global asia In Focus global asia Vol. 11, No. 4, Winter 2016

In Focus What the Trump

The articles in this Era Portends for In Focus section were developed from presentations at a Trading Relations workshop on the Japan- South Korea-US Trilateral In Focus Dialogue on September 23, in Northeast Asia 2016. The workshop was co-organized by the Korea- Pacific Program, School of Global Policy and Strategy at the University 108 110 of California San Diego, and the Asia Research Stephan Haggard Vinod K. Aggarwal Fund in Seoul. Introduction: the significance The US perspective: The future of three national perspectives is unclear. Can America again on the post-Trump trade provide leadership on trade, or environment in Northeast Asia. will it abdicate this role to China? 114 119 Yukiko Fukagawa Suengjoo Lee The Japanese perspective: The South Korean perspective: With uncertainties over TPP and We must review the TPP, the RCEP, Japan must work with its changing regional architecture neighbors to tap its potential. and a role in future mega-FTAs.

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The Liberal Trading Order under Assault: A US Perspective By Vinod K. Aggarwal

Newsmaker: US President-elect Donald Trump is featured in a

In Focus: Given the hotly contested US presidential elec- ogy Agreement (1997, expanded in 2015), the Chinese newspaper tion and the surprising victory of Donald Trump, Basic Telecom Agreement (1998) and the Finan- headlined “Outsider counter-attack” at it is easy to lose sight of the broader challenges cial Services Agreement (1999). a newsstand in to the US-promoted post-Second World War eco- Second, on a regional basis, countries have Beijing. China is wary nomic order. These come from systemic changes, continued to pursue trade liberalization through of trade wars in his

Aggarwal administration, but American domestic political conflicts and a arrangements such as the European Union, the sees opportunity in rethinking of the ideological consensus around North American Free Trade Agreement (NAFTA) his opposition to TPP. Photo: AP/Ng Han Guan the benefits of free trade. and the Association of Southeast Asian Nations After 14 years of fruitless, contested nego- Free Trade Agreement of 1992, which evolved tiations, members essentially terminated the into the ASEAN Economic Community in 2015. Doha Round of the World Trade Organiza- Third, since the late 1990s, countries have tion of both bilateral and regional accords in the TPP’s problems have given a boost to the tion (WTO) in December 2015. Instead, coun- negotiated a flurry of bilateral FTAs. While there Asia-Pacific region, it is no surprise that the region Asian-focused Regional Comprehensive Eco- tries have increasingly focused on bilateral free were only 47 in 1994, the number had increased was among the first to embark on mega-FTA nego- nomic Partnership (RCEP), which includes 16 trade agreements (FTAs), sectoral agreements, to 262 by the end of 2015.2 Major economic pow- tiations. Twelve countries in Asia and the Ameri- countries. With six countries having signed regional accords, and more recently so-called ers such as the US, the EU, China and Japan, and cas negotiated the TPP trade deal, with negotia- FTAs with ASEAN as a bloc, the next logical step minilateral mega-FTAs. And yet, despite active medium-sized economies such as South Korea, tions concluding in October 2015, but now facing seemed to be a broader FTA. Japan first pro- US promotion of two of these mega-FTAs, the Chile, Mexico and Singapore, have all negotiated a very uncertain future with a new US president. posed a free-trade area covering the so-called Trans-Pacific Partnership (TPP) and the Transat- a “noodle bowl” of bilateral FTAs, often with stra- In part, the TPP has its origins in the difficulty ASEAN+6 countries. China initially pushed for lantic Trade and Investment Partnership (TTIP), tegic and political objectives in mind. of transforming the Asia-Pacific Economic Co- an ASEAN+3 grouping, excluding India, Aus- neither appears to be on the verge of seeing the All three approaches can be problematic. Secto- operation (APEC) forum into a true pan-regional tralia and New Zealand, but finally agreed to the light of day. The problems in ratifying the TPP ral agreements tend to undermine the global coa- trade agreement. By 2008, the effort to create ASEAN+6 approach. The idea of creating RCEP provide us with an early-warning indicator of the lition for free trade by focusing solely on “winners” a so-called Free Trade Area of the Asia-Pacific was first discussed in November 2011 and for- pressures driving US trade policy under a Trump from trade agreements.3 Regional approaches (FTAAP) seemed to be going nowhere. Mean- malized a year later. Currently, negotiations are administration. The implications could well create their own sets of rules and procedures, while, the Trans-Pacific Strategic Economic Part- ongoing and 14 rounds have been completed. bring us to the “World without the West” identi- and often have regional content requirements nership agreement, known as the P4, created Although participants have set the end of 2016 fied by Barma, et al, in 2007.1 that impede global sourcing efforts. And bilateral in 2002 by Chile, New Zealand, and Singapore as the target for completion, this deadline will FTAs, with their varying provisions, can lead to (with Brunei joining the negotiations in 2005), almost certainly be missed. But were the RCEP growing Challenges to the significant discrimination and impede trade, par- called for trade liberalization that went beyond to succeed and TPP to die, China could even lead multilateral trading order ticularly given the Asia-Pacific’s complex supply traditional border barriers to include the regu- a broader regional agreement. Even before the demise of the Doha Round, grow- chains. Indeed, this growing complexity has pro- lation of intellectual property, rules of origin, ing frustration with the slow pace of multilateral vided one of the key motives for countries to turn government procurement and other “behind- Triple threat to the Western negotiations led many countries to seek alter- to mega-FTAs: multilateral FTAs that involve a the-border” measures. In November 2009, the liberal trading order natives to liberalize international trade. First, large number of participants. The goal of these Obama administration affirmed an earlier Bush What has led to the problems that we see in the countries negotiated sector-specific multilateral agreements has been in part to rationalize the administration decision to take part in TPP nego- Western liberal trading order? The candidates agreements, including the Information Technol- multiplicity of bilateral FTAs. With the prolifera- tiations, which concluded in October 2015. include declining US hegemony and the rise of

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1 Naazneen Barma, Ely Ratner, and Steven Weber. “A world 4 David H. Autor, David Dorn, and Gordon H. Hanson, “The China 6 Vinod K. Aggarwal and Simon J. Evenett, “Do WTO rules preclude 9 Ashton Carter, US Secretary of Defense Speech “Remarks on the without the West.” The National Interest 90 (2007), pp. 23-30. Syndrome: Local Labor Market Effects of Import Competition in industrial policy? Evidence from the global economic crisis,” Business Next Phase of the U.S. Rebalance to the Asia-Pacific,” Tempe, 2 See: , “Regional Trade Agreements,” the United States,” American Economic Review, 2013, 103(6), pp. and Politics, Vol.16, No.4, pp. 481-509, 2014, part of a Special Issue Arizona, April 6, 2015, www.defense.gov/News/Speeches/Speech- www.wto.org/english/tratop_e/region_e/region_e.htm. 2121-2168. on Industrial Policy, edited by Vinod K. Aggarwal and Simon J. Evenett. View/Article/606660/remarks-on-the-next-phase-of-the-us- 3 See Vinod K. Aggarwal and John Ravenhill, “Undermining the 5 For the extensive political science and economics literature on 7 Barack Obama, “Here’s the Deal: the Trans-Pacific Partnership,” rebalance-to-the-asia-pacific-mccain-instit. WTO: The Case against ‘Open Sectoralism,’” AsiaPacific Issues, this topic, see Sonia N. Aggarwal and Vinod K. Aggarwal, Nov. 6, 2015, www.whitehouse.gov/blog/2015/11/06/heres-deal- 10 Gary Clyde Hufbauer, “Could a President Trump Shackle No.50 (Honolulu: East-West Center, February 2001). “Industrial Policy: Theory and Practice,” forthcoming. trans-pacific-partnership. Imports?” 16-6 Assessing Trade Agendas in the US Presidential 8 Brock Williams et al., The Trans-Pacific Partnership: Strategic Campaign (2016), p. 5. Implications, R44361, Congressional Research Service, Feb. 3, 2016.

China, a fraying US domestic coalition for free least some states in getting intervention right.5 with respect to the TPP.8 As current Secretary Still, some of the calls for high tariffs and nam- trade and an erosion of the ideological consen- Recent work on China’s aggressive support for its of Defense Ashton Carter put it, “In terms of our ing China a currency manipulator may simply be sus — particularly among rich countries — on companies, both state-owned and private, shows rebalance in the broadest sense, passing TPP is an opening gambit in a businessman’s approach the benefits of trade. that even “green” new-growth sectors — where as important to me as another aircraft carrier. to trade negotiations. NAFTA is due for moderni- A systemic explanation focuses on the relative presumably developed countries would find a It would deepen our alliances and partnerships zation and the TPP had genuine problems with balance of power between the dominant state, comparative advantage — have fallen victim abroad and underscore our lasting commitment respect to environmental provisions and inves- 9 In Focus: the US, and a rapidly-rising China. During the to the glut of Chinese bank-led financing in the to the Asia-Pacific.” tor-state dispute settlement. Trump has argued Cold War, the US promoted open markets among wind, solar and other sectors.6 The temptation to frame the TPP in economic that he favors a bilateral approach to trade agree- its allies as a bulwark against the Soviet bloc. Yet, From an ideological perspective, non-govern- and strategic balance-of-power terms diverted ments, a policy pursued actively in the 2000s but following the end of the Cold War, the security mental organizations have played an important attention from the specifics of the agreement. The with the resulting “noodle bowl” problem that justification for supporting “free-riding” allies role since NAFTA in promoting an alternative result has been a failure to promote TPP on its eco- motivated larger agreements such as the TPP. Yet, Aggarwal began to erode, and Trump during his campaign vision of the costs of trade. In addition to argu- nomic merits. With its likely demise, the Chinese without attention to the very real issue of pro- fully exploited this changing sentiment. Follow- ments about health and environmental implica- have lost no time in moving forward with RCEP. moting domestic adjustment programs for work- ing the inclusion of China into the WTO in 2001, tions, criticism of multinational companies has ers, it is unclear how new trade agreements will its rapid export growth began to pose a new chal- found its way into the mainstream. Moreover, Looking to the Future satisfy Trump’s core constituency. lenge to the US-led trading order. From the stand- this theme has been taken up not only by activ- Some have suggested that RCEP could provide a It remains to be seen if the US can again pro- point of the theory of hegemonic stability, China ists and unions but by prominent academic econ- stepping-stone to the broader regional free-trade vide leadership on trade or if it will abdicate this has increasingly moved toward becoming a peer omists such as Paul Krugman, Larry Summers agreement in APEC that was initially pushed by role to China, which would see a Trump presi- competitor of the US, making policy co-ordina- and Joseph Stiglitz. the US. Originally, the idea was that both TPP dency accelerating the demise of the post-Second tion more difficult. The political implications of these three devel- and RCEP could become part of the FTAAP, World War liberal economic order. At the domestic level, rapid Chinese import opments are quite clear. The major party candi- with the former going further in its liberaliza- penetration of the US market,4 often with US dates in the US presidential election both turned tion efforts than the latter. But with the election companies located in China leading the charge, protectionist. In June 2016, Trump called TPP a of Trump, the US appears set to give up its lead- has led to the disappearance of domestic manu- “rape of our country” and NAFTA the “worst trade ership on trade issues in the Asia-Pacific region facturing jobs, eroding the political consensus for deal in the history of the country.” Both candi- and even risks being excluded from agreements Vinod K. Aggarwal is Director of the free trade in the US. This should not have come dates, but particularly Trump, also singled out such as RCEP. Berkeley APEC Study Center, Travers Senior as a surprise to liberal economists except for their China for opprobrium. RCEP is likely to follow the Chinese approach Faculty Fellow and Professor at the Travers self-induced, formalized naïveté about the eco- of signing first and negotiating later. It is also Department of Political Science, and Affiliated nomic costs of adjustment. The mantra of “let Selling the TPP: Security Framing much less focused on behind-the-border meas- Professor at the them adjust” ignored the massive literature on In the face of sharp opposition to trade liberali- ures, which were the subject of the TPP. With at the University of California, Berkeley. active labor market policies, lobbying and other zation, and to globalization more generally, the most Asian countries pursuing active industrial aspects of the political economy of trade that has Obama administration (and the Bush adminis- policies, strongly binding rules that would con- An earlier version of this paper was long been a staple of international and compar- tration before it) pushed the importance of the strain government behavior seem unlikely. presented at a conference entitled “US- ative political economy. By ignoring these costs, TPP as balancing China — economically, polit- What comes next is unclear. The US president Japan-South Korea Relations: Looking liberal economists have been directly responsible ically and from a broader strategic standpoint. has the legal authority to raise tariffs both across- Forward,” Sept. 22-23, 2016, at the for the rise of protectionist populism. Obama argued that “if we don’t pass this agree- the-board and selectively.10 Thus, the constraints Graduate School of Global Policy and The other aspect of the domestic political econ- ment — if America doesn’t write those rules — that Trump faces are more in the realm of political Strategy at the University of California, omy of trade concerns industrial policy. While then countries like China will.”7 Returning to economy than law. A trade war with China would San Diego. For comments, the author economists have been highly skeptical of the abil- the post-Second World War tactic of selling trade have costly implications for all parties concerned, is grateful to Stephan Haggard and ity of states to successfully promote industrial accords in a security context, there is now an and particularly for smaller Asian states that are Sarah Lee. For research assistance, policy, they have often ignored the success of at increasing reliance on oversold strategic claims part of the Asia-Pacific global supply chain. the author thanks Michelle Huang.

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