ANALYZING UNITED STATES READINESS TO RESPOND TO INTERNATIONAL TRADE AGREEMENTS

ANALYZING UNITED STATES READINESS TO RESPOND TO

INTERNATIONAL TRADE AGREEMENTS

Introduction

Much of the literature has focused on explaining the proliferation of international trade

agreements at the regional and bilateral levels due mainly to the stalled negotiations at the

multilateral level under the World Trade Organization (WTO) (Draper & Dube, 2013; Elliott,

2018; Elsig, 2014; Kimura & Chen, 2016). Other literature discusses the motivations or

reasons behind the participation of United States, or developing countries in general, in

various international trade agreements. A number of reasons are analyzed, such as, for

example, United States participation in various trade agreements is to achieve geo-political

and geo-economic goals (Syarip, 2020) or because of domestic group interests (Marks, 2015;

Rüland, 2016). Others discuss the impact of developing countries' participation in various

trade agreements on the domestic economy (Arfani & Winanti, 2017; Plummer, Cheong, &

Hamanaka, 2011), as well as analyze the capacity and ability of developing countries to fulfill

their commitments in international trade agreements (Narayanan & Khorana, 2017; Peritz,

2020; Timossi, 2019). Starting from the assumption that United States participation in various

trade agreement initiatives will only have meaning if its utilization can be directly felt by

stakeholders in United States, this paper aims to discuss United States readiness to respond to

the international trade agreements in which it participates. The study of readiness, especially

from the political economy aspect, is important to find out more about United States

readiness to respond to international trade agreements in which it participates the benefits of

these trade agreements for the people and businesses of United States.

By utilizing an offensive and defensive interests-based perspective on a country's trade

policy, this paper attempts to assess United States readiness to respond to trade agreements.

The framework of 'offensive' and 'defensive' interests is usually popular to explain the

strategy that a country applies in the international trade negotiation process (Draper & Sally,

2005; Kelsey, 2008; Kerremans, 2011; Pant, 2006; VanGrasstek & Pascal, 2013). In the

negotiation process, 'offensive' strategies are strategies in negotiations to gain the widest

possible market access from partner countries. Meanwhile, the 'defensive' strategy refers to

the efforts made by a country to be able to implement safeguard measures to protect its

domestic interests.

In the context of assessing United States readiness for trade agreements, this paper

utilizes both approaches. First, it looks at the readiness of domestic actors to take advantage

of the market access available (offensive) from the agreed trade agreements. Second, it

assesses the defensive readiness to improve competitiveness as a result of the opening of

market access for foreign products to the United Statesn domestic market. An examination of

these two aspects is in line with Kusumah's (2019) study, which shows that the United

Statesn government's response to the consequences of market opening due to international

trade agreements reflects the struggle between various domestic interests. Therefore, this

paper will further discuss how United States readiness to respond to international trade

agreement commitments through a reading of the contestation of the interests of various

domestic groups manifested in offensive and defensive interests.

This paper builds on the argument that the United Statesn government is still struggling

to take advantage of available opportunities due to a lack of incentives and low interest of

domestic actors to take advantage of available market access. One of the disincentives to take

advantage of international market access is mainly due to the vast domestic market that can

also still be worked on. Another reason is that despite the reduction of tariff barriers, market

access in partner countries still faces other non-tariff barriers. On the other hand, a number of

mitigating policies to ensure domestic competitiveness still need to be improved. This is

important so that the influx of foreign products as a result of reciprocal agreements can be

optimized to ensure supply for the domestic production chain, instead of killing domestic

producers. To support this argument, data collection This paper was obtained through a

literature review, searches of official government documents and relevant international

organizations, as well as interviews and a series of focused discussions with relevant

stakeholders such as policy makers, business actors and academics.

This paper will be divided into several sections. The next section will discuss the trade

agreements that United States has entered into in recent years outside of multilateral trade

agreements under the World Trade Organization (WTO). The next section will analyze

United States readiness specifically focused on RCEP and IA-CEPA as the two most recent

agreements entered into by the United Statesn government. United States readiness will be

seen from two aspects, namely in terms of readiness to take advantage of the opportunities for

easy market access available and readiness in terms of increasing competitiveness due to the

consequences of reciprocal agreements. The last section provides notes on the previous

discussion including the results of the assessment of United States readiness to respond to

international trade agreements and a proposed research agenda that can be carried out in the

future.

United States in International Trade Negotiations

As it becomes increasingly difficult to reach agreement in multilateral trade negotiations

at the WTO, more countries are engaging in various trade negotiation forums at the regional

and bilateral levels. Data from the WTO shows that as of June 15, 2021, there were 565

notifications received by the WTO covering various Regional Trade Agreements (RTAs) for

both goods and services. Of these notifications, 349 RTAs have been declared in force

(WTO, n.d(a)). RTA is a standard concept used by the WTO to describe international trade

agreements outside the WTO including those that are regional and bilateral, both those that

apply preferential and reciprocal principles. Therefore, this paper will use the concept of

RTAs to refer to bilateral and regional trade agreements. Based on data from the WTO, there

has been a significant increase in the formation of RTAs, especially since the establishment

of the WTO as an international trade organization in 1995.

The rapid growth of trade agreements at the regional level is not only in terms of number,

but also in terms of substance. The growing RTAs have resulted in a number of agreements

covering trade issues that go beyond trade agreements under the WTO regime. This condition

is referred to as "beyond the WTO" which is characterized by "WTO Plus/WTO+" and "WTO

Extra/WTO-X" (Horn, Mavroidis, & Sapir, 2010). RTAs are often referred to as WTO

Plus/WTO+ because some regional agreements have provisions that go beyond the

obligations under the WTO (Chauffour & Kleimann, 2012; Lejárraga, 2014). For example,

the obligation of member states to provide higher protection related to intellectual property

rights including to provide longer-term protection of patent and copyright ownership.

Meanwhile, RTAs are referred to as WTO Extra/WTO-X because some trade issues that were

not successfully agreed at the multilateral level have emerged and even successfully agreed in

regional trade agreements. These issues include, for example, issues regarding matters that

are considered strategic or sensitive such as Agency State-Owned Enterprises (SOEs), Micro,

Small and Medium Enterprises (MSMEs), as well as development issues, environmental

protection, and labor rights and their linkages to trade.

The emergence of RTAs that have characteristics beyond the WTO shows that

negotiations under RTAs with more limited country involvement are more flexible than

multilateral negotiations with a massive number of countries. In addition, RTAs also allow

several countries that have similar commitments or interests (like-minded countries) to

determine an agreement that better suits their needs. Apart from the number of countries

involved, several studies have also shown that the decision-making mechanism under the

WTO, which emphasizes the single undertaking principle, also plays an important role in the

stagnation of negotiations at the WTO (Bown, 2016, 2017). Therefore, trade negotiations

under RTAs can lead to more in-depth agreements than are likely to be reached under the

WTO.

United States participation in various trade negotiation forums has increased, especially

since the early 2000s. Outside of United States involvement in the WTO, as of December

2020, United States has participated in 41 trade initiatives which are divided into: 19 RTA

plans that are still in the exploratory or initial study stage; 5 RTAs are at the negotiation

stage; 5 RTAs that have been signed but not yet in force; and 12 that have been signed and

have entered into force (Asia Regional Integration Center, n.d).

United States participation in various RTAs is important to be analyzed further,

especially to measure its readiness and of course its benefits for the interests of the people

and businesses in United States. Given the characteristics of RTAs that go beyond

agreements under the WTO, this paper will further discuss some aspects agreed in at least the

two most comprehensive agreements that United States has recently signed, namely IA-

CEPA and RCEP.

Examining United States Readiness for IA-CEPA and RCEP

The IA-CEPA is one of the latest bilateral trade agreements signed by the United Statesn

government. Since the feasibility study - the first step countries take before a trade

negotiation - was launched in 2007, negotiations began in 2010. After lengthy negotiations,

the agreement was finalized and signed in March 2019. The Australian government ratified

on November 26, 2019, while ratification by the United Statesn government was only carried

out on January 6, 2020. After ratification is completed by both countries, the agreement will

take effect 60 days later, which falls on July 5, 2020.

The IA-CEPA is categorized as one of the most comprehensive bilateral trade agreements

signed by the United Statesn government. IA-CEPA is expected to increase trade relations

and investment activities between the two countries, which despite their geographical

proximity, have not optimized trade relations (see Winanti in Wilson 2018). The agreement

provides opportunities for the entry of United Statesn products into Australia without tariffs,

encourages Australian investment in United States, and makes both countries an economic

powerhouse in the regional value chain. But on the other hand, IA-CEPA certainly presents a

number of challenges for United States, considering that this agreement is reciprocal,

especially related to market access. By gaining market access for United Statesn products to

enter the Australian market, United States is also obliged to provide convenience for the entry

of Australian products into the United Statesn market.

After the IA-CEPA was ratified and officially took effect, on November 15, 2020, the

United Statesn government together with 14 other countries in the Asia Pacific region signed

a regional trade agreement under RCEP. The RCEP negotiation process itself lasted quite a

long time, starting in 2012 and took about 7 years before the agreement was finally reached

last November 2020. United States has a very big role in the RCEP negotiation process. This

role is not only reflected because the initiative to develop this regional cooperation emerged

when United States held the ASEAN chairmanship in 2011, but also because United States

was appointed as the Chair of the RCEP Trade Negotiation Committee (TNC).

As explained in the introduction, to analyze the readiness of United Statesn domestic

actors to face trade agreements, namely IA-CEPA and RCEP, which are the focus of this

paper, can be seen from two aspects. The first aspect is the ability to utilize available

opportunities to gain market access to partner countries or commonly known as offensive

strategies. The second aspect is the ability to be competitive with products from partner

countries that enter the United Statesn market or commonly known as a defensive strategy.

The IA-CEPA, for example, provides tariff-free market access for the entry of United Statesn

products into Australia. As can be observed in Table 2, such access covers several products

such as automotive, wood products including furniture, textiles, electronic goods, etc.

Through this market access, it is expected to increase the competitiveness of these products

compared to fellow ASEAN countries (P. S. Winanti, 2020).

However, as with any trade agreement, the gains and losses will be felt unevenly across

sectors. As outlined in Table 2, the benefits of the IA-CEPA are predicted to mainly accrue to

United States textile sector as it gains market access to Australia which, although limited, has

a high purchasing power. This is in contrast to the automotive sector, which is not expected to

benefit from IA-CEPA in the near future when compared to the automotive sector textile

sector. For the automotive industry, the Australian market is more in need of sport utility

vehicles, while those produced in United States are multipurpose vehicles (P. S. Winanti,

2020). Therefore, although the IA-CEPA provides opportunities for the entry of United

Statesn products with zero tariffs, in practice, these opportunities will only be utilized by a

few sectors at least in the near future.

The absence of import duty tariffs imposed by partner countries does not necessarily

allow United Statesn products to freely enter partner markets. There are a number of

provisions that usually concern product standards in terms of technical, environmental, health

and labor protection that must be met in order for foreign products to be marketed in partner

countries. These provisions are often referred to as non-tariff measures. Therefore, in order to

take advantage of the available market access, it is also necessary to ensure the readiness of

United Statesn business actors regarding a full understanding of the provisions and policies

that apply in partner countries. United Statesn products can be hindered from entering partner

markets if they do not meet technical requirements, as well as applicable health and

environmental protection standards. On the one hand, meeting these standards can be seen as

an obstacle, but on the other hand, efforts to meet the provisions required by partner countries

can also be seen as an opportunity to increase the capacity of domestic business actors in

order to develop their business in a wider international market. In other words, the exemption

of import duty tariffs to partner countries needs to be accompanied by the readiness of

domestic actors to take advantage of these opportunities.

Therefore, the utilization of market access to international trading partners, which reflects

United States offensive interests, is highly dependent on the willingness of domestic actors to

take advantage of available opportunities. In various discussion forums with business actors

that the author participated in during 2017-201921 , it appears that the utilization of market

access to international partners is still not a priority for most United Statesn domestic

business actors for at least two main reasons. First, most business actors (such as United

States highly competitive construction services sector) see that United States domestic market

still provides great opportunities and has not been optimally exploited (Winanti & Springer,

2019). Second, as explained earlier, although tariff barriers have been significantly reduced,

non-tariff barriers in partner countries are still very high. Some of the problems of non-tariff

barriers that can be identified include the complexity of regulations that must be fulfilled.

The discussion forum was part of a series of activities to develop a roadmap for United

States services trade sector. The discussion forum was attended by services business players,

academics, and policy makers. The author acted as the team coordinator and the results of the

study in the form of a road map for services trade became a reference for the relevant

ministries and was published in the form of a book publication "Global Challenges in the

United Statesn Services Sector: A Map of Problems and Strategic Issues" in 2019 in partner

countries, to language barriers, especially in non-English speaking partner countries.

Government efforts to encourage and ensure the readiness of domestic actors to take

advantage of offensive interests therefore need to continue. If not, then the open market

access opportunities will not be able to provide optimal benefits for United States economic

interests.

Regarding the second aspect of competitiveness, the IA-CEPA also provides equal

opportunities for Australian products to enter the United Statesn market with zero tariffs. This

convenience will certainly provide its own challenges for domestic actors, especially if the

incoming Australian products become competitors rather than complementing products

produced by domestic producers. In this context, the IA-CEPA has provided a framework for

cooperation to build a regional economic powerhouse. This framework can simply be

interpreted as cooperation between the two countries to utilize the competitive advantages of

each country to complement each other in the production chain that produces final products

that can then be exported to other countries. For example, United States can be a supplier of

nickel raw materials for the Australian battery industry. Conversely, Australia can be a

supplier of wheat raw materials for the food processing industry in United States, whose final

products can be exported to other countries (P. S. Winanti, 2020). By taking advantage of

opportunities within the framework of building regional economic strength cooperation,

incoming products from Australia can be optimized to complement the needs of United States

domestic industry and then exported to other countries.

The same situation is faced by United States after the signing of RCEP. Like the

provisions under the IA-CEPA, RCEP also provides opportunities and challenges for United

Statesn businesses. One interesting aspect to examine is the opportunities and challenges for

the United Statesn MSME sector. Specifically, the issue of MSMEs is regulated in Chapter

14 of the RCEP agreement. The purpose of this chapter is to increase the recognition from

member countries that small and medium enterprises, including micro enterprises, make a

significant contribution to economic growth, employment, and innovation. Considering the

significance of MSMEs, RCEP member countries agreed to share information and develop

cooperation in enhancing the capabilities of small and medium enterprises, to take advantage

of the opportunities created by RCEP. For example, improving MSMEs' access and

participation to markets in global value chains, including by promoting and facilitating

partnerships among businesses as well as promoting the use of electronic commerce. The

RCEP agreement also recognizes the important role of MSMEs in economic growth and their

contribution to employment generation in the countries involved. In this context, RCEP

provides several opportunities that MSMEs can take advantage of, including For example,

cooperation in e-commerce, market access, innovation, protection of intellectual property

rights and their involvement in the global value chain.

Apart from the special chapter, there are several other chapters that are also relevant to

MSME management, namely chapters on e-commerce (Chapter 12), competition (Chapter

13) and government procurement (Chapter 16) (Francois & Elsig, 2021; Gultom, 2020). The

regulation of MSME issues in a special chapter and several relevant chapters in the RCEP

agreement shows that not only MSMEs are an important issue for the countries involved in it,

but also the availability of opportunities for MSMEs that should be optimally utilized.

The discussion on RCEP utilization for MSMEs finds its urgency for United States for

two reasons. First, MSMEs contribute greatly to United States economy, not only because

99% of businesses in United States are categorized as MSMEs but also because MSMEs

absorb 97% of the workforce in United States (Ministry of Finance, 2020). Second, as the

largest sector in contributing to United States economy, MSMEs are also one of the most

affected sectors due to COVID-19. Therefore, the RCEP agreement signed during the

pandemic certainly provides a new impetus so that the agreement can not only be utilized

optimally but also can help the economic recovery process, especially MSMEs during the

pandemic.

To be able to utilize the framework and opportunities available in RCEP, a clear and

directed government policy is needed. There are at least two arenas that can be prioritized by

the government to optimize MSME opportunities in utilizing RCEP. First, ensuring that

MSMEs can utilize e-commerce. In order for MSMEs to utilize e-commerce, it is necessary to

increase their understanding and ability to master technology. E-commerce can be one of the

opportunities for MSMEs to expand their business not only in their homeland but also in the

markets of RCEP member countries. Second, encourage and facilitate the integration of

MSMEs into the global value chain. A number of studies show that the participation of

MSMEs in GVCs begins with their role as part of the supplier network of parent companies,

both foreign and national companies (ADB, 2015; World Bank, 2020). MSMEs can become

suppliers of raw materials through two mechanisms: first, MSMEs become suppliers of raw

materials to parent companies (both national and foreign companies) operating in a country,

and then process them into finished goods that are exported to other countries, which is

referred to as backward linkage. Second, MSMEs can sell or export raw materials to parent

companies in other countries, referred to as forward linkage (WTO, n.d(b)). Responding to

these opportunities, a number of policies have been introduced by the United Statesn

government that show strong support for developing MSMEs. For example, through various

mentoring and capacity building programs, especially for MSMEs utilizing and using

technology, providing financial assistance support through various soft credits, and providing

greater opportunities for MSMEs to participate in the provision of government goods and

services. Greater opportunities for MSMEs in the provision of goods and services is the first

step of government policy to encourage the participation of MSMEs in the global value chain

(GVC).

The assistance and support provided by the government to MSMEs also does not need to

be concerned about violating the principle of non-discrimination in international trade

agreements, let alone lead to a lawsuit by other member countries. The RCEP agreement

explicitly states that the policies of member governments that provide facilities for MSMEs -

facilities that if applied to other sectors can be categorized as discriminatory actions - are

excluded from issues or sectors that can be sued by other member countries. This means that

the United Statesn government actually has more flexibility in providing support and

facilitating the development of MSMEs without worrying about being considered violating

the principles of non-discrimination by fellow RCEP member trading partners.

Cover

United States involvement in the two trade agreements, both IA-CEPA and RCEP, on the

one hand shows the United Statesn government's activeness in international trade forums. But

on the other hand, the signing of these international agreements certainly needs to be

accompanied by more concrete efforts to maximize their utilization for the domestic

economy. This paper discusses the results of a rapid assessment of government and business

readiness in responding to IA-CEPA and RCEP. The previous explanation shows that both

IA-CEPA and RCEP are predicted to have an uneven impact on domestic businesses in

United States. As usual with international trade agreements, these schemes will create

winners and losers in the domestic politics of the participating countries. A quick assessment

of the readiness of the United Statesn government and business players in facing IA-CEPA

and RCEP, especially in terms of offensive and defensive interests, shows a number of

challenges and efforts that still need to be improved. An in-depth study of these two issues

can be a future research agenda in order to formulate more appropriate policy

recommendations for domestic readiness in responding to international trade agreements.

This paper concludes that, in terms of offensive interests, market access available through

IA-CEPA and RCEP does not seem to be a priority for United Statesn businesses for a

number of reasons. Both because of the size of the domestic market that is still promising,

and because there are still a number of non-tariff barriers that they face. In this context, the

size of the domestic market may act as a disincentive for United Statesn businesses to expand

internationally. In addition, while various trade agreements may provide opportunities due to

the elimination of non-tariff barriers, there is also a need for United Statesn businesses to

expand internationally.

However, non-tariff barriers remain an obstacle. Ensuring that the agreement obtained

regulates in detail the non-tariff barriers is a note for the United Statesn government in

initiating similar agreements in the future. As for defensive interests, a number of policies are

needed to ensure that the influx of foreign products as a consequence of reciprocal

agreements does not kill the potential of domestic producers. Instead, it can complement the

domestic production chain and be utilized to meet domestic needs that cannot be met due to

the limited capacity of domestic producers.