The Trans-Pacific Partnership, which would have created trade links between the U.S., Japan and a number of other Asian countries, is dead. Donald Trump has vowed to kill the pact on his first day in office. That won’t be a hard promise to keep, as the trade deal was already effectively dead.
If there were any policy that was doomed this election cycle, it had to be this one. The TPP had garnered opposition from both sides of the political spectrum — Bernie Sanders supporters were dead set against it as well. I don’t really know, but I suspect the TPP mostly acted as a scapegoat for more general fears about globalization — a symbolic show of strength by skeptics of trade deals.
Killing the TPP will have only a small impact on the nation’s economy, just as passing it would have generated only small benefits. The real risks are to the U.S.’s international prestige and to the economic health of key American allies.
The void it leaves will be filled by China and Russia, which are pushing their own Asia-Pacific free-trade area. Trade deals have a major political component, cementing alliances and giving large countries more influence. By leaving Asian economic integration to China and Russia, the U.S. weakens its bond with key regional ally Japan and passes up an opportunity to deepen an alliance with Vietnam. These and other Asian countries will have every incentive to move closer to our big rivals.
The TPP also would have given an economic boost to U.S. allies. With a reliable market for its goods, Vietnam would have been better able to take advantage of export-led growth, sending it down the same path that worked for South Korea, Taiwan and others.
Japan, meanwhile, could have used the TPP to help its efforts to jump-start its ailing economy. Prime Minister Shinzo Abe has been trying to improve productivity by opening the country’s protected industries to international competition. TPP would have helped with that. The stronger Japan’s economy, the more the U.S. can rely on the country in case of a confrontation with China or North Korea.
What’s done is done. The question is how can the U.S. limit the risks from the TPP’s demise?
The biggest step would be to conclude a bilateral trade agreement with Japan. This would reassure the U.S.’s top Asian ally that America still is committed to its security and economic advancement.
Japan is a developed economy, so a U.S.-Japan free-trade agreement wouldn’t put many American workers in danger. Instead, it would be a big opportunity for U.S. companies. Many of Japan’s industries are protected against foreign competition, mostly by non-tariff barriers and regulations. The most famous example is the auto industry, but service industries such as finance, telecommunications and retail are probably also very protected. It’s no coincidence that these industries are less productive in Japan than in the U.S. because they haven’t had to raise their game to fend off foreign competition.
Opening up Japan’s service sector through a U.S.-Japan free-trade agreement would stimulate Japanese companies to increase productivity by adopting modern business practices. But it also would potentially be a huge boon to U.S. exporters. Services, as opposed to goods, are an increasingly important part of what U.S. companies sell overseas.
But it’s not just services that the U.S. could sell more of to Japan. Technology is another. The country that once gave the U.S. the Walkman and the VCR is now crazy for iPhones. U.S. tech products have real appeal in Japan, and a trade agreement could accelerate that trend.
A U.S.-Japan trade deal could be politically appealing to leaders in both countries. Trump could sell an export-boosting measure as an example of “winning” at international trade. Abe could sell a U.S.-Japan accord as a bulwark of Japan’s security, as well as a structural reform to raise productivity. Both men could walk away claiming victory — and both would be correct.
While the TPP is dead, a U.S.-Japan trade deal should be the first thing to take its place. Japan is a large, wealthy ally that’s too important to write off. By integrating the U.S. and Japan’s economies more closely, both countries can reap economic and strategic benefits.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University.