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If Trump pulls America out of the TPP, the question is: what next?

Reuters/Lucas Jackson

Donald Trump this week repeated his pledge to abandon America’s commitment to the Trans-Pacific Partnership (TPP) trade agreement on “day one” of his presidency.

That means on January 20, Inauguration Day, a regional trading agreement embracing nearly half of global GDP will shed the world’s biggest economy, assuming Trump carries out his threat. This would be a hugely significant step both practically and symbolically.

Trump’s action will not kill TPP stone dead, but it will rob the nascent trade pact of its cornerstone participant, and its raison d’etre from an American perspective – which was to give expression to a US pivot to Asia and provide a counterweight for China’s rise.

The question is: what next?

What can be predicted with near certainty is that a vacuum created by the US pulling back from TPP will provide unpredictable trading and political opportunities for its rival in the Asia-Pacific.

Trade politics inseparable from geo-politics more generally will become a more important component of a regional mix.

Unsurprisingly, China is not waiting for Trump to lower the guillotine on TPP before marking out its own territory as a leader of a self-interested regional free-trading, anti-protectionist push.

In this, we may well be seeing the beginning of a new phase in Chinese assertiveness, this time on terrain that might have been regarded as an American preserve and those of its Western liberal allies, including Australia.

Beijing has been testing the territorial limits in the South China and East China seas. That assertiveness will now be accompanied by a more aggressive posture in pursuit of regional trade initiatives. The latter is not necessarily a bad thing from an Australian perspective.

The US has been urging China to behave like a “responsible stakeholder” in a global economic and trading system. That wish may now be realised in discomforting ways that the US had not anticipated.

The “responsible stakeholder” will take advantage of opportunities that present themselves to assume a more expansive trade leadership role consistent with its growing power and influence.

And this in accord with a much bolder foreign policy espoused by China’s leader Xi Jinping. Long gone are the days of Deng Xiaoping’s dictum that China should bide its time and hide its intentions.

Global Times, Beijing’s conservative mouthpiece, quoted Xi telling fellow APEC leaders in Peru this week that:

We must energise trade and investment to drive growth, make free trade arrangements more open and inclusive and uphold the multilateral trading regime.

China will now seek to energise APEC-driven discussions on a Free Trade Agreement of the Asia-Pacific (FTAAP). It will no doubt take a leadership role in discussion on a Regional Comprehensive Economic Partnership (RCEP) involving 16 countries, including the ASEAN bloc, China, Australia, India, Japan, South Korea and New Zealand.

Xi will also advance his “One Belt and One Road” initiative to expand China’s trading and political influence among countries in its immediate neighbourhood. The China-initiated Asian Infrastructure Investment Bank will be used to bolster this overall strategy aimed at consolidating Beijing’s economic reach in what it perceives to be its own sphere of influence.

How odd, you could say, that the leader of a country whose Communist Party membership numbers about 90 million should be espousing free-trade principles that one might have expected to be coming from the leader of the “free world”.

Trump’s hostility to free trade and open borders defined his presidential campaign.

What this tells you in an upside-down Alice-in-Wonderland environment is that America is on the defensive and China is asserting itself in ways that could not have been anticipated even as recently as 12 months ago.

Trumpism with its populist impulses, its America-first dogmas, its antagonism towards outsiders is a strange and unpredictable beast.

How all this will play out is anyone’s guess and will depend to an extent on Trump’s cabinet appointments. Will arch-protectionists in his inner circle prevail, or will free-market supply-siders win the day?

These policy battles – who wins, who loses! – will provide early indicators of where a Trump administration will take us on the trade and economic front. These will be massively important policy debates.

Will America seek to hold back the forces of globalisation by placing its thumb on the scale? Or will it accept realities? This will take time to work itself out.

China will be hoping that after early uncertainties things will settle down, as a new Trump administration understands that America’s own interests will not be served by trade frictions and possibly trade wars.

Trump’s pledge in his 100-day action plan – outlined in his Gettysburg speech – to name China a currency manipulator and thus subject to 45% tariffs on its exports to the US would amount to a declaration of a trade war with all sorts of unpredictable consequences, not least impact on global growth.

The International Monetary Fund has estimated that a surge in global protectionism would take down global growth by 1.5% over several years, and thus push the world toward recession.

A pragmatic Beijing will not wish to antagonise a new administration for the simple reason that it is not in its interests to do so. After all, 18% of China’s exports go to the US market. The US, for its part, needs to recognise that we are living in an era of interconnectedness that no amount of clumsy interference will reverse.

However, we cannot be sure that Trump’s threats, enshrined in a simple – and simplistic – seven-point trade manifesto will not be invoked and thus provoke wider conflagrations on the trade front.

These seven bullet-points suggest – at the very least – a confrontational approach to trade issues aimed largely at Beijing, including anti-dumping measures, complaints to the World Trade Organisation (WTO) about all manner of trading infractions, an aggressive counter-attack against China’s “theft” of American trade secrets, and instructions to label China a currency manipulator.

The Trump seven-point trade plan leaves no doubt that Beijing is the target and TPP will be an early casualty, never mind that China itself is not a participant.

Let’s consider the implications of Trump’s animus towards TPP.

At the stroke of a pen America will be abandoning a multilateral trading pact that would have embraced 12 Pacific Rim countries, accounting for annual trade of US$30 trillion, or 40% of global GDP.

What Trump is proposing throws a spanner in the works of a trade initiative that has taken years to negotiate and involved intricate negotiations on highly complex market-access issues as a model trade pact with vast potential benefit for participants.

This is now being cast out the window by an American president apparently hostage to his campaign rhetoric and seemingly committed to a course of action that will inject fresh uncertainty into a rules-based trading system.

If the TPP was alone among trade initiatives under threat that would be one thing, but a president-elect antagonistic to free trade and open borders has cast doubt on the operations of the WTO and railed against a slew of trade agreements, including the North American Free Trade Agreement.

Under threat are negotiations on the completion of the Trans-Atlantic Trade and Investment Partnership (TTIP). Assuming Trump carries out his threat to kill the TPPm the TTIP will find itself an even more lonely relic, subject to nationalist buffeting on both sides of the Atlantic.

These are dog days for the world trading system that was under siege in any case, prey to rising nationalism and protectionism across the globe.

Obama’s own leadership on trade has been weak. Trump’s influence threatens to be destabilising.

This item was the second in the ANZ Blue Notes series looking at implications of a Donald Trump presidency.

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