Pacific states launch bold trade pact, shaping world order as America retreats

The Pacific pact may become the new benchmark for world trade, drawing countries as far away as Britain into its orbit Credit: Le Toan

The world’s most radical trade pact has come into force across the Pacific as the US sulks on the sidelines, marking a stunning erosion in American strategic leadership.

Eleven countries are pressing ahead with the Comprehensive Agreement for Trans-Pacific Partnership (CPTPP), defying barely-disguised efforts by the Trump Administration to kill the treaty. 

A vanguard of Japan, Singapore, Mexico, Australia, Canada, and New Zealand activated the treaty over the weekend, ripping down barriers to trade in almost all goods. It eliminates 18,000 tariffs, and slashes others in stages over coming years. 

The great irony is that the US itself drafted much of the original text under the Obama Administration, aiming to ensure that Washington writes the rules of global trade and commerce in the 21st Century, not Beijing.

The pact opens up trade in services on the basis of equal treatment. It cuts the costs of customs clearance, rules of origin, and compliance to a minor friction.  

Once Vietnam, Malaysia, Peru, Chile, and Brunei have ratified the treaty it will cover 13.5pc of global GDP, bigger than the EU’s post-Brexit market and a faster-growing region of the global economy.

Korea, Thailand, Taiwan, Indonesia, and Colombia have all expressed interest in joining. So has the UK despite being in the Atlantic. It promises to become the world’s biggest free trade zone in short order,and perhaps the nucleus of a new global order. 

The partnership - earlier known as the “TPP” - was originally a tool of US foreign policy. It was to anchor the “Asian Pivot” and underpin the US system of military and diplomatic alliances around the Pacific Rim.

In the words of one former US defence secretary it was worth more to American power than another aircraft carrier battle group. Above all, it was a way to “contain” the hegemonic reflexes of China.  


The White House assumed that the TPP would wither on the vine without US impetus. Instead, long-standing US allies across the Pacific have brushed off pressure from Washington and forged ahead regardless with what is now known as the “anti-Trump pact”.

“America is the biggest loser,” says the Peterson Institute in Washington. The fall in food tariffs under the CPTPP means that US farmers will be undercut by exporters from Australia, Canada, and New Zealand in the lucrative Japanese market. Wheat from Canada will be $70 cheaper per metric tonne by 2020.

America’s agricultural industry is already reeling from Chinese counter-sanctions on soya and other grains as a result of Mr Trump’s trade war. 

The latest twist is that Chinese officials have begun to explore the possibility of joining the pact that was supposed to exclude them, prompting a polite though wary riposte from the founding members.

The Chinese see the pact as a way to head off the risk of trade isolation, and as a hedge against Mr Trump’s “America First” policies.

Beijing is alarmed by clauses in the revamped Nafta deal for North America that gives the US an effective veto if either Canada or Mexico wish to sign a future trade deal with a “non-market economy”, clearly meaning China. 

The Pacific Pact will cover 13.5pc of global GDP, but expand quickly as Asians and even the British line up to join

Membership of the CPTPP would help to circumvent this legal clause. Precisely for this reason the Trump Administration would fight Chinese accession tooth and nail. 

Whether China could meet the high standards demanded for membership is far from clear. Reformers in the Communist Party believe it could serve as a battering ram to break down internal resistance by vested interests, much as China’s accession to the World Trade Organisation in 2001 served as a goad for deep changes in the economy.


The deal raised the bar on labour conditions, human rights and environmental protection, addressing a key deficiency in the WTO system. It constrained state aid, covert subsidies, and dirigiste intervention in the economy. It embraced e-commerce. This has largely survived in the new CPTPP version.

It also had intrusive rules on intellectual property and patent protection, as well as tough demands on biotechnology and pharmaceuticals that almost derailed the treaty. Some of these US-imposed conditions have been watered down. It will be hard - if not impossible - for a future US administration to reimpose the original terms if it wanted to join the pact.

The Pacific free trade deal is in stark contrast to the bare-knuckled fight between the US and China for technological supremacy in the mid-20th Century. A 90-day truce in the bilateral trade war has delayed a further rise in US tariffs on $200bn of Chinese goods from 10pc to 25pc.

Yet the risk remains that Mr Trump will ultimately subject the gamut of Chinese exports to punitive tariffs in what amounts to a blockade, exhausting China’s ability to retaliate with tit-for-tat measures. This would endanger almost $1 trillion of bilateral trade and threaten a global economic shock.   

So far China seems to be suffering the greater damage from the skirmishing, although it is hard to separate trade effects from the parallel effects of China’s debt saturation and the clamp-down on shadow banking. 

Conversely, the apparent resilience in the US has been flattered by Mr Trump’s late-cycle stimulus blitz that will soon fade, and then come back to haunt.

China has tried to counter US trade policies by developing its “One Belt One Road” programme. This aims to create a latterday co-prosperity sphere in South-East Asia and across an arc of 65 countries as far as Africa, largely through infrastructure projects. 

The One Belt prestige venture has essentially failed. China no longer has a large current account surplus and is having to ration capital outflows to defend the yuan. It cannot afford to waste huge sums on political projects, many of them white elephants with little commercial logic.

Its use of debt financing to gain control of ports and strategic assets in a “string of pearls” around the Indian Ocean has led to an angry backlash. Accusations of a new colonialism are being heard from Pakistan to Malaysia, and Kenya. 

Some Chinese officials judge it wiser to drop the neo-imperial pretensions and aspire instead to work more modestly through the multilateral framework of the CPTPP. Mr Trump has conveniently left them an open door.