Does the TPP Save Global Trade?

Ichiro Suzuki

In January 2017, as soon as the first Trump presidency started, the 45th President has pulled his country out of the Trans-Pacific Partnership (TPP). The trade pact was negotiated among eleven countries on the Pacific Rim under President Obama. After the U.S. departure, Japan’s Minister of Economy, Trade and Industry Akira Amari took pains to keep the pact alive among those that were left to cross the finish line. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into force in December 2019. Five years later, in December 2024, the United Kingdom joined the CPTPP after exiting the European Union. Though not facing the Pacific, the U.K. needed a trade pact to promote its economy. With the U.K. in, the CPTPP accounts for 15% of the world’s GDP. China is not a part of it though they expressed interest in becoming its member. 

The U.S. is retreating from free trade as the new Trump administration is turning its back farther away from the system that brought prosperity to the post-WWII world. With the U.S. no longer a reliable trade partner, there is a growing voice for a new trade pact with greater coverage. Addition of the EU, Switzerland, Norway and South Korea, to the the expanded CPTTP would cover a third of the world’s imported volume, exceeding roughly a quarter represented by the U.S. and China combined.  

Expanding a network of free trade partners is always an excellent idea, whether the largest economy is in it or not. The one without the United States, however, presents a more serious problem than it appears on the surface. The largest importer is absent in the network. The U.S. is not mere largest importer. It is by far the largest importer without importing fossil fuels. American people are unmatched, overwhelming consumers of industrial and agricultural products, much of which is imported, including intermediary materials. They are overwhelming consumers of fossil fuels, too, but the U.S. is self-sufficient on them. Of the five largest economies in the world, China, Germany, Japan are relentless and very efficient export machines. No.5 India is aspiring to be one amid multinational corporations’ efforts to restructure their global supply chain. For all of them, the largest import item is crude oil and natural gas. None of them imports consumer goods fiercely. Absence of the U.S. as importers of consumer goods leaves the rest of the world in a seriously lopsided structure. In fact, the world has experienced what it was like to live without American consumers in the 2008-09 Great Recession, which was caused by the biggest banking crisis since the 1930s. American consumers stopped spending, and that brought the global economy to a halt. EU and Japan always mocked profligate American consumers, only to realize their buyers’ strike hitting their economies very hard. American consumers were brought back to life by ultra aggressive monetary easing by Fed chairman Ben Bernanke. It was a frustrating process in the first half of the 2010s to repair damaged balance sheets of American households. No one can replace the profligate American consumers, the world came to realize by the mid-2010s.

A decade and a half after the Great Recession, the world is once again facing a risk of living without American consumers. Even worse, this time around, China has much greater manufacturing capacity than they did back then. The country accounts for over 30% of global exports whereas its economy is about 15% of the world, and none of Chinese export is raw materials, with vast majority being manufactured products from shirts, sneakers to electric vehicles. It would take much longer than a decade to correct this structural flaw if a wholesale change is ever going to be attempted. At present, however, China has no intention of scrapping its vast manufacturing capacity. President Xi Jinping has announced promoting domestic demand in the face of a ‘trade embargo’ by the U.S. The Chinese Communist Party has said this before with little results to speak of. They are probably going to be more committed to it this time. It is nonetheless an uphill battle. Chinese households don’t spend because not only of the sluggish real estate market but also of weak outlook of their wages and salaries and a mere lack of good job opportunities. On top of this, effects of declining population weigh on. In order to make the household sector feel better, bad debts in the real estate sector has to be conquered, and this remains a tall order. While bank balance sheets may be relatively sound, those of real estate developers are not. The latter was responsible for a much greater portion of real estate financing in China than in developed countries. It takes vast financial resources to straighten out the problem, at a time when China’s debt to GDP ratio is approaching 100%, not a sound level for China’s development stage, at least in terms of the country’s per capita GDP. It remains to be seen how this turns out. There is a reasonable chance that some kind of deal is going to be worked out sooner or later, but it may still take time. China appears to have the upper hand between the two and patiently waits for a right time. In the meantime, the rest of the world struggles at their mercy. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.