Carefully Consider Your Own Strategy as the United States Withdraws from the TPP

6 min

President Trump signed and transmitted to the Office of the U.S. Trade Representative (USTR) a Presidential Memorandum withdrawing from the Trans-Pacific Partnership (TPP) and echoing his policy to negotiate trade deals going forward on a bilateral basis. During the campaign, President Trump made significant promises regarding trade issues. For example, he proclaimed that he would rip up existing trade agreements, renegotiate the North American Free Trade Agreement (NAFTA), and impose a 35 percent tariff on imports from Mexico and a 45 percent tariff on imports from China. In total, the United States has 20 free trade agreements (FTAs), all of which embody the reciprocal reduction of tariffs and other barriers to trade and investment.

President Trump may seek ultimately to renegotiate or terminate these FTAs and impose high tariffs on designated countries. For instance, under Article 2205 of NAFTA, the United States may withdraw from the trade pact after giving six months' written notice. If President Trump decides to notice a withdrawal from NAFTA, the Agreement would remain in force for the remaining parties, namely Canada and Mexico. Some may argue that NAFTA’s Article 2205 requires Congressional input just as Britain’s High Court ruled on Monday that Article 50 of the Treaty on European Union (TEU), which governs withdrawal of a Member State form the EU, requires Parliament’s input to effect Brexit. Regardless, what is clear is that U.S. trade laws give a U.S. president broad authority under varying circumstances to impact U.S. trade agreements, impose tariffs, institute quotas to limit imports, block the investment of foreign entities to invest in certain U.S. businesses, and engage other international issues affecting business. President Trump’s past statements regarding NAFTA and his recent direction to USTR underscore his strong opposition to multilateral trade deals. His recent Executive Order regarding the TPP heralds his willingness to make good on campaign promises. Clearly trade will be a key issue of his administration.

President Trump’s Inauguration

In his inaugural address, President Trump stated, "From this moment on, it’s going to be America First. Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength. I will fight for you with every breath in my body – and I will never, ever let you down. America will start winning again, winning like never before. We will bring back our jobs."

TPP Withdrawal for the American Worker

According to the White House press pool, after signing the Executive Order to withdraw from the TPP, the President said, [It is a] great thing for the American worker, what we just did. "Not all agree, however." In September 2016, the Petersen Institute for International Economics (PIIE) published a briefing assessing the trade agendas espoused by both leading candidates in the Presidential campaign. In the preface, Adam S. Posen, the President of PIIE, concluded that President Trump’s "stated approach to the global economy of waging trade war and protecting uncompetitive special interests would be disastrous for American economic well-being and national security."

What’s the Impact?

The question everyone is asking: what impact will the intended withdrawal from the TPP have on the United States – both economically and politically? 12 countries negotiated the TPP, which covers 40 percent of the global economy. Japan was the last permitted to join the negotiations in May 2013. This was a game-changer. Before Japan joined, look at those who were members to the negotiations with the United States. Six had an FTA with the United States (i.e., Singapore, Chile, Australia, Peru, Mexico, and Canada – listed in order of when they joined the TPP negotiations). Only 4 have no FTA (i.e., Brunei, New Zealand, Vietnam, and Malaysia). The amount of trade with these countries is comparatively low, although U.S.-Vietnam trade continues to grow since the U.S.-Vietnam Bilateral Trade Agreement in the early 2000s and Vietnam’s WTO accession. The key factor that garnered attention was the possibility of an FTA with Japan. Reportedly Prime Minister Abe underscored this point and the economic benefits that the TPP would have provided to both sides when he met with President-Elect Trump (the first foreign dignitary to do so after the election). Plus the TPP included elements that do not exist in other FTAs, such as addressing digital trade and commerce. It is possible that some of these upgrades would be woven into any renegotiation of NAFTA, although that is yet to be seen.

Obama Administration View

As late as mid-September 2015, former President Obama and then-U.S. Department of Commerce Secretary Penny Pritzker were working hard to laud the benefits of the TPP. Here are the highpoints on the Obama administration’s stance – first the economic argument: the agreement provides access to 95% of global customers and 80% of global purchasing power; 70% of global growth is outside the United States; companies who export support 11.5 million U.S. jobs – and these companies need access to markets; and the TPP reduces and eliminates 18,000 tariffs, plus also eliminates trade barriers, in the Asia Pacific region. In total, the region accounts for two-thirds of the world’s middle class. Equally important, the Obama administration argued, is the political argument, claiming that failure to pass the TPP will harm U.S. global leadership.

Non-U.S. View

In late November 2016, at the Asia-Pacific Economic Cooperation summit being held in Lima, Mexico’s Economy Minister Ildefenso Guajardo Villarreal said that Mexico, Japan, Australia, Malaysia, New Zealand, and Singapore plan to continue with the TPP with or without the United States. According to one account on Mexican radio, Guajardo said, "We determined that our countries will press ahead with this agreement independently of what Washington decides[.] "It is possible that withdrawal may harm U.S. businesses (and ultimately workers) if U.S. goods are found to be priced comparatively higher than those coming from these other countries. But from a political and national security standpoint, will a United States looking inward be interpreted as ceding influence in the region to China?

Consider How Trade Affects You

The coming months will provide additional details about how the new administration will deal with global economic and security issues. But one thing is certain - trade issues are important to the new Trump administration. They should be similarly high on both U.S. and foreign companies’ strategic To Do lists.

The question everyone should be asking: how may I position my company to take advantage of this significant shift in U.S. trade policy? Now is the time to consult with experienced legal counsel to ensure a robust understanding of how to navigate the ever-changing U.S. regulatory landscape. If you would like further information on the subject, contact members of Venable's International Trade and Legislative and Government Affairs groups who are following these updates.

Now is the time to consult with experienced legal counsel to ensure a robust understanding of how to navigate the ever-changing U.S. relationships abroad, whether from a regulatory perspective or expanding your business in new markets. We are here to help answer the questions, "Who is making these decisions?", "When does the process begin?", and "How will this impact my business?"