Karen Hooper: Hi, I'm Karen Hooper, director of analysis for Latin America here at Stratfor. I'm joined by my colleague, Matt Gertken. He is our senior analyst for Asia-Pacific affairs, and today we're going to discuss the Trans-Pacific partnership, which is a free trade agreement the United States is negotiating with states along the Pacific Rim.
And we really see this as a moment in global affairs where the United States is taking FTAs to the next step and attempting to unite the Asia-Pacific region with the Pacific coastline of the United States — North America and South America — altogether into one trading block and this is going to have impacts for Latin American and it's going to have impacts for Asia. So Matt, what do you think about how this affects Asia and how it affects the US relationship with Asia?
Matt Gertken: Thanks, Karen. Well the way that I approach the TPP is to look at how the U.S. has traditionally tried to use its vast economy: as a tool for influence across the world. And in particular, looking at the Pacific. Major economies — Japan, China and a number of emerging economies in Southeast Asia, are in this region and the US wants to create a framework across the Pacific that will then be the framework that any future big regional trade liberalization initiatives. So, notably, China has been left out of the TPP. And what the US is kind of saying there is that they want an ambitious agenda, one that will involve more than just trading in goods, where China really can dominate, and get into areas where the U.S. is great, which have to do with things like services, investment — all kinds of, you know, deeper structural issues. The U.S. wants to create that kind of framework, one that when we go forward in the future working with our partners, there will be higher bar. And then if China ever does join the TPP, or if China joins a future, say APEC, tree trade group, China would have to undertake those reforms as well. At least that's the hope for the United States.
Karen: So Japan's a pretty recent entrant to these negotiations. How important is Japan's participation in this, and what role does Japan play in this multilateral negotiation?
Matt: Yeah, I mean, Japan's a big one, and everybody felt like Japan joining gave huge impetus to the TPP because, of course, Japan's economy is it's $5 trillion roughly — and that's about a third of the size of the U.S. So when Japan joined, it ended up taking up something like 30 percent of what would be the whole trade that the TPP's capable of. So when Japan joins, that really gives a lot heft to this, but of course Japan has traditionally been reticent about doing free trade agreements. And in particular they compete with the U.S. in a lot of sectors: agriculture, car manufacturing, high tech. So you know that's going to be sensitive FTA to negotiate, and, actually, what I' really like to hear from you is: When Mexico joined NAFTA with the United States, it was a similar kind of paradigm shift in a way, where Mexico had to, you know, approach trade liberalization to an extent that it not done before. And Japan in a way is also now at that juncture, where in the U.S. is really trying to pry open Japan's doors.
Karen: Yeah I think that Mexico is a really great example, especially if we look back at the history of the 1990s and the political and economic turmoil that led up to the decision to engage in NAFTA. Mexico was at a point where it was a relatively closed society, so for Mexico when it opened up to NAFTA, it opened up not only to trade with the United States, but also to investment and investment that had been liberalized to the degree that, really, we hadn't really seen before in North America except for the relationship between the U.S. and Canada. So for Mexico, there was an enormous amount of room to expand its trade relationship, expand its export-oriented sector — in terms of targeting the United States. Since then, you know, Mexico's had its exports almost totally dominated by the U.S. market. It's completely reliant on the U.S. for investment for trade. But that's liberalizing, that's changing, so Mexico is exporting to increasing markets at this point. It still exports about 80 percent of its goods to the United States, but it's also exporting more to Asian countries, to Europe, to China, and receiving imports from other areas around the world, especially Asia. So for Mexico, the change has been really enormous over the past twenty years. But the thing to take from NAFTA is that the expectations didn't necessarily match up with the outcome. Mexico was hoping that it would have been net job gain. But even though it gained jobs in the manufacturing sector, it also lost jobs in agriculture sector because, quite simply, Mexico — and a lot of others developing countries around the world — simply does not have the competitiveness the United States does, particularly with the subsidy regimes that the United States maintains. So for any country looking into an FTA with the United States, they that to understand that they're going to be making compromises on things like agriculture protections, and other really important things. One of those is right now one of the top agenda items for the United States is intellectual property rights. And protecting intellectual property for the United States is going to be something that is going to be a bit of a sticking point because it's going to require countries entering these agreements with the U.S. to enforce property laws that they may not necessarily be ready to enforce. And so I think that's something that's pretty important as the U.S. tries to take advantage of its technological advances. And in that case I think we really do see some competition with Japan, given that Japan is so industrialized and so ahead of the curve on those things in its one right.
Matt: Right those two are competitors, and of course, you know, in Japan, it's a liberalized economy in general, but the U.S. has always had these complaints and of course Japan has its own complaints. And those two working that out — that shows that intense complication of a project like this, because that's just one country. If you look at the countries that the U.S. is bringing into the TPP — or hoping to — that it doesn't already have FTAs with, that's not only Japan who would really be a stickler on some issues, ones that make the U.S. uncomfortable as well, like agriculture.
But also, you know Vietnam and Malaysia, both Vietnam and Malaysia would be included. They tend to have relatively high tariffs. They have state intrusion in their economies that the U.S. is trying to get them to cut back on — especially Vietnam which the U.S. still calls a non-market economy; it's a socialist country. And that legacy is going to be very difficult internally for the Vietnamese government to deal with. They have a sense that they want to engage in reforms that will improve efficiency in their economy, cut back on the state and let more market forces do their work. But you know what they want and what they actually are capable of doing while still retaining power is very different. And similarly when the US goes to countries like Malaysia, which we have very good relations with, a very open country in general with trade, there are still going to be some pretty tough areas of negotiation, because the TPP is asking for Malaysia, for instance to tone back on things like favoring state companies. The SOEs, or state-owned enterprises in Malaysia, they have an affirmative action policy in a way that benefits the majority. And that system is one that the Malaysian government is not really capable of shifting much on, even though there's some desire to. And the U.S. is really going to ask that they adjust some of those features. The U.S. is also going to want to get into, well in general, places as we've mentioned, investment services, government procurement. You mentioned intellectual property rights, which again is a big problem in Asia, where there's a lot of piracy and other things that the U.S. is concerned about. So the U.S. wants to maximize its ability to sell services and certain goods that are high tech, but it also doesn't want to have that kind of information stolen or to agree to a watered down free trade agreement that doesn't allow it that take advantage of what it's capable of.
Karen: So it sounds like some of the competitiveness rules that the U.S. is pushing for in these FTAs where foreign companies come in to a country and they have to be able to compete at an equal level with domestic firms. That's going to be a real problem in Asia. I see, you know, in terms of in Latin America, the three countries that are pursuing this agreement are Mexico, Chile and Peru. And they've already got FTAs with the United States, so I think for them it's going to be a relatively marginal benefit. Chile and Mexico also have FTAs with Japan already, and Peru's got economic agreement with Japan is pursuing an FTA. So the gains in Latin America are going to be relatively marginal, but it I think it's those countries in Asia that don't have these FTAs that we're really going to start to see those shifts and those opportunities for change.
Matt: Another thing I would point out is that the way the U.S. is approaching this is such that the different states will go into negotiations. They all know what they want to get out of it, but they all have different areas as well. And it's not necessarily true that in every case their goal is to liberalize trade in uniform way. What would make the TPP great in some ways would be if the rules were uniform. In some areas they've tried to do that, like they say that they want to reduce tariffs by 90 percent. Or they say that they want to have one common set of rules of origin for the goods that are produced within. And that kind of uniformity would be great when you have this many disparate players. But the problem is then when you go to the negotiating table, states bring their own interests to the negotiating table and they often want to often protect the sectors precisely where their comparative advantage is the weakest. Where they really might stand to lose in the competition they'd be entering. But on the other hand, you know none of them can afford not to take part in this because they need every little increase in their exports and in their other economic initiatives that they can get.
Karen: So overall its seems like the United States is using the TPP as a way to enact or sort of figure out if it can impose these more stringent rules on its trading partners in a multilateral format. And I think it'll be really interesting to watch whether or not it can happen. We'll be following this pretty closely going forward absolutely. Thank you for joining us here at Stratfor. We'll continue our conversation about the TPP on our website. I hope you'll join us.