US Presidential Politics Sours Further on the Trade Front

Yesterday’s New York Times carried a front-page article that neatly captured the inside-out world of the US presidential campaign season for trade watchers.  The article highlighted both Donald Trump’s bashing of Japan’s trade policies and the increasing concern within Tokyo over this potential narrative.

Where to begin with reactions to this story?

First, perhaps to Japan—get in line.  Anyone with an interest in trade has been watching the Trump campaign (especially) with a growing sense of unease or even horror for a long time. 

This is a candidate, of course, who has already threatened to slap China with 45% tariffs on all products shipped to the United States.  This would, Trump has claimed, stop China from unfairly dumping products into the American market. 

It’s not entirely clear, but it seems that he expects that, if China were not “unfairly dumping” all these products into the US market, then the goods would be made in the United States by American workers?  Or perhaps he just wants Americans to pay an additional 45% for goods?  Or shift production to some other country like Vietnam or Myanmar?

At the same time, the Financial Times is reporting the largest collapse in Chinese trade in years, with exports and imports plunging faster than at any time since 2009.  The IMF is now warning of the risk of “eminent economic derailment.”

Whatever the original justification might have been for wanting to impose huge tariffs on Chinese imports, in such stagnating conditions, such a policy would be doubly disastrous.  But logic is not a key element of Trump’s brand.

For Japan specifically, Trump has long claimed that Japan practices a host of “unfair” policies, including manipulating its currency to keep it artificially low. 

One huge irony, of course, is that Japan is embarking on some of the biggest changes in domestic policy in a very long time as a result of commitments made in the Trans-Pacific Partnership (TPP) agreement.  These will include tackling sensitive issues in agriculture and services, revising regulations, and changing legislation to bring Japan into compliance with this 12 party agreement.

Japanese leaders have decided to proceed with the TPP precisely because such reforms are necessary to achieve higher levels of economic growth after a prolonged period of domestic stagnation. 

In the face of impressive political courage in Tokyo, Donald Trump has instead raised the specter of old ghosts from decades ago.  Others may start to pick up and run with his ideas as well.

In the 1980s and 1990s, when Japan was experiencing rapid economic growth, the two countries came perilously close to important trade “wars” over issues like autos and auto parts, construction, and insurance.  Trump’s language now restarts some of the same debates of this time period and may make it harder for Japanese officials to take critically important bold steps at the domestic level.

Equally alarming, of course, is that Trump is not alone in his comments.  Although, in typical Trump fashion, he has gone much further out on a branch than anyone else, other top political contenders for the position of US president are also bashing trade in general.

Ted Cruz, another top Republican party contender, once backed his party’s stance in favor of freer trade.  He had been a supporter of Trade Promotion Authority (TPA).  However, once he became a candidate for President, he suddenly switched his stance on the issue last summer and voted against the bill in the Senate. 

On the other side of the aisle, Democrat Bernie Sanders is strongly against trade.  He argues that trade agreements have done untold damage to American workers in the past and will continue to harm their prospects in the future.

Hilary Clinton was, of course, a frequent and vocal supporter of trade and of the TPP in particular when she was serving as President Obama’s Secretary of State from 2009-2013. 

When she began her run for president, she was as non-committal as possible.  Generally she argued that she needed time to study the deal before she could declare her position.  Once the texts were released in November 2015, however, this became harder to defend. 

In addition, with Sanders running an unexpectedly strong campaign, Clinton was forced to tack left of where she had likely hoped to remain.  This appears to have pushed her to make recent statements on the TPP particularly complaining as well about possible currency manipulation by key trading partners (not all of whom are also TPP members). 

Other areas of concern for her are state-owned enterprise behaviors, lax American enforcement of existing rules, and tax avoidance by American companies.  (See her recent op-ed for details.)

In short, the entire slate of top contenders for the US presidential office are either clearly hostile to trade and the TPP or are, at best, not supportive of the agreement “in its current configuration.” 

This is a problem.  Not just for businesses in the United States, but regionally and globally, as many stand to reap considerable benefits from the implementation of the TPP.  The agreement cannot come into force without the Americans. 

What to do?  We have been suggesting that the best pathway is to have the US Congress vote on the implementing legislation for the TPP as soon as the ITC issues its report in May and before Congress leaves for the summer recess. 

Most people would regard this as a crazy strategy.  Voting on a complex trade bill ahead of a general election is not seen as a sensible approach for candidates.  But this is not, as we have clearly seen, a normal election cycle either.  With all candidates at the top of the ticket lukewarm or hostile to trade, waiting to get approval for TPP is looking increasingly problematic. 

In the upside-down world of today, the TPP might not cost as many votes as might otherwise be expected either.  Voters are making decisions based on a lot more than the usual criteria. 

Hence, holding the TPP vote early and getting it out of the way may look increasingly possible.  But this will only happen if members of Congress believe that there is sufficient support from the business community to justify the vote. 

So call or write Congress.  Today.  Even if you are not American.  Don’t pass it off to your GR or PR person.  Do it personally.   And ask others to do so as well.  Congressional staffers count the number of times members are contacted and aggregated numbers are critical.

The TPP matters to too many in the broader trade community to let this fall down over narrow parochial concerns in a handful of districts or, even worse, nonsensical policy based on a misreading of facts from 25 years ago. 

Here are key contact details if you do not have a specific member to approach.  Contact them all or at least reach the committee chairpeople at:

House Ways and Means:  http://waysandmeans.house.gov/

Senate Finance: http://www.finance.senate.gov/

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

ASEAN’s Trade Modernization Agenda?

Last week, ASEAN leaders and economic ministers held a series of meetings in Southern California with one another and with a variety of cutting edge businesses.  These meetings ought to spur officials to redouble efforts to craft an appropriate trade modernization agenda for the region.  A forward-thinking set of policy frameworks can help large and small businesses better capture potential gains from trade.

After the leader’s summit in Sunnylands, officials moved to San Francisco and Silicon Valley.  USTR took economic ministers and trade delegations from ASEAN on a “road show” to highlight different types of companies and technologies at the forefront of innovation. 

These efforts were supplemented by a conference organized by the US-ASEAN Business Council that also discussed additional elements of an appropriate trade agenda, including creating new funding models to foster creative start-up companies and encourage entrepreneurs. 

One challenge for ASEAN is the tendency for officials to try to micromanage the business environment.  Perhaps the single most important take-away from the California experience may have been that government has a critically important role to play to setting in place broad, facilitating policies that foster growth in the private sector and allows companies to flourish.  But heavy-handed interventions or narrowly prescriptive policies are likely to lead in the wrong direction.    

In fast-moving sectors, government attempts to pick and choose appropriate policies, or to select the “right” sectors, firms or industries to support are more likely to backfire than ever before. 

While it is important for governments to encourage companies to take advantage of trade opportunities, officials might more usefully focus their attention on removing policy obstacles and allow firms to find their own pathways to success and failure.  In a world where companies can locate anywhere in the globe, governments simply cannot afford policy roadblocks and time consuming and expensive obstructions to doing business. 

Our own proposal for adding a broad e-commerce perspective to AEC Blueprint 2025 can be found here.  We welcome suggestions from companies for specific items to flesh out the details.

Silicon Valley, of course, represents the current extreme end, perhaps, of innovation built up around the promise of digital connectivity.  However, in a very short period of time, many elements of what appears to be revolutionary today will spread to companies large and small in often far-flung locations. 

The smallest firms can provide services via mobile platforms.  Companies in remote locations will be able to create products using additive manufacturing techniques.  Firms can use various types of platforms to manage everything from client relationships to human resource systems to inventory controls in the most complicated global companies and even across firms that are not directly connected.

Such innovations are not simply a distant prospect or likely to remain the preserve of well-financed major Western players.  These technologies will spread and costs will fall, just as smart phone technology has allowed more and more people to harness tremendous computing power in the palm of their hands today.

The trade agenda in ASEAN (and in most places) has simply not caught up with this rapidly evolving environment.  While the AEC Blueprint 2025 nods in the direction of helping smaller firms, mentions the importance of e-commerce, and says that services are important, none of this is really sufficient for ASEAN member states to effectively harness the new trade modernization agenda that is needed to help businesses compete. 

Instead, ASEAN officials must seriously drill down and create practical policy frameworks to ensure that trade can continue to flourish across the region in the next decade.  This means, most critically, that ASEAN must work on policy areas that have traditionally been considered “off limits.”  For instance, it is no longer possible for a modern trade agenda to leave data, internet and information policy details to individual member states. 

Officials have to understand how globally connected firms do business today. Many of the ideas of how to provide privacy and security, as an example, do not match up with the way that firms actually move information around. 

The charming notion that police could walk into a room and “seize” data does not match the reality of how information actually flows.  No sensible firm would want to house important information in only one location, as it would be extremely vulnerable to disaster.  A fire, flood or earthquake could wipe out a whole firm.    Companies—even small ones—would like to have multiple locations for data storage and seamlessly switch (or have their service provider switch) between them if needed to avoid disruptions in service.

This is not to suggest, of course, that privacy and security are not critically important ideas or that government and companies ought not be concerned with either notion.  It is simply to note here that officials responsible for crafting rules and regulations to ensure privacy and security need to understand how companies actually operate and how they might reasonably be expected to operate in the near term before trying to craft responsible policy solutions. 

ASEAN has got to do a much better job of reaching out directly to companies to determine which policies are creating obstacles and which areas need improvement.  This must include more than annual summit meetings with top level ministers and business councils (welcome though these meetings may be), but must include sustained and ongoing input to working committees at all levels within member states and at the ASEAN level. 

The practical consequence of a failure to create policy frameworks across ASEAN that are in harmony is that businesses will not grow in some member countries.  Companies will not invest in locations that do not provide a facilitating environment.  Innovation will not happen.  Entrepreneurs will not develop, or they will leave and go to some other location to build up their new ideas.  This would be a tremendous waste of the talent and energy found across Southeast Asia.

---Note:  Last week’s post about the TPP timelines led to an excellent query by Alice at UBS in Singapore.  (UBS clients should request their outstanding TPP Timelines research full of excellent graphics.)  Congress will vote on the implementing legislation to bring US laws into conformity with the TPP.  (As soon as possible, please!) Then USTR will start the process of certifying that other TPP members have complied with TPP rules.  USTR will notify Congress of the results of this study.  But Congress does not need to vote on this process.  Once the report is finished and submitted (assuming no major objections), the US domestic procedures are considered to be finished.  If all 12 parties have also finished, TPP entry into force will proceed in 60 days.

Second TPP Note:  The New Zealand TPP Website has released the Spanish and French versions of the texts.  One big change with the overall legal scrub has been the tariff schedules that were adjusted to remove all the complicated reference notes (like B5) and given more standardized formatting.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Moving the TPP Ball Forward in Washington

Washington DC:   With the formal signing of all 12 members on February 4, 2016, in New Zealand, the Trans-Pacific Partnership (TPP) has crossed another milestone.  What is up next?

Officially, the member states remain focused on finishing up domestic procedures needed to trigger the entry into force for the whole deal.  In practice, most eyes are focused on Washington.

While domestic approval is not automatic everywhere else, most of the TPP member countries do not face the same set of hurdles as the United States. 

Malaysia, for example, just managed to clear two contentious days of parliamentary debate on the TPP at the end January.  While the government did not, strictly speaking, need MPs to grant approval for the deal, the government had promised a debate before signing the final texts.  In the end, MPs did not block the agreement. 

The country still has to change 26 different pieces of legislation to bring the country into alignment with new TPP requirements.

In most parliamentary systems, getting legislative approval is easier (assuming the government that negotiated the deal is the same government that is asking members of parliament to approve the final agreement). 

Most other TPP members are rapidly moving towards granting approval and making necessary domestic legislative changes to bring the agreement into force.  This likely includes Japan, which appears to want to finish approvals for the TPP ahead of this summer’s elections in the Diet.

The United States, by contrast, has a special problem.  The agreement was launched under a Republican administration, but negotiated under a Democrat.  Traditionally, however, Democrats have been less than enthusiastic about trade.  Hence the President has to get the opposition to do the heavy lifting to get the agreement through the legislature. 

To this mix, add a crazy electoral cycle, as an earlier blog post noted, where even the normally reliable pro-trade Republican party has been stepping out against trade.  Even a former USTR (trade minister), now a Republican Senator from Ohio, Rob Portman, just said he would vote against the TPP.  (Surprisingly, his photo at USTR seems undamaged so far…)

There are three issues of particular concern in DC.  First, the patent length for data protections for biologic drug continues to raise a ruckus. 

Think about that for a moment.  In an agreement that runs to 1200 pages with thousands of pages of specific schedules, the fight is literally over one number—should it be 12 or 8 or 5?  More amazing, this is a fight that has been highlighted for years.  It’s been in our blogs for more than a year with the clear warning that 12 years is simply a non-starter for the other parties. 

Astonishing, no? 

Anyway, issue number two is the onshoring of financial services data.  Until this week, I was not aware that it was the United States that caused this problem in the first place.  I thought there was another (unnamed) TPP member that was pushing for this policy.  No. US Treasury has some obscure rule about data flows for financial services that it wants to maintain for future policy space. 

Again, think about this for a moment—the TPP deal is potentially going to be derailed in Congress over a policy position that US Treasury has taken. 

Third, the “tobacco carve out” is a problem.  Tobacco is not carved out of the deal.  Tobacco is included.  What is carved out is the ability of tobacco firms to sue for expropriation (seizure of assets by government) under the investor-state dispute settlement mechanism. 

In doing the rounds this week in Washington, the consensus among many veteran trade watchers is that much of the fuss can be handled without “renegotiation.”  It appears to have finally sunk in that asking the other TPP member companies to reopen the deal for 3 things will put the US at risk of accepting 33 unpalatable changes in the agreement in return. 

Hence, people are furiously working behind closed doors to figure out some sort of domestic level solutions.  For example, in tobacco, maybe a commitment to not exclude tobacco (or any other sector) from ISDS in any future negotiation?

The general level of animosity in the town is clearly not helping.  Each side is accusing the other of “insufficient” attention.  The few objective observers in DC have said that there have been a lot of meetings between the White House and various members of Congress.  Whether these have been sincere or sufficient or include adequate listening or whatever is clearly a subjective call. 

Executive branch staff members are also fanning out across the country and holding meetings everywhere.  One staff member joked that if there were three people in a Starbucks somewhere who wanted to discuss TPP, he would be there on the next airplane.   The various business organizations are actively and intensively working the ground in some districts. 

The timing of the US vote is going to be interesting.  The idea seems to be to work out the “fixes” to the specific problems and objections of members that can be addressed.  Then the package will be ready to go with all the necessary implementing legislation while everyone furiously counts votes.  The minute the votes are thought to be ready, the whole thing will be put forward.

The earliest date this might happen is probably May.  The ITC has to report on the expected benefits of the agreement with a target date of May 18.  This could be sooner, although if I were the ITC, I would not try to rush what is going to be a highly contested report.

Most people are expecting the vote in the lame duck session.  However, this is risky, as noted earlier.  Timing is tight.  Depending on who wins, it is not automatic that getting it done then is easier.

One other point of note for TPP watchers from this week—even if all 11 TPP parties managed to complete their own “domestic procedures” by summer and the US somehow miraculously got the Congressional votes in June, the deal does NOT happen 60 days later.  This is because the American domestic procedures also include another element—certification. 

The United States has to certify that all parties have sufficiently carried out the necessary legislative steps to implement the deal on day one.  In practice, this means USTR has to notify Congress that, for example, Malaysia did pass the 26 pieces of legislation to comply with TPP rules.  Only when this certification is finished can the United States declare that it has sufficiently completed its own procedures to trigger entry into force.

This process could be speedy, but likely not just 60 days.  Hence, if all 12 parties appeared to ratify in mid-2016, the agreement would likely enter into force around January 2017. 

Of course, lots of things—like the death of a Supreme Court Justice, perhaps—could easily throw the entire process into complete disarray and either speed up or derail the trade agenda entirely.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Traveling with One “L” or Two? A Review of TPP Timelines

A former trade negotiator once told me that he spent over an hour of his time on Earth arguing over whether or not the word “traveling” should be spelled with one “L” (American style) or two (British style).  Such linguistic disputes are common in the final phases of trade agreements, as the legal texts get nailed down and then translated.

For the Trans-Pacific Partnership (TPP), the legal teams are holed up in Japan, confirming all the final details of the agreement.  In both legal and trade terms, language is extremely important.  There is a vast difference between a sentence that reads, “Members shall…” and “Members shall endeavor…”  The former requires the action by members while the latter merely urges action. 

Getting a dozen legal teams to comb out the final details on such a comprehensive agreement that runs to hundreds of pages is taking a long time.  Fortunately, the official language of the TPP is English.  This means that, although the final document will also be translated into Spanish and French, the legally applicable text is the English version only.  This dramatically cuts down on the time required between the completion of negotiations and possible release of final texts. 

While we all wait for the texts and associated schedules to be circulated (hopefully within another week or two), it seems a good time to review the timelines ahead for the TPP. 

In general, there are two critical sets of timelines that matter for the agreement.  The first deadlines are a whole set of complicated dates related to approval of the TPP inside the United States.  The second deadlines are those related to entry into force for the entire TPP agreement. 

To make matters more complicated, the US domestic procedures contain multiple timelines.  To try to summarize (and simplify slightly) the situation:

1.     President Obama, following Trade Promotion Authority (TPA) guidelines, has to notify Congress of his intention to sign the texts.  This triggers a 90 day procedure under which the texts must be formally released to the public for at least 60 days.  At the end of 90 days, the President is allowed to sign the agreement.

2.     The formal signature of the agreement by the President must be accompanied (within 60 days) with a list of legislative changes necessary for Congress to consider in order to bring domestic laws into compliance with TPP rules (wherever needed). 

3.     At some point, the President will need to deliver to Congress the official text of the agreement, a draft implementing bill, and a statement about how the agreement matches requirements of Congress under TPA.

4.     Once Congress receives the bill from the President, it must send the bill directly to relevant committees for expedited review.  There are specific time deadlines that apply again once the bill has been submitted.

5.     After limited floor debate, both houses of Congress must vote on the bill.  No amendments are allowed, so members must vote either yes or no.

Hence, one important issue inside Washington is figuring out when is the most auspicious moment to trigger some of the deadlines.  Most critical, of course, is the best opportunity for the final debates and reviews inside of Congress prior to final votes.

While many will feel particular urgency to get US approval for the TPP agreement, the implementation of TPP commitments across all 12 members remains some distance off.  New Zealand’s government has been releasing a series of helpful fact sheets.  One, on implementation and legal commitments, highlights the three options included in the TPP agreement for handling the entry into force deadlines.

The basic problem is that, while negotiations on the TPP agreement with the 12 members concluded on October 5, member states need to have domestic approval to move forward with implementation.  An agreement with a dozen participants may run into difficulties at the domestic level in getting approvals at the same time. 

Hence, the TPP has three possible methods for achieving entry into force.  The first and easiest method is to have all 12 countries finish domestic procedures within 2 years of signing the agreement.   Within 60 days of the last approval, the agreement automatically enters into force. 

Under option 1, entry into force could be much sooner than 2 years since it is triggered by the speed of domestic procedures alone.  Most TPP members have parliamentary systems, where the government usually has higher confidence that domestic legislators will follow government policy.  It is conceivable that many TPP members could put the matter before parliaments immediately after signature and be ready to move forward in a matter of weeks.

Except, as noted, the United States.  To add to the difficulties, as anyone following the United States knows, America is in the middle of a drawn-out electoral cycle in a bitterly contested, hyper-partisan environment.  It is not at all clear whether the TPP will get the 51% of votes needed in both houses of Congress or when this approval might be most likely.

This concern has given rise to the next option for TPP approval.  Under option 2, if all 12 parties have been unable to commit to the agreement at the domestic level inside of 2 years, the agreement can still come into force if at least 6 members are ready. 

However, this comes with a catch—because TPP officials have been worried that either the United States or Japan would not get the agreement through their legislators and bureaucracies for approval, option 2 also requires that both countries must be among the six (or more) countries ready to move ahead to implementation.   Hence, option 2 really means that, provided the United States and Japan can join up with at least 4 other good-sized members by the end of a two-year period, the agreement can proceed.

But what if either Japan or the United States are not finished with domestic procedures within 2 years?  Then Option 3 kicks in, under which the agreement can come into force within 60 days of the last one signing the agreement (along with the other major party and at least 4 more members). 

The TPP agreement, therefore, does give more weight to the Japanese and American approvals than the remainder.  This is a reflection of economic realities, where the payoffs are greatest if, and only if, the biggest markets are included.  Unless all 12 members are included at the outset, then members that collectively contribute at least 85% of the market size need to be ready to implement the TPP.  Any country that is not involved at the date of entry into force (other than the U.S. and Japan) can enter the agreement at any later time.

This complex set of entry into force conditions makes it difficult to predict with accuracy exactly how soon the TPP will take effect.  If all 12 parties moved at light speed, the soonest possible date could be fall 2016.  It is a pretty safe bet, however, that this will not happen so smoothly or so soon.  Instead, businesses might realistically be planning and pushing for TPP implementation in 2017.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***