Thursday, April 24, 2014
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The Economics of Strategic Containment

NEW DELHI – At their recent summit in Cannes, the G-20 shelved, if not buried, the World Trade Organization’s moribund Doha Development Round of multilateral trade negotiations. Crisis-weary Europe and America face a rising tide of protectionism at home, and are trying to find ways to blunt the edge of China’s non-transparent trade competitiveness.

Turning his attention from the Atlantic to the Pacific, US President Barack Obama – with his eye, once again, trained on China – has now unveiled a new regional trade initiative. Why was the US unwilling to move forward on the Doha Round, but willing to pursue a regional free-trade agreement?

The answer lies in the fact that the Trans-Pacific Partnership (TPP), launched by Obama and the governments of eight other Pacific economies – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam – is not just about trade.

While Obama chose to stick to the economic factors driving the TPP, US Secretary of State Hillary Clinton, on the eve of the just-concluded Asia Pacific Economic Cooperation gathering in Hawaii, laid out the initiative’s wider strategic context. “The United States will continue to make the case that….[the region] must pursue not just more growth, but better growth,” which “is not merely a matter of economics,” Clinton said. “Openness, freedom, transparency, and fairness have meaning far beyond the business realm,” she continued. “Just as the United States advocates for them in an economic context, we also advocate for them in political and social contexts.”

Following up on these remarks, Obama drew attention to persistent US concern about China’s exchange-rate policy, inadequate protection of intellectual property, and impediments to market access. “For an economy like the United States – where our biggest competitive advantage is our knowledge, our innovation, our patents, our copyrights – for us not to get the kind of protection we need in a large marketplace like China is not acceptable,” Obama observed.

The TPP initiative should be viewed against this background, and not just in the context of the collapse of the Doha Round. The TPP’s nine sponsors have resolved “to establish a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and twenty-first-century challenges.”

These leaders also agreed to fast-track the TPP initiative, and to consider opening it to other members – most importantly Japan, a late convert to the idea of a Pacific region free-trade agreement.

The TPP’s agenda is divided into three categories: core, cross-cutting, and emerging issues. The core agenda is to stitch together a traditional free-trade agreement focused on industrial goods, agriculture, and textiles. The agreement would also have provisions for intellectual-property protection and what are dubbed the social and environmental issues. In short, the TPP’s core agenda will offer the region a “Doha Round-type” agreement that includes the social and environmental agenda that developing economies have been resisting within the WTO.

Going beyond the core, the cross-cutting issues include investor-friendly regulatory systems and policies that enable “innovative” or “employment-creating” small and medium-size enterprises to operate freely across borders within the TPP region.

Finally, the TPP seeks to bring into the ambit of a trade and investment agreement “new and emerging” issues. These include “trade and investment in innovative products and services, including digital technologies, and ensuring state-owned enterprises compete fairly with private companies and do not distort competition in ways that put US companies and workers at a disadvantage.”

In short, the US has moved to bring together all of the economies in the region that are worried about China’s beggar-thy-neighbor trade and exchange-rate policies. For the US, the eight other TPP countries, with a combined population of 200 million, constitute its fourth largest export market, behind only China, the European Union, and Japan. If Japan joins, the TPP’s importance would rise dramatically.

While the economics of the TPP is important, the strategic component is even more so. This is the second leg of America’s new “Pacific offensive,” aimed at offering nations in the region an alternative to excessive and rapidly growing dependence on a rising China.

The first leg of the offensive was the idea of the “Indo-Pacific” region, which Clinton developed a year ago and followed up this year with an essay called “America’s Pacific Century.” There, she defines the new region of US strategic engagement as “stretching from the Indian subcontinent to the western shores of the Americas.”

Extending east from the Indian Ocean and west via the Pacific, the US is creating a new strategic framework for the twenty-first century. The TPP is just one of the pillars of that new edifice.

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