Michael Froman - IBA Annual Conference 2017

He served as US Trade Representative from 2013–2017 under President Barack Obama and is also former Deputy National Security Advisor for International Economic Affairs. In conversation with the IBA’s Director of Content, James Lewis, Froman outlines just how damaging President Trump’s withdrawal from the Trans-Pacific Partnership could be, and what it means for the Asia Pacific region, given the rising power of China.

James Lewis: I wanted to start with a really simple question before we plunge into specifics. It doesn’t always grab the headlines, but trade is obviously enormously important. I wanted you to tell us why you feel it’s so important.

Michael Froman

Michael Froman: Well, when you look back over the history of the global economy, there’s probably been no more powerful dynamic for alleviating poverty, creating middle classes and tying countries together, than international trade. And it goes back obviously hundreds of years – globalisation is nothing new. It’s been around for quite a while, but the sort of acceleration we’ve seen over the last 70 or 80 years really has been remarkable. Whether it’s China – its rise and ability to raise people out of poverty – or what’s going on across the African continent as those economies open up to each other and to the rest of the world, then, of course, across Latin America, Europe and North America as well. If done properly, it can be a very powerful force for spurring on economic activity and promoting increased productivity.

It’s obviously very helpful to consumers who can access a wider variety and cheaper goods, making it easier for their limited resources to go further. But also in terms of the production side, really helping companies become more and more productive as they engage in international trade and foreign markets that help keep them on the edge of innovation.

JL: You spent many years negotiating the Trans-Pacific Partnership (TPP). I’m interested in how you feel, on a personal level, about Donald Trump pulling out of the TPP.

MF: Obviously I think the decision to pull out of the TPP was a terrible mistake and I think historically will be seen as a self-inflicted wound of the first order. Having said that, I’m actually quite optimistic. I think that, as we look at what is being discussed in the renegotiation of the North American Free Trade Agreement (NAFTA), a lot of it is based on the TPP. We see that the other 11 countries that are part of the TPP are actively considering moving ahead to put it in place in part or in whole because they value the rules that we all negotiated collectively.

This wasn’t a United States template per se. It was negotiated among developed and developing countries large and small, Asian, Oceanic, Latin American and North American. It really represents a collective view of what 21st century rules should look like. I’m optimistic that those rules are going to find their way into effect, maybe not as cleanly and eloquently as we designed them but, ultimately, they will have a positive effect on the global trading system.

US President Donald Trump signs the first of three Executive Orders concerning the withdrawal of the US from the TPP in the Oval Office of the White House in Washington, DC on 23 January 2017.
MediaPunch Inc/Alamy Live News.

JL: You referred there to a ‘self-inflicted wound’. How damaging is it going to be, and what will be the consequences for the US?

MF: Well, I think it does very much undermine US credibility and leadership in the region in the short term. But I think, over time, it will really depend on what the US does as an alternative. We warned – and we’re now seeing it play out in real time – that, if the TPP doesn’t move forward, we’re basically creating a void in this region, and the Asia Pacific is a critically important region. Other countries like China are very happy to fill that void – define the rules of the road in a way that plays to their interests, rather than necessarily our values, and carve up market access in a way that hurts our workers, farmers and ranchers because we’re not getting access to the markets that we otherwise would. I think we’ve gone through that first phase of pulling out and people are adjusting to that. Over time, the US and the Trump administration will have to figure out the strategy towards this region. And, of course, the President will be here in November on a tour of five countries, with a lot of opportunity to lay out such a vision.

JL: You’ve alluded to it leaving a void that China is all too happy to fill. There’s the Regional Comprehensive Economic Partnership (RCEP), which is being talked about as the main way forward for China. Just how damaging is it for America’s influence in the region and how much of an influence will it have in that shifting dynamic in world power in China’s benefit?

“ The decision to pull out of the TPP was a terrible mistake and I think historically will be seen as a self-inflicted wound of the first order

MF: I think you start with the fact that the nature of the Asia Pacific region is still uncertain. It can be defined as the Pacific Rim, trans-Pacific in character, or it can be defined as China-centric in character. I think the steps that the Trump administration has taken probably put a thumb on the scale in favour of the China-centric view of Asia.

This has been a very good year for China and the region. In January, President Xi Jinping went to Davos, Switzerland, and declared China to be the leading defender of the open rules-based free trade system.

But I think China has also moved. China has a regional strategy. It has become much more adept at using both soft and hard power.

When you look at the combination of the One Belt One Road Initiative, the Silk Road Fund, the Asia Infrastructure Investment Bank... what they’re doing in the South China Sea in terms of staking out territory and the RCEP, that combination of initiatives is a very powerful one that leads other countries closer to China or to model Chinese behaviour if there is no alternative. The TPP was never about containing China or anything of that sort. It was about providing an alternative to countries in the region that want to have and build an economy around higher standards, which can attract the kind of high-quality economic activity they’re all looking for. And without the TPP, we’ve created this void where the only alternative is really the China-centric one.

JL: Are we seeing a tipping point? I sometimes refer to the famous quote that ‘the 20th century was the American century’. People are asking whether the 21st century might be the Chinese century. Are we seeing key tipping points? Is the Trump administration’s rejection of the TPP part of that?

“ The steps that the Trump administration has taken probably put a thumb on the scale in favour of the China-centric view of Asia. This has been a very good year for China

MF: I think it’s part of that ongoing dynamic. I’m not sure that it is at a point that is irreversible or irretrievable. China, of course, has enormous challenges of its own and its leadership is wrestling to deal with those challenges. I do think there is still an opportunity for the US to play a very active role. We’ve been a Pacific power for a very long time, certainly during the Obama administration; the rebalancing strategy towards Asia... that was both military and political and, in the TPP, it was very much economic as well.

Now, the question will be ‘How will the Trump administration reposition the US in that regard?’ I don’t think it’s too late, it is still an opportunity. One can look at the first nine months of this year as a conditioning exercise: the new administration came in with a new perspective on the world, and wants to make sure other countries understand that some of the assumptions that have been acted upon before may be brought into question. But now the question will be whether they can pivot from that conditioning exercise to actually lay out and then, very importantly, carry out the hard work of step-by-step execution of a regional strategy.

JL: The TPP did take some negotiating. Were there any particularly thorny issues along the way?

MF: Hundreds of them! It was fascinating because it’s the most complex trade negotiation I think countries have tried to undertake. It was 12 countries, and it wasn’t a case in which eight countries basically agreed on everything and the other four countries just needed to be convinced. On every issue, it was a different coalition of countries – sometimes we shared our view with Japan and were working vis-à-vis Vietnam to bring them on board; sometimes we shared a view with Vietnam and were working to bring Japan on board. We had to build consensus. At one point, I estimated there were about 1,000 difficult issues and, each time we got together at the ministerial level, we would narrow that list down.

Some of the issues that became most controversial publicly were around intellectual property, particularly in the pharmaceutical area. But I think we found a pathway that would have created a very positive environment for innovation and also access to the benefits of that innovation. There were issues around dispute settlements and making sure it was done fairly and in a way that could assure governments that they could regulate in their national interest.

I think we found a way forward on that. And then there’s the whole complexity of issues around market access. Every country has them, whether it’s dairy or wool or autos or footwear and apparel, that surround domestic sensitivities and how to open up economies, while at the same time respecting those domestic sensitivities and finding transition periods, and ways of bringing people on board.

JL: You’ve talked about pharmaceuticals and intellectual property. It brings to mind a very powerful sector with some major corporations. When you’re engaged in that sort of process, you must get lobbied furiously by the industries concerned. And they are powerful, aren’t they? How do you deal with that?

MF: Well, one of the things I enjoy most about trade negotiations is that it’s a multi-level, multi-party negotiation. So it’s high diplomacy in dealing with other countries but you’re also dealing with domestic constituencies of all sorts and then their patrons and supporters in the political system and having to negotiate these multiple dimensions at the same time.

The pharmaceutical industry is a very powerful industry, but so is our commitment to our generic pharmaceutical business in the US, and that’s a powerful industry too, as are the non-governmental and civil society organisations that are focused on access to medicines, making sure that, particularly in developing countries, people can access medicine sooner rather than later. They are all very active, and tend… obviously to have different sets of very conflicting interests…

JL: You came in for quite a lot of criticism from the environmental lobby and it looks like you’re familiar with the sort of criticism I’m alluding to. I’ve quotes here that say you took the balance perhaps too far towards Wall Street, the corporates. I just wanted to give you a chance to respond to that.

MF: Absolutely. I mean actually, when you look at the environmental obligations of the TPP, they’re really quite remarkable. We had a lot of environmental groups and experts saying this is a game changer. Now, there are politics in the US around environmental groups and labour groups and support for each other, something we call the BlueGreen Alliance where, even if they felt the substance was good, they couldn’t come out and support the agreement. But there were a number of mainstream environmental groups who thought that what we did on wildlife trafficking, oceans, the maritime environment, illegal fishing and illegal logging, were really quite substantial.

If you take wildlife trafficking, most of the international community has signed up to something called the Convention on International Trade in Endangered Species (CITES). It’s considered one of the best international environmental treaties, but its enforcement mechanisms are very weak. We brought CITES into the TPP and said ‘Now you can enforce CITES through the TPP, through its trade sanctions.’ If a country is not implementing its CITES obligations, you can impose trade sanctions on them. The environmental community loves that.

We did that across several different kinds of environmental obligations, using the power of trade as an enforcement mechanism for other issues related to the trading system. Some environmental groups were very honest with me. They said ‘we will oppose this agreement regardless of what is in it’, and that’s a difficult position because there’s nothing you can do. I still kept them informed.

“ You need these countries and partners whether they’re allies, competitors or even adversaries; you need to be able to work with them on one issue after another… it’s difficult to reduce these issues to individual transactions

JL: One of the particular concerns of environmental groups was that there was too much power given to corporations to sue governments if they were bringing in policy that might damage their interests.

MF: So this is really the area of international arbitration called investor state dispute settlement (ISDS). I think a number of their concerns have merit, which is why we used the TPP to reform ISDS.

Right now, ISDS is in 3,200 agreements. The US is party to 50 of them. Europeans are a party to, I think, 1,000 of them, including many among themselves. This was intended so that, if a country expropriated another company’s property, that company didn’t have to go to local courts to try and sue the local government – oftentimes in countries where the legal system may not be completely independent and reliable – to find recourse, it would go to international arbitration as well. It goes back hundreds of years in our country, back to the Jay Treaty. It is not a new process.

But, to the degree that companies or investors are abusing that, just to simply challenge a regulation that they don’t like – we need to make sure, for example, that one can’t sue on the basis of lost profits alone, that one can’t sue because the government changed regulation. It’s the government’s right to change regulation. Those were provisions in the TPP that would have tightened loopholes, raised the standard…

JL: OK. Going back to major trade agreements, we talked about the TPP, the other big one is the Transatlantic Trade and Investment Partnership (T-TIP). What might be the future now the Trump administration is clearly rejecting globalisation.

MF: They’ve not rejected the T-TIP completely. In fact, they’ve signalled at times that maybe the T-TIP is a type of agreement they’d be willing to pursue. I think the reality is… the priority of the Trump administration appears from the outside to be the renegotiation of the NAFTA, first and foremost, then perhaps the renegotiation or recalibration of the agreement with Korea, and then, on the trade side more generally, we’ve got to deal with China on an ongoing basis. Not necessarily negotiating an agreement, but dealing with the challenges that trade and investment with China pose. They’ve talked about potentially doing something with Japan, something with the United Kingdom. I think the reality is, even one or two of these things, like the renegotiation of the NAFTA, may use up so much energy, time and political capital, between the renegotiation itself, if it’s successful, and then ultimately getting it back through Congress, which is a whole other set of challenges, that it’s hard to imagine the T-TIP completed in the short run.

Then I think there’s a broader issue, which is… and I’m hearing this from some of my foreign and former counterparts… because the Trump administration has raised the prospect that, just because the US signs an agreement doesn’t mean we’re going to stay in it, it is somewhat of a deterrent for other countries to sit down with us to invest time and effort. If you are in the Eurpoean Union and you have a focus right now on finishing the Japan agreement, negotiating with Mexico and Australia, New Zealand, the Association of Southeast Asian Nations, Mercosur, the Gulf Cooperation Council countries, India… you might say that those are higher priorities in reality and wait to see whether the Trump administration really does follow through on its negotiations and even what happens potentially after the Trump administration.

JL: Looking back at the way the system’s been working and at America, where there’s been wage stagnation and widening inequality, there does seem to be a view formed that the system is working for what some would call the ‘one per cent’ of richest people in the world. Do you feel it was inevitable to some degree that the American population were going to look to a populist leader, someone who is anti-establishment, someone who was going to reject globalisation and the system as it had been to that point?

MF: Well, I think that globalisation benefited far more than the one per cent. Not just in the US but, if you look around the world, countries that opened up and integrated themselves saw significant increases on every human development indicator: witness Asia. Countries that stayed relatively close to each other have seen almost no improvement in human development: witness the Middle East. So I think there’s real data there about how globalisation and integration are pro-development and pro-growth.

“ The dislocation up to now has been mostly a result of automation. When you see the estimates around artificial intelligence and robotics…the significance is going to be even greater going forward

While the benefits are certainly not equally shared, it’s a mistake to think that they only go to the one per cent. Having said that, I think, in the US, the issues you point to are real and legitimate – wage stagnation, widening income inequality, and a real sense that… neither the government nor the business sector have done enough to really address those who feel left behind by the system.

I think other countries in many respects do it better than we do. I think some states do it better than we do at the federal level. When it comes to training programmes, transition assistance or preparing people with the skills they need to succeed in a rapidly changing economy, we have not done a good enough job. There has not been the kind of political support across the spectrum needed to really take that issue on. And that goes to Democratic administrations as well as Republican administrations.

We tried in the Obama administration, through the budgets we submitted every year, to do things like free community college, which is a mechanism potentially for getting people into a more vocational education, but it was never funded. There are lots of other ideas like that out there. I think it’s perhaps the most serious issue we face as a country because, while economists will tell us that the dislocation up to now has been mostly a result of automation – globalisation is maybe 20 per cent, automation 80 per cent – when we look ahead and you see the estimates around artificial intelligence and robotics, machine learning and mechanisation, the significance is going to be even greater going forward. It doesn’t matter where the dislocation is coming from, whether it’s from globalisation, immigration or technology. We need to find better ways to make sure that our people are prepared to succeed and, where they are adversely affected, that we have mechanisms to make sure that they can transition and continue to succeed. Right now, in the US, not nearly enough attention is being paid to that.

This is an abridged version of an interview with Michael Froman at the IBA Annual Conference in October 2017 in Sydney.
View The filmed interview