A strategic shift

By Hussain H Zaidi

President Donald Trump has pulled the US out of the Trans-Pacific Partnership (TPP) on his first day in the White House. If for nothing else, Trump deserves a round of applause for being as good as his word.

Compliments aside, the decision taken by the man who presides over the globe’s largest economy and trading nation is likely to set the pace and direction for international economic developments.

Free trade agreements (FTAs), which seek to eliminate or slash import tariffs, have been seen as the capital instrument of driving up trade and economic growth. Buying into this conventional logic – neoliberalism, as it is commonly called – countries all over the world have gone on a spree to conclude FTAs both bilaterally and regionally. Since 1995, more than 400 such agreements have been notified to the World Trade Organization (WTO) Secretariat, while the number of FTAs notified between 1948 and 1994 was merely 124. So pervasive has been the influence of neoliberalism among both academics and policymakers that one could question it only at the peril of being rounded on.

The recent trade data flies in the face of the FTA-centric approach. The explosion of such agreements notwithstanding, for several years, world trade has been hit by stagnation and, at times, recession. From $15.9 trillion in 2008, the year when the global financial crisis erupted, the world trade fell to $12.3 trillion in 2009. The next two years saw some recovery as the trade volumes surpassed $18 trillion. But then stagnation set in, leading to a fall in trade volumes to $16.2 trillion in 2015.

The neoliberal approach to international trade has been beset with two perennial problems, which partly explains why tariff elimination agreements are not the recipe even for trade enhancement, much less for increased prosperity.

One, as a rule, the FTAs have fallen short of full-scale liberalisation by excluding ‘sensitive’ sectors from tariff elimination. These are highly protected, inefficient sectors, and – going by the neoliberal theory – they are most in need of liberalisation. In Pakistan, for instance, the auto sector has, by and large, been excluded from the FTAs’ coverage. European countries, by the same token, make it a point to put their agricultural products on the sensitive or negative lists of their FTAs.

Two, free trade has strong distributional effects within the economy, as it tends to reward relatively abundant factors of production at the expense of scarce ones. In developed countries, such as the US, one of the outcomes of the FTAs is that labour-intensive sectors are the losers, while capital-intensive sectors are the winners. In the wake of the North Atlantic Free Trade Agreement (Nafta), thousands of American workers employed in the apparel and other labour-intensive sectors lost their jobs owing to cheaper imports coming from Mexico.

The US Bureau of Labor Statistics puts the number of jobs lost in the country’s manufacturing sector at six million between 1999 and 2011. It was the cause of such displaced workers that Trump took up during his election campaign. Obviously, trade is one of the several factors responsible for unemployment. But it’s easier to point a finger at trade.

The US walking out of a tariff elimination treaty is significant not merely for the TPP – the agreement was only signed and never ratified by Washington – but for trade, economic policies and narratives in a larger context as well. The decision, to start with, has put the future of the TPP trade deal under question. Australia and New Zealand, who are among the signatories to the treaty, have announced their decision to invite some Asian countries – notably China – to join them to fill the vacuum left by the withdrawal of the US. In the words of Australian Prime Minister Malcolm Turnbull, “losing the US from the TPP is a big loss, there is no question about that. But we are not about to walk away…certainly there is potential for China to join the TPP”.

However for Japan – which is now, arguably, the most influential member of the TPP because of the size of its economy – the trade pact “without the US is meaningless and the balance of interests would crumble”. The Japanese view reflects the country’s disapproval of a stronger Chinese role in the Pacific. It will be difficult for China to join the TPP, in case it chooses to do so, in the face of a likely Japanese opposition.

Ironically, Beijing, until recently, was not invited to join the TPP, because Washington, with Obama at the helm, viewed the arrangement as a counterweight to the Asian giant’s influence in the region. But now Washington has walked away from the arrangement. National priorities keep on changing.

Another Asian economic powerhouse who may be roped in to join the treaty is South Korea – which, like Japan, is a staunch American ally. However, it’s hard not to agree with the Japanese view that without the US, the TPP will lose its vigour.

Trump’s views about the TPP and other such treaties signal a strategic shift on the part of the US from its erstwhile strategy of using trade as an instrument to advance0 its political interests and impose its cultural values – such as respect for human rights – on other nations. The new administration’s preference seems to be on saving jobs by reviewing and possibly quitting trade deals and going tough on immigration and cross-border movement.

Beijing is being tipped to step in to fill the vacuum created by Washington’s strategic shift. China’s remarkable economic growth owes much to the star performance of its exporting sector. Over the past three decades, the country has used its successes in the economic sphere to shore up its political clout. With the US on the retreat in economic diplomacy, China is likely to grow more aggressive. Beijing is already on its way to shore up its global influence through the One Belt, One Road strategy – of which the China-Pakistan Economic Corridor is a part. Concluding FTAs with en route countries is an important component of the strategy.

A China-centric international economic order – in the event that it comes about – will be based on new rules of the game. Unlike the US, the Asian giant has never been ideologically committed to trade and political liberalisation. It remains a one-party state and largely a government-controlled economy.

Herein lies the capital significance of Trump’s ascendency. Neo-liberalism, which remained the supreme economic doctrine of the world for nearly three decades, has finally come under challenge – and that too on its home ground. The absolute faith in the virtues of the market economy, coupled with a hands-off approach on the part of the government and the uncountable benefits of economic integration – which are the cornerstones of neoliberalism – have come under question. It remains to be seen how potent this challenge turns out to be.

The writer is a freelance countributor.

Email: hussainhzaidi@gmail.com

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