On January 23, 2017, President Trump signed a “Presidential Memorandum” in which he directed the United States Trade Representative (USTR) to “withdraw the United States as a signatory to the Trans-Pacific Partnership (TPP), to permanently withdraw the United States from TPP negotiations, and to begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages.” The President had previously expressed his strong preference for bilateral trade agreements with individual countries, over agreements with multiple countries, during his campaign.
The United States has 20 bilateral free trade agreements in force and has existing bilateral agreements with all of the Trans-Pacific Partnership (TPP) countries except for Brunei, Japan, Malaysia, New Zealand and Vietnam, and has a regional multilateral agreement with Canada and Mexico. Bilateral and multilateral approaches both have advantages and disadvantages and can be used strategically to benefit the parties.
Why a preference for bilateral agreements?
President Trump and others in his administration have argued that it is easier to negotiate bilateral agreements because there are only two parties, the United States has more leverage in a bilateral negotiation with only one other country, the United States is not reduced to the lowest common denominator, and it is easier to withdraw from a bilateral agreement. The Trump administration has also asserted that China primarily engages in bilateral agreements and that this is what the United States intends to do as well. It is important to be aware, however, that neither the North America Free Trade Agreement (NAFTA), nor the TPP require any kind of international agreement for withdrawal. Consistent with authorizing US law, TPP’s Article 30.6 and NAFTA’s Article 2205 provide that a withdrawal is effective after six months’ notice.
Economic and political clout
The United States has a gross domestic product (GDP) of about $17 trillion, and has a high per capita GDP. With a vast market, US negotiators do indeed hold a lot of cards at the negotiating table. However, multiple bilateral agreements, with a diversity of technical provisions, can make it more costly and complicated for US exporters to take advantage of market opening opportunities. Theoretically, it would be possible to have across bilateral agreements consistent rules for things such as rules of origin and transshipment. In practice, there is usually divergence in measures, creating a cats-cradle of trading rules. Hence, the preference of many US businesses for common measures that can be provided by multilateral agreements.
In truth, the distinction between bilateral and multilateral agreements is not crisp. In addition to the central multilateral accord, TPP contemplates a series of bilateral agreements among various TPP partners. These bilateral deals take the form of annexes and side letters. A good example of such a bilateral side agreement is between the United States and Japan. Even though the United States and Japan were part of the TPP group, the two countries negotiated a side agreement specifically addressing automobiles. In 2015, Japan produced a total of 9,278,238 automobiles. Although Japan is one of the largest producers of automobiles, it restricts imports of automobiles produced in other countries. The bilateral side agreement, together with the multilateral provisions, were designed to open the Japanese market to US manufacturers by reducing non-tariff barriers through increasing regulatory transparency and lessening regulations on standards and technology.
What are the benefits of multilateral agreements?
Multilateral agreements can create international standards as well as create the efficiency advantages of a broader market. As tariffs on goods are relatively low across most product categories in trading countries, non-tariff barriers for both goods and services have now become the key focus of trade negotiations. Indeed, there is an international competition for standard setting, with the competition playing out across domains as diverse as energy and environmental rules, and information and communication technologies. Where countries coalesce around common standards, they can create scale and competitive advantages for their producers. This norms setting function was one of the key benefits cited by US trade officials in advocating for the TPP.
Another important benefit of multilateral agreements, from the perspective of exporters, is accumulation, also known as cumulation. For example, TPP allowed accumulation of rules of origin making it easier for businesses to establish supply chains with relaxed country of origin restrictions. The TPP allows components from TPP countries to be combined into a finished product with simplified origin rules. The negotiation of such a multilateral accord can be challenging when various parties have different types of products they consider highly sensitive to foreign competition and therefore deserving of longer duty phase-out schedules.
The European Union (EU) has developed the “pan-Euro Mediterranean cumulation,” which is a diagonal accumulation of origin regime. The system allows for the accumulation between the EU members, European Free Trade Association (EFTA) states, Turkey, countries that signed the Barcelona Declaration, the Western Balkans and the Faroe Islands. The parties include a network of free trade agreements with similar origin rules. This system allows these countries to accumulate components from other pan-Euro Mediterranean countries.
Another potential advantage of multilateral agreements is that sometimes more bargaining chips are available. During the Bush administration, USTR was in negotiations for a bilateral investment treaty with Vietnam, which would have contained Investor-State Dispute Settlement provisions similar to those in the TPP. In joining a broader TPP negotiation, USTR arguably found it easier to persuade Vietnam to agree to the investor protections. The entry of Japan as the 12th and last founding member of the TPP sweetened the pot even further for Vietnam, because the TPP allowed for more market access opportunities for Vietnamese exports in Japan. These types of negotiating carrots may be lost if the United States solely pursues bilateral agreements.
At times, the bilateral approach works best for the United States and in other instances multilateral agreements may be advantageous. Both approaches are available tools in the international trade toolbox, and the Trump administration’s thinking may evolve over time.