investment treaty with the Netherlands. It may also terminate its treaties with other countries as they come up for renewal. This will make it politically very difficult for Indonesia’s neighbours, Malaysia and Vietnam, to agree to have an ISDS mechanism included in the TPP.

The form of capitalism found in East Asia also relies heavily on production networks. Yet free trade agreements associated with Western countries tend to assume that manufactured goods are produced in one country. Cumulative rules of origin which would take into consideration a country’s participation in production networks are generally problematic for the US or are included in such a way as to privilege the TPP members – such as the US. The infamous “yarn forward” rule, which will require Vietnam to source yarn from the US rather than its current supplier, China, is but one of the problems faced by East Asian economies. For Malaysia and Singapore, for example, over 70% of total manufacturing trade is in networked products.

Obviously, on the other side of the Pacific, both the US Administration and Congress remain strongly committed to market-led capitalism. Completing the TPP is said to be just around the corner. Indeed, sometimes it is assumed that all the US has to do is to get Trade Promotion Authority (TPA) – or fast track – from Congress and the deal will be signed and ratified in short order.

However, with Democratic Party leaders arguing that fast tracking should be shelved until after the November mid-term elections for fear of alienating groups who have not been impressed with previous trade agreements, little is likely to happen. Even if Congress approves fast tracking there will be considerable pressure for it to contain provisions such as sanctions for currency manipulation, lack of workers’ rights or degradation of the environment, each of which would make the US negotiating position even more inflexible.

Certainly there is no real sign that the US has much room to manoeuvre on a number of key provisions. It will have great difficulty giving up on protection of its sugar and textile industries. Neither Hollywood nor the pharmaceutical industries will allow intellectual property rights provisions to be watered down. And US corporations are unlikely to favour excluding the ISDS mechanism from the TPP.

It is possible that access to the US market and fears of China’s more aggressive regional stance will persuade the Asian partners to water down their negotiating positions and perhaps the US will scale back its demands. But at present this outcome looks unlikely.

With South-East Asia’s exports to the US slowly decreasing as a percentage of total trade, and with China rising, chances are that the Regional Comprehensive Economic Partnership (RCEP), whose membership includes SE Asia, China, Japan, South Korea, Australia, New Zealand and India, will look like a better bet than the TPP.

RCEP is less intrusive, less ambitious and more flexible than the TPP. And there is the possibility it will evolve along sequential lines with a Framework Agreement being concluded and then gradually implemented as opposed to the TPP’s “single enactment” approach where nothing is agreed until everything and everyone is agreed.

For the 12 negotiating partners, then, the clash of capitalisms may well mean that the TPP is a bridge too far.


A version of this article first appeared on the Sheffield Political Economy Research Institute’s website.