Market Insider

Trans-Pacific trade deal could solve a big problem for Trump, but it may be difficult to rejoin

Key Points
  • Japanese Prime Minister Shinzo Abe, visiting Trump at Mar-A-Lago this week, is expected to encourage the U.S. to reconsider joining the Trans-Pacific Partnership, while Trump is instead pushing a bilateral trade agreement with Japan.

  • The talks are also expected to be dominated by North Korea, but there should be some comment on trade at the conclusion of talks Wednesday.

  • White House economic adviser Larry Kudlow Tuesday said nothing concrete has occurred, and the idea of the U.S. return to TPP is more of a thought than a policy at this point.

President Donald Trump (L) greets Japanese Prime Minister Shinzo Abe as he arrives at the White House on February 10, 2017 in Washington, DC.
Mario Tama | Getty Images

As President Donald Trump takes on China on trade, Japan is inviting him to find a different way to level the playing field — by going around China and rejoining a trade pact with 11 nations in the Pacific Rim.

Prime Minister Shinzo Abe, visiting Trump at Mar-A-Lago this week, is expected to encourage the U.S. to reconsider the Trans-Pacific Partnership, while Trump pushes a bilateral trade agreement with Japan, instead.

Shortly after taking office, Trump withdrew the U.S. from the TPP, which was opposed by both presidential candidates during the election and was a casualty of anti-globalization sentiment.

Trump last week asked advisors to look into whether the U.S. could now get a better deal in TPP, but White House economic advisor Larry Kudlow on Tuesday said nothing concrete has occurred, and the idea of the U.S.'s return is more of a thought than a policy at this point.

VIDEO1:3801:38
President Trump reconsiders TPP

Trade experts said it's unlikely that either Abe or Trump will get his way this week but there could be vague agreement. The president is unlikely to embrace TPP, and Abe is not expected to be able to wholeheartedly accept a separate free trade agreement with the U.S. Trump also has threatened Japan with steel and aluminum tariffs that he has waived for other countries.

"Both Abe and Trump need to come out of this summit and say they got something on trade. Framework is the word everyone is using," said Sheila Smith, senior fellow for Japan studies at the Council on Foreign Relations. "The rhetoric is going to be a compromise and both sides can come out and say we won."

Tom Block, Washington policy strategist at Fundstrat, said he expects Japan to get exemptions from the steel and aluminum tariffs. As for TPP, "I think they're going to say they talked about it. It came so far out of left field. It was envisioned to be part of a counterbalance to growing China. It made sense then. It makes sense now, but I think it's going to be a hard sell to the Trump base," he said.

There are many hurdles to the U.S. returning to TPP, but America may find its farmers and businesses are at a disadvantage because they are not in it.

New Zealand, an early member of TPP, said the U.S. cannot simply jump back into the agreement, though it would be welcome. New Zealand Prime Minister Jacinda Ardern told Reuters Tuesday that she could see the U.S. rejoining but not without renegotiation, and that would have to be approved by all 11 countries. Other members include Canada, Australia, Mexico, Malaysia, Singapore, Chile, Vietnam, Peru and Brunei.

"Trump is correct that the TPP would be a big boost to U.S. agriculture. But we have seen this a few times and are not too optimistic on its chances of happening in the short run," said Daniel Clifton, head of policy research at Strategas Research. "Trump's real focus is on securing a bilateral trade agreement with Japan and to rebuild TPP from the bottom up rather than the top down."

The U.S. is discussing the TPP now that a trade skirmish with China looks like it could become a battle of wills. The U.S. has said it would put tariffs on $50 billion in Chinese goods, and China responded by pledging to put tariffs on U.S. goods and agriculture. Trump has also threatened to up the ante by putting tariffs on another $100 billion of Chinese goods, and China says it will respond.

"The only reason the Administration even dipped their toe in these TPP waters was because it is a full-throated anti-China move. The entire strategic point of the TPP is to fortify an economic ring fence… around China," wrote Chris Krueger, Cowen policy analyst.

The payoffs from reengaging in TPP could be important to the Trump administration, as it works with Asian allies on North Korea's nuclear ambitions.

"It embeds the United States in the future of Asia. It anchors us. It tethers us. It's a strong commitment in shaping the economic future of the region," Smith said

The U.S. is tangling with China on one front, and is trying to resolve the renegotiation of the North American Free Trade Agreement with Canada and Mexico before the Mexican election in July.

"Once NAFTA is done, I do think there is going to be attention paid maybe not just to Japan but to the region," said Smith. TPP was a way to correct some of the issues that were not working or outdated in NAFTA, she added.

Domestic politics could continue to be a problem for the U.S. consideration of TPP, and there are wild cards, including how the administration prioritizes it and what Congress might demand of a deal. "If you have a change in leadership in one or both houses of Congress, they may not want a new trade deal until after the next presidential election," said Jeffery Schott, senior fellow on international trade at Peterson Institute for International Economics.

"The other countries have demonstrated they are going forward without the U.S. There is this growing discrimination against U.S. farmers and exporters in the region," he said. "Certainly it will deepen once TPP 11 goes into force."

The road back to TPP could be tricky. "Near term there's not much that can be done because the agreement isn't in force. The prospect for session negotiations will really only become serious next year. But the other countries are unlikely to make major revisions in the existing text that was signed in March in Chile," said Schott.

Schott said it's not clear what Trump meant by a better deal, or whether one is possible. "Bigger and better would be more countries participating which means there would be a bigger economic payoff and that would likely occur once the agreement enters into force and other countries join. Already there's consideration in South Korea, Taiwan, Columbia and the United Kingdom, among others," he said.

WATCH: Abe, Trump to discuss TPP, N. Korea

VIDEO4:5104:51
Japan concerned US will abandon them in N. Korea talks: Expert