Trade correspondent L.C. reports:
The Trans-Pacific Partnership now goes into effect for the six initial signing nations. The five other original signees are expected to follow shortly. Others are lining up, but not the US, an original participant until Trump took the US out. (Kyodo 3/2018 photo)
The new Trans-Pacific Partnership (TPP) has passed its last hurdle and is about to enter into force. On October 31st, Australia became the sixth country to lodge its ratification document with New Zealand, the TPP document depository.
The six ratifying countries are Japan, Canada, Mexico, Singapore, New Zealand, and Australia. The remaining five TPP countries – Brunei, Chile, Malaysia, Peru, and Vietnam – are expected to sign soon, with Peru likely this year. Only Malaysia has signaled hesitation as Prime Minister Mahathir Mohamad says he wants to review the agreement that was signed by his predecessor.
This is a major diplomatic triumph for Japan. When the US withdrew from the original twelve-nation pact three days after President Trump took office, Tokyo assumed the leadership role in pushing for the pact to be revised so that the remaining eleven countries could still enjoy its benefits. This led to the TPP-11 agreement last January; it preserved almost all the high ambitions and standards set for the original deal.
Per the TPP-11’s entry-into-force provisions, the first round of tariff cuts will take effect for the six ratifying countries 60 days later – that is, on December 30th. Because the tariff phase-outs in the agreement can take place once a year, the second round of tariff cuts will take effect two days later, on January 1st and every New Year’s Day thereafter. (Japan’s tariff cuts, however, will take effect each year on April 1st to coincide with the start of its fiscal/financial year.)
The doubling up of tariff cuts at the turn of the year was a surprise, giving the deal’s trade liberalization a boost. That six countries wanted to make this happen indicates their enthusiasm for the agreement.
Upon the news of Australia’s ratification, Japanese Economy Minister Toshimitsu Motegi told reporters, “As protectionist moves strengthen across the world,” the TPP will “send out a strong message that free and fair rules for the 21st century will spread to the world,” and Japan will continue to be “a flag-bearer for free trade.”
The TPP-11 members have an array of existing trade agreements among themselves, but most of these previous agreements are less ambitious than the TPP and so will be subsumed by it.
The TPP includes not just the zeroing out, over time, of most tariffs but also investment liberalization, basic labor standards, curbs on state-controlled enterprises, provisions covering services and digital commerce, and restrictions on non-tariff barriers.
TPP expansion likely
Other countries are seeking to join the TPP-11. This week the participating countries reportedly agreed to meet in early 2019 at the ministerial level to consider the process for allowing new members. The agreement itself says new members can join if they agree to all the provisions of the existing accord and are approved for entry by all existing members.
According to the Japanese press, Thailand wants to join in 2019. South Korea has already officially said it will seek membership, as has the UK post-Brexit. Taiwan, the Philippines, and Indonesia have expressed interest in the past, and other Latin American countries including Colombia have as well.
Countries that join later will not enjoy as many benefits as the original countries until all the benefits have fully phased in, which for many tariff cuts will take years. The agreement puts many US exporters at a disadvantage as competing suppliers of the same goods will have better access, improving over time, to the markets of fellow TPP countries. This has already been a concern raised by US farmers, but it affects other sectors as well. The Japan-EU free trade agreement (FTA), likely to take effect in early 2019, will add to the US disadvantage in selling to Japan.
If the US rejoins, it will be able to enjoy the benefits of the current TPP plus the provisions put on hold when it bowed out, which include intellectual property protections.
US trade balance worsens
On November 2nd the Commerce Department announced that the US goods and services monthly trade deficit in September was $54.0 billion, up 1.3% from August’s upwardly revised $53.3 billion and the highest in seven months. The goods gap with China was the largest ever. This came as imports, hitting a new record, grew more than exports, and the goods deficit rose while the services surplus fell. The annual deficit this year will likely be the highest in a decade. The September figure reflected strong US consumer demand, the high dollar value, and the effort to front-load imports before new tariffs hit. According to a headline in The Hill, “Econ 101 predicted Trump would widen the trade deficit.”
In other trade deal developments this week, it was reported that Tokyo hopes the early onset of the TPP will give it more clout in the upcoming trade talks with Washington, which are expected to begin in January. On the other hand, the Trump Administration will be under increased pressure from US farmers to get results from Japan given the new access to its agricultural market that will be given its TPP partners. Japan intends to stick by its pledge not to offer the US any more access than it has given other trading partners, but the US has signaled it will seek more. Japan’s key goal for the talks with Washington remains to entice it back into the TPP.
Meanwhile, President Trump called for a closer trade relationship with Brazil following the October 28th election of Jair Bolsonaro as president. Trump said the two countries will “work closely together on trade” and that he could foresee a US-Brazil FTA. Trump denounced Brazil’s “very big tariffs” – even though the US runs a trade surplus with Brazil, as it does with most Latin American countries.
More US tariffs on China coming, or Trump-Xi deal?
Perhaps deliberately, the Trump Administration sent out conflicting signals about its plans surrounding the upcoming meeting between Presidents Trump and Xi Jinping and for escalating tariffs on China. The Administration also expanded its crackdown on Chinese officials and companies engaged in economic espionage.
The week began with reports that President Trump is preparing to impose a final round of Section 301 tariffs on the remaining Chinese exports not yet hit – about $257 billion per year worth. These could come as early as December if the anticipated November 29th Trump-Xi meeting isn’t successful. A failed meeting would also assure that the 10% tariffs currently imposed on $200 billion in Chinese imports to the US would rise to 25% in January.
There was speculation from some observers that the President made upbeat statements on prospects for a China deal in part to please the stock market and calm farmers’ fears ahead of the midterm elections. The President told reporters, “I think we’ll make a deal with China. We’re getting much closer to doing something.”
In China, as growth slips and trade pressures increase, state-controlled companies are gaining at the expense of privately-owned businesses. While the latter are generally more competitive and efficient, they can’t rely on the subsidized loans from state-owned banks that are available to the state-owned firms. Ironically, a less market-driven economy with more state intervention and distortion is the opposite of what the US wants its pressure to bring about.
US tech firms threatened with foreign taxes
A new cross-Atlantic trade tiff is brewing as European countries consider imposing a digital services tax that would hit very large online companies – most of which are based in the US. Google, Facebook, eBay, and Amazon are prime targets. According to the US Internet Association, 64% of all US services exports are digital products, and not surprisingly the US runs a services trade surplus.
The EU has such a tax under consideration, and other countries, including Mexico, are also considering joining in. On October 29th the UK government unveiled its budget proposal that included a 2% digital services tax, to take effect in 2020.
This prompted an immediate response from the US government and private sector. House Ways & Means Committee Chairman Kevin Brady (R-TX) released a strong statement the following day: “Singling out a key global industry dominated by US companies for taxation that is inconsistent with international norms is a blatant revenue grab…. If the UK or other countries proceed, that will prompt a review of our tax and regulatory approach to determine what actions are appropriate to ensure a legal playing field in global markets.” Translation: the US will retaliate. Major US online companies and associations joined in sharply criticizing the UK and EU plans, with the Chamber of Commerce saying it would crimp innovation. Some charged that the tax would be World Trade Organization (WTO) illegal.
Beyond Europe, the leading countries that impose what the US sees as unfair barriers to digital trade are China, India, Indonesia, and Vietnam. Beyond consideration of taxes, these barriers include data localization requirements, online content filtering and censorship, liability assigned to platform providers, copyright restrictions, and forced disclosure of encryption and private data.
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