Trump Tanks Pacific Trade Agreement
Trump’s first business day saw the end of U.S. participation in the Trans-Pacific Partnership (TPP). This controversial trade confederation represented a chance for 12 prosperous nations bordering the Pacific Rim to reduce trade barriers. President Trump stated after his election in November that he intended to leave the TPP, and accomplished this by Executive Order on Monday. This effectively means that the TPP cannot be ratified as it currently stands.
What Is the TPP?
The TPP was the result of several years of talks beginning in 2008. These discussions were centered on expanding the 2005 Trans-Pacific Strategic Economic Partnership Agreement (TPSEPA), which was a successful arrangement between New Zealand, Chile, Brunei, and Singapore. The hope was that increased cooperation would lead to lower costs of doing business while opening up new markets. However, opponents likened the deal to the North American Free Trade Agreement (NAFTA), which allowed American manufacturers to move jobs south to Mexico in exchange for cheaper goods coming north.
China Sees Opportunity for New Trade Agreement
The U.S. withdrawal sidetracks the ratification process. It also leaves the remaining 11 countries searching for a replacement superpower to serve as an anchor. China could potentially fill that role, given the strong pro-trade rhetoric from Chinese President Xi Jinping during last week’s World Economic Forum in Davos, Switzerland. China has an alternative deal called the Regional Comprehensive Economic Partnership (RCEP) which would involve 10 countries who are members of the Association of Southeast Asian Nations along with their major trading partners with whom free trade agreements have already been negotiated. As of 2016, the combined GDPs of countries that would be party to the RCEP made up an astonishing thirty percent of the world’s GDP.
China Still Faces Trade Hurdles
Of course, the success of the RCEP would depend on China actually following through on its promises of free trade. Economic analysts remain skeptical given the country’s protectionist history, and recent clampdowns on the movement of foreign funds across its borders. Additionally, given that the United States is still the major market for Chinese goods, a stronger regional partnership will still not completely offset possible tariffs of up to 45 percent that have been proposed by Donald Trump in response to charges of market manipulation by Chinese exporters.
TPP Dealt Fatal Blow by 2016 Election Season
Originally praised by Hillary Clinton during her term as Secretary of State, the agreement drew fire from most Democrats. It was expected to hurt unions and blue collar workers, some of the party’s strongest supporters. The 2016 election season was the final nail in the coffin for the agreement. Outsider Bernie Sanders, Clinton’s main opponent in the primaries, used his opposition to the agreement as the prime example of what set him apart from the Democratic establishment, causing Clinton to drop her support to appeal to the party base. President Obama tried a coalition with pro-trade Republicans, however Senate Majority Leader Mitch McConnell eventually spoke out against its provisions.
Trump Cuts Foreign Aid for Abortion Providers
While trade negotiations led the Trump agenda, the President signed another Executive Order with global implications on Monday. In a reversal reinstating the “Mexico City Policy”, Trump cut international funding to non-governmental organizations involved with providing abortions. This applies even if the NGOs do not use U.S. aid for this purpose. The Reagan administration adopted this policy. However, President Obama revoked the policy when he came into office. Abortion rights supporters denounced this as an attack on women’s rights. Still, political commentators expected this Order given Trump’s campaign platform. It continues a long history of Republican Presidents enforcing the policy while Democratic Presidents rescind it.
How Dropping Participation in the TPP Affects Trading
Trump appears to be putting together a new economic coalition. Potential members include the U.K., Russia, and the more moderate countries of the Middle East. This will cut the impact of withdrawing from the TPP. Additionally, many of the countries that were in TPP already have free trade agreements with America. Look for a short term drop in the dollar while investors wait to see China’s reaction. U.S. indices may see some downward movement, as many DOW and S&P 500 countries have significant business dealings in the Pacific region. The Shanghai index should go up on expectations of increased trade opportunities throughout the Asian Pacific region.