The TPP earthquake

Fast-track negotiating authority for international trade agreements was bestowed on U.S. President Barack Obama after a law renewing the controversial power passed the Senate. With the temporary power called Trade Promotion Authority, which was last used during the Free Trade Agreement (FTA) negotiations with South Korea eight years ago, Obama plans to finalize his ambitious trade agenda, the Trans-Pacific Partnership (TPP), in July. The U.S., which made trade partners of Canada and Mexico with the North American Free Trade Agreement, can expand its free trade turf to the Pacific Rim nations with the deal, which has 12 founding members.

The TPP would eliminate tariffs on products and services and also bring the members together under a uniform set of rules on intellectual property rights, investments and a number of other areas to help cross-border trade become seamless and efficient. The TPP offers broader and more comprehensive terms in integrating markets than Korea’s bilateral FTA with the U.S. At the same time, it augments discrimination against non-member economies. Because of its protective design, the TPP is likely to draw more members into the framework to avoid relatively disadvantageous trade positions.

As he tried to get legislative support for his trade promotion authority, Obama emphasized the TPP’s potential as an economic and diplomatic tool to better position the U.S. against China’s increasing influence. The duel between the two superpowers through their different trade blocs is expected to get more intense. China has also launched the Asian Infrastructure Investment Bank to get its own team together for shared investment opportunities and economic cooperation - minus the U.S. and Japan.

Korea has bilateral FTAs with the U.S. and nine other TPP members excluding Japan and Mexico but it cannot easily jump on the TPP bandwagon. Upon joining the TPP, Korea would enter unilateral trade terms with Japan and the liberalization and import regulations would be far more unfavorable for Korea compared to the FTA with China. Japan would likely demand greater liberalization of Korea’s rice market. The government cannot risk further angering farmers having just imposed tariffs on rice imports from late 2014 after a 20-year grace period. The political implications make it difficult for Korea to join the TPP.

Rules of origin would be applied uniformly on 12 TPP members to deepen in-house industrial supply chains and cooperation. At the same time, it could be damaging to other exporters and manufacturers of non-finished goods. The Philippines, Thailand and Indonesia are hurrying to get into a trade framework that already has rival regional exporters like Vietnam and Malaysia. Latin American countries also are keen because Chile and Peru are already included.

More will get on the wagon when membership increases in order not to be left behind or excluded from the industrial network. Because a TPP would automatically establish bilateral free trade between the U.S. and Japan, Japan would soon be able to close a free trade deal with the European Union. The U.S. then would gain traction in pursuit of a free trade pact with the EU. The TPP would become the single largest trade bloc led by advanced countries.

We must not weigh the TPP simply within the founding context of 12 members. We must consider a potential impact that could bring about a sea of change in the global trade order. We should not just figure out the right time to join the deal, but come up with comprehensive measures to hone the adaptability and resilience of our industrial and business environment in a new global trade order under the creation of a truly formidable TPP, which could even pose a challenge to the World Trade Organization (WTO), the current arbiter of the world’s trade rules.

Korea will have to decide when to join the TPP according to negotiation results. It would take about four to five years to reach an agreement on individual terms. What’s also urgent is improvement and refurbishment of the system and industrial environment to make our industries better adapt to new trade regulations and the new order ushered in by the TPP.

The TPP rules on state enterprises require public entities to be more market-friendly and competitive, which should be taken into account in the reform process of local state corporations. We also must draw up mid- to long-term outlines to enhance our competitiveness and industrial readiness for greater market openings to Japanese goods and services. The Ministry of Trade, Promotion and Energy should be under three divisional vice ministers to augment trade functions to better prepare for the TPP, a Korea-China-Japan FTA and an economic cooperation pact with the Association of Southeast Asian Nations.

The U.S. Trade Representative plans to make the most of its revived trade promotion authority to ratify the TPP within the year and close an FTA with the EU in the near future. But considering the recalcitrant nature of the Congress - as underscored in the wrangling over the TPP - it would take some time for the TPP deal to fully take effect. We must not waste the eleventh hour before the landscape changes in the global trade order.

Translation by the Korea JoongAng daily staff.
JoongAng Ilbo, July 2, Page 33

*The author is a professor of the Seoul National University Graduate School of International Studies.

by Ahn Duk-geun