posted on 02 February 2017
by John West, Asian Century Institute
As many of us now fret over the demise of the TPP at the hands of Donald J. Trump, a new wave of trade liberalisation in Asia could be taking shape through “Trump Trade Policy", argues John West.
TPP -- the right agreement
The Trans-Pacific Partnership (TPP) negotiations were successfully concluded on 6 October 2015, but the US Congress never ratified the deal. And then in January 2017, new US President Donald Trump withdrew the US from the TPP. striking a likely death blow.
This is a pity. The TPP was very much the right agreement for today’s world of global value chains where companies from "headquarter economies" like the US, Japan and Korea create and design products, and then outsource the labor-intensive stages of manufacturing to "factory economies" like Southeast Asia or China.
The TPP went beyond mere trade liberalization and sought to establish a more seamless environment for trade and investment. It dealt with issues like services, electronic commerce, telecommunications, competition policy, state-owned enterprises, intellectual property, government procurement, and transparency and anti-corruption.
The concerns of US workers and environmental activists were also taken on board in labor and environment chapters. Vietnam, Malaysia and Brunei made important commitments regarding freedom of association for trade unions, forced labor and human trafficking. The TPP also implicitly embodied a renegotiation of the North American FTA (NAFTA), which is now more than 20 years old, as Canada, Mexico and the US were all parties to the TPP.
The TPP’s signatories are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, the United States and Vietnam, which account for 40% of the world economy and one quarter of world trade. The absence of China is often alleged to be a deliberate geopolitical ploy by the US. In reality, China was invited to join the TPP trade talks, but declined. And China would have immense political difficulties signing up to the TPP’s chapters for labor rights and state-owned enterprises.
Perhaps the greatest objection to the TPP was its inclusion of an Investor-State Dispute Settlement (ISDS) procedure which would enable companies to sue governments in international arbitration tribunals, rather than domestic courts. The most egregious abuse of an ISDS procedure was Philip Morris's challenge of the Australian government's plain packaging laws for cigarettes. Fortunately, Philip Morris's spurious arguments did not win the day.
The great value of the TPP is evident in the efforts of governments from Japan, Australia, Singapore and elsewhere to try to convince the Trump administration to reconsider its objection to the TPP. But the TPP's fate seems to have been sealed by the signature of Trump. Proposals to go ahead with the TPP without the US, or even by replacing the US with China as the Australian government has suggested, will not fly. The Japanese government has made clear that the TPP would make no sense without the US. This matters, as Japan and the US together accounted for three-quarters of the economic weight of the TPP signatories.
From TPP to TTP, Trump Trade Policy
While many are painting Trump as a protectionist, the emerging reality seems more nuanced. Trump certainly wants to bring manufacturing jobs back to America, especially as he bullies companies into investing in the US rather than Mexico or China. But he is also interested in pursuing "America First" trade through “one-on-one", bilateral free trade agreements (FTAs). He doesn’t like mega, multilateral trade agreements, which are complicated and difficult to leave.
Bilateral trade diplomacy can be beneficial for an aggressive hegemon like Trump’s America. It can extract maximum benefits from its relatively weaker partner. It can easily carve out politically sensitive sectors like steel and autos for protection. It can declare countries like China as currency manipulators, and punish them with trade barriers. And it can link other issues like military security to trade.
An aggressive hegemon can also unilaterally sanction any partner that causes it displeasure, without having to bother with international dispute settlement mechanisms and the rule of law. Mr Trump already seems to be of the same stripe as the Chinese Communist Party which also abhors multilateralism, as evident in its dealings with the ASEAN countries over the South China Sea.
However, bilateral trade diplomacy can also have some negative effects, as it can set up a hub-and-spokes trading system, with the hegemon at the center, and the other countries retaining trade barriers between themselves, something which is avoided in a multilateral agreement. This can have adverse effects on global value chains, which function better when there is free trade at every stage along the value chain.
Japan and Trump Trade Policy
Japan's Prime Minister Shinzo Abe is now readying his government for a possible bilateral FTA with the US. Indeed, this will be on the agenda when Abe meets Trump soon (likely 10 February). While Tokyo is incredibly stubborn when it comes to protection of its agriculture and services sectors, not to mention its motor vehicle industry, Abe is in a position of great weakness vis-a-vis the US.
Abe is desperate to win Trump's support for the US-Japan Security Alliance, in the face of an assertive China and a volatile North Korea. This will also be on the agenda when the new US secretary of defence, James Mattis, visits Japan this week. Japan's burden sharing of the Alliance has also been questioned by Trump, as Japan only pays about half the costs of the more than 50,000 US military staff in Japan. Moreover, Japan only spends 1% of its GDP on its Self Defense Forces, while the US military spending represents 3 1/2% of GDP.
While Japan should lift its game and finance more of its national security, with a national public debt of close to 250% of GDP, its room for manoeuvre is limited. And Japan is also cornered because of its dependence on the US market which absorbs some 20% of Japan's exports (a little more than China does).
There may well be very rapid movement on a Japan/US FTA, as the now-ditched TPP provides an excellent blueprint for beginning negotiations.
Once he has dealt with Japan, Trump will likely pass over the other TPP partners. The US already has FTAs with Australia and Singapore. Canada and Mexico will tackled in a NAFTA negotiation, which will likely take the TPP template as its starting point. And the other TPP signatories are really just peanuts, except perhaps Vietnam, which would be a useful ally against China. Elsewhere in Asia, Trump will likely push to renegotiate the US’s FTA with Korea.
The man of "The Art of the Deal" could then line up China as the next target.
China and Trump Trade Policy
The US has had a trade deficit since 1975, and today has the world’s largest trade deficit, some $677 billion in the first 11 months of 2016, with China’s $319 billion representing almost half. This has motivated Trump to threaten to slap a 45% tariff on China’s exports to the US. The other leading contributors to the US trade deficit were Japan ($62 billion), Germany ($60 billion), and Mexico ($59 billion).
This single-minded obsession with the trade deficit overlooks the complexity and richness of the economic relationship between China and the US. While the US may have a deficit in trade in merchandise goods with China, it also has a surplus for services trade with China ($30 billion in 2015). The stock of US foreign direct investment (FDI) in China was very much higher than Chinese FDI in the US -- $65.8 billion in 2014 versus $9.5 billion -- even though the latter has since been rising quickly. Sales of services in China by majority US-owned affiliates were $43.3 billion in 2013 (latest data available), while sales of services in the United States by majority China-owned firms were $4.4 billion. And some imports from China embody American parts and components.
All that said, the Chinese government remains highly protectionist when it comes to international trade and investment, despite its ambitious reform program announced a few years back, which still remains to be implemented -- and despite President X’s phony pro-globalization preaching at the recent Davos meeting.
Reports by the OECD, the American Chamber of Commerce in China and the European Union Chamber of Commerce in China all confirm very clearly the continuing difficulties in trading, investing, protecting intellectual property, and doing business more generally in China. And China’s present tightening of controls on capital outflow is making things even more difficult. While China was a currency manipulator in the past, as artificially kept its exchange rate low, this is no longer the case, in contrast to the claims of Mr Trump.
If Trump were to slap a 45% tariff on China’s exports to the US, it could provoke retaliation and lead to a trade war. This would have disastrous consequences for the Chinese, American and even global economy. But perhaps the best way to understand Trump’s posture vis-a-vis China, including his questions about the One-China Policy, flirtations with Taiwan and strident comments posture regarding China’s actions in the South China Sea, is that it is an opening bid in a possible bilateral FTA between the US and China, and better cooperation on issues like North Korea. Trump Trade Policy could indeed make great headway in opening up the Chinese market. This would not only be beneficial for US business, but also for the Chinese economy, which is in desperate need of reform. Mr Trump may not imagine that he actually could help strengthen China’s economic power through opening up its economy to freer trade.
China will not lead free trade in Asia
With America’s retreat from the TPP, many commentators have argued that China will take over the lead of trade liberalisation in Asia, notably through the Regional Comprehensive Economic Partnership (RCEP), another mega trade deal currently being negotiated. Nothing could be further from the truth!
The RCEP is a negotiation which seeks to create one single FTA between the ten ASEAN member states (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Viet Nam) and those six countries which already have FTAs with ASEAN - Australia, China, India, Japan, Republic of Korea and New Zealand -- the “Plus-6 countries". The RCEP were launched in in November 2012, with the goal of completing the deal by end 2015.
On paper, the RCEP looks like a huge deal. It involves half the world's population. The participating countries account for 30% of global GDP and about a quarter of world exports and foreign investment. It could thus become the world’s biggest trading bloc. The RCEP promises to rationalise into one agreement the complex "noodle bowl" of agreements between ASEAN and the Plus-6 countries, and result in “significant improvements" over the existing agreements. The RCEP will also require agreements between those Plus-6 countries that don’t already have agreements.
But the RCEP is proving much more difficult than envisaged. Rationalising into one agreement the complex "noodle bowl" of agreements between ASEAN and the Plus-6 countries is in fact very challenging, as many of these agreements are quite different from each other, having been negotiated at different points in time. Filling in the gaps between the Plus-6 agreements is also proving arduous, especially in light of the need for FTAs between China and India, China and Japan, and Korea and Japan, countries which have testy relations.
The reality is that the RCEP negotiation may never be concluded. And if it is, it will not result in any significant market opening. Its main focus is on merchandise trade barriers, rather than issues like services, investment, intellectual property and competition policy which are key to global value chains. In fact, apart from Singapore and Hong Kong, Asian economies have never been thrilled about open markets for trade and investment. They are mainly concerned with serving the interests of their entrenched business elites. This is a great pity as Asia desperately needs much more open markets to continue its development.
In the press the RCEP is billed as a China-led negotiation, which excludes the US, and which seeks to rival the US-led TPP, even though officially it is an ASEAN-led deal. But from all reports, the RCEP negotiations are suffering from a lack of strong leadership. Some countries like India and Indonesia are not enthusiastic at all about RCEP, and China shows no visible signs of wishing to further open its markets. The negotiating deadline of end-2015 was initially extended to 2016, and now there is the mere hope that it will be finalised in 2017. Perhaps the best indicator of the value of the RCEP is that US business is not interested in it at all.
Now that the TPP is dead in the water, some RCEP countries like Australia are investing much greater energy and enthusiasm in the RCEP. While this is welcome, it will not likely be enough to result in significant market opening under the RCEP.
It is true that there is a protectionist dimension to Trump’s trade policy, as he seeks to bring back manufacturing jobs to America. But TTP, Trump Trade Policy, will also pursue trade liberalisation through one-on-one bilateral trade deals, on an ‘America first’ basis. And Asia’s biggest economies, Japan and China, which both need the US market, will likely be early targets for Trump’s new trade diplomacy.
In short, the US will likely remain Asia’s trade hegemon, but a less friendly one than in the past, as its pursues one-on-one bilateral trade deals.
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