Obama II (II)

Jun 07, 2013

Obama II (II)

The Next Four Years: Creating a Trade Legacy

So, what can we expect in Obama II?

Having acted cautiously during his first term, some expect Obama to now be more aggressive on trade in his second. Given that this will be his last term, it is likely he now feels he has more space to make some bold moves.

Indeed, the 380-page Trade Policy Agenda issued on March 1 is a useful compass for gaging the president’s thinking, packed as it is with oldies from his first term, together with some ambitious pronouncements for opening up new markets over the next four years. If successful, the president could end his term with an enduring legacy as a free trade champion.   Topping the list are:  concluding the Trans-Pacific Partnership (TPP) negotiations, launching a trade and investment agreement with the European Union, and restarting WTO negotiations with a focus on trade facilitation, expanding the Information Technology Agreement, and a new International Services Trade Agreement. Managing the difficult trade relationship with China will also be a central theme in Obama’s second term.

Trans-Pacific Partnership (TPP)

One of President Obama’s defining foreign policy initiatives has been the so-called “pivot to Asia,” of which the TPP free trade agreement negotiations are an integral part.  Were TTP to fail, therefore, it would place a lasting blemish on the president’s reputation as “America’s first Pacific President.” With such high stakes, the administration has pledged to “strive to complete the negotiations this year.”   

With most tariff barriers in the region already eliminated, what remains are the so-called “behind-the-border” impediments to trade and investment. This is where the TPP wants to be a pioneer, and its proponents are pinning hopes on it becoming the vehicle that takes us toward a future Free Trade Area of the Asia-Pacific Agreement that would include all of APEC. 

TPP negotiators, meeting over the past three years, have been down in the trenches fashioning new rules on such arcana as regulatory convergence, supply chain management, and cross-border services trade.  While hardly sexy, these are the indispensable facilitators of global trade. Given that most TPP members are major service economies, the TPP features a fast-track services liberalization agenda that advances long-standing goals in the WTO.

Home to more than 40% of the world’s population and 40% of world trade, the Asia-Pacific is poised to continue growing faster than the world average through 2016. Following the addition of Mexico and Canada to TPP negotiations in 2012, Japan will join the talks in July when the TPP next meets. With the addition of the world’s third largest economy, the TPP would cover nearly 40% of global economic output and one-third of all world trade. 

While Japan’s entry to the TPP talks adds economic weight to the grouping and will increase incentives for others to join, its participation could also slow down the talks. One former US trade official cautioned recently that if Japan joined, TPP negotiations would unlikely conclude before President Obama left office.   

While China has been absent from TPP negotiations, the US has expressed its openness to China’s participation. However, given the TPP’s high standards and the deep reforms China would have to undertake, it is highly unlikely it would enter the fray any time soon.

Transatlantic Trade and Investment Partnership (TTIP)

If negotiating the TPP isn’t daunting enough, President Obama announced early this year his intention to launch negotiations with the European Union (EU) on a comprehensive Transatlantic Trade and Investment Partnership (TTIP). This is a massive undertaking and could make TPP negotiations look like a walk in the park. 

The EU is currently the US’s largest bilateral trading partner. Most tariffs between the US and EU are already low. Improving market access, therefore, will require addressing similar “behind-the-border” regulatory barriers as in the TPP, such as EU restrictions on GMO products and divergent pharmaceutical, health, and safety standards. Prior experience trying to reduce such barriers in the Transatlantic Economic Council suggests that making progress in these sensitive areas will not be easy. However, the US believes that a successful TTIP would “create new business and employment by expanding trade and investment opportunities in both economies.” Agreements on mutual recognition, testing and certification, and standards will be essential features of any TTIP.

Reviving the WTO

Despite all the headline-grabbing news on free trade agreements, the Obama Administration pledges it is equally committed to multilateral trade and the WTO, saying it “remains the primary forum for liberalizing multilateral trade, developing and enforcing global trade rules, and serving as a bulwark against protectionism.” 

The US announced this year that it would continue to lead efforts to move negotiations, which stalled in 2011, along “more constructive and productive pathways.” It sees the next WTO Ministerial Conference in early December in Bali as a pivotal moment, given that the WTO will launch negotiations on an ambitious International Services Trade Agreement. Its centerpiece will be the removal of impediments to global services trade, with the aim of enabling service providers to compete on quality and competence, rather than nationality. The US will also be pushing for comprehensive coverage of services, as well as transparency and predictability in regulatory policies that now present barriers to trade. A key feature will be new provisions to support services trade through electronic channels. 

US-China:  Managing Tensions

US officials are fond of saying that the US-China relationship “continues to mature and evolve.” Nowhere is this more true than in trade where, despite major differences, strident accusations, and a series of trade actions against each other, the two economic giants have managed to prevent tensions from escalating. The increasing use by China of WTO mechanisms is a measure of this maturation. 

The US will be expected to continue its multi-pronged approach to trade relations with China – dialogue, negotiation, and enforcement. In particular, the US wants to advance bilateral investment treaty (BIT) negotiations to increase protection for US investors. Another US priority will be getting China to submit a comprehensive offer to join the WTO Government Procurement Agreement, which would provide substantial access to one of the world’s largest government procurement markets. Protecting US intellectual property will remain a US priority in Obama II, as will hacking and cybersecurity, which US officials say has moved to the front of US concerns about China.  

While there may be occasional dust-ups, history shows, however, that any US president who acts out threats to be too tough on China can end up later reversing course. Recall President Clinton’s reference to China’s leaders as the “butchers from Beijing” and his promises to get tough on trade and human rights, only to have him support China’s entry into the WTO. Similarly, Obama II is likely to deviate little from the historical course of incrementally improving US-China relations. This is because no single issue is larger than the relationship itself. The president is therefore likely to pick his fights carefully, using a mixture of quiet diplomacy, US trade laws, and WTO remedies.

The Big Unknown

Much of this, of course, depends on the president’s relationship with Congress and his ability to obtain Trade Promotion Authority, which lapsed in 2007. President Obama’s ability to succeed here will very much determine whether he goes down in history as a trade champion or a loser.    


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