U.S. President Donald J. Trump has taken a radically different approach to trade than his predecessors and calls for protectionism have increased in the United States. Trump has launched a series of unilateral moves based on the belief that international trade is a zero-sum game in which the preceding U.S. administrations’ “disastrous” policies disadvantaged American workers and companies. Trump’s actions have included withdrawing from the Trans-Pacific Partnership (TPP), renegotiating the North Atlantic Free Trade Agreement (NAFTA), investigating foreign countries’ alleged “unfair” trade practices, and, most recently, increasing tariffs on steel and aluminum imports on national security grounds. Tariff exemptions have been granted on a selective basis, further undermining multilateral trade rules and norms.
Trump has put together a team of trade hawks that have sneered at the multilateral trading system. Perhaps the most protectionist actions proposed by the team so far is the plan to impose tariffs on $60 billion worth of Chinese imports and limit the country’s investment in the United States in retaliation for years of intellectual property theft, forced technology transfers, and restrictions on foreign ownership by China.
At the Asia-Pacific Economic Cooperation (APEC) summit late last year in Da Nang, Vietnam, Trump reiterated his America First agenda in favor of bilateralism, reciprocity, and “fair trade.”
These trade measures will harm Asia-Pacific countries, which face pressure to retaliate. Hopefully, tit-for-tat trade wars can be avoided although Beijing has pledged to “fight to the end.” However, new uncertainties regarding continued access to the U.S. market have forced Asia-Pacific countries, for whom trade is an economic lifeline, to adopt a three-pronged policy response: accelerate the signing of mega free trade agreements (mega FTAs), enhance regional connectivity, and deepen interregional economic cooperation.
Asia-Pacific countries can’t influence decisions in the United States, but their pursuit of policies to promote their own domestic demand and the three-pronged approach should enhance their economic resilience to possible global shocks generated by Trump’s protectionist policies.
Accelerating Mega FTAs
Australia and Japan have taken the lead in pushing through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP11) without the United States. This agreement was signed on March 8, 2018, in Chile and is expected to come into effect early next year, once it is ratified by at least six of the eleven member countries. Although Japan hopes to have the agreement approved by the Japanese Diet this summer, other countries may take longer. For example, Malaysia has already announced a longer timeline for ratification.
Although twenty-two U.S.-supported provisions from the original TPP have been suspended or amended, the revised CPTPP is still a gold standard agreement: it eliminates customs duties on 95 percent of merchandise trade while containing many groundbreaking rules relevant to twenty-first-century trade. The CPTPP offers large economic benefits even without U.S. participation. This is because the United States is already one of the most open markets in the world, and several CPTPP countries have bilateral trade accords with the United States as backup. Using a computable general equilibrium (CGE) model, we estimate that the net benefit of CPTPP to all its members would be 0.3 percent of their combined gross domestic product (GDP) in the medium run. All eleven CPTPP countries would benefit, albeit less than if the United States were in the accord.
Several other countries may also join the CPTPP. South Korea’s trade ministry says it is assessing CPTPP’s effect before making a decision. Indonesia and Thailand, and even the United Kingdom, have expressed interest in joining the accord. President Trump said that he is open to joining the trade deal, but only if it involves a “better deal for the United States.” This may not happen anytime soon because CPTPP countries are more interested in ratifying and then implementing the hard-won deal than crafting a new deal sufficiently favorable for the United States to return.
Asian countries have also accelerated negotiations for the Regional Comprehensive Economic Partnership (RCEP), a grouping of the ten members of the Association of Southeast Asian Nations (ASEAN) and six of ASEAN’s dialogue partners (Australia, China, India, Japan, South Korea, and New Zealand). The last five years of RCEP negotiations have involved twenty-one rounds of meetings. But debate has persisted, as India remains concerned over its growing trade deficit with China and wants other countries to open up their service sectors in exchange for further trade liberalization. Success of the CPTPP should give a boost to RCEP, and the negotiating parties are optimistic that it can be concluded later this year under Singapore’s ASEAN chairmanship. To fast-track RCEP, the idea of concluding an agreement without one or more members—an “RCEP minus X” formula—is gaining traction.
Since RCEP is a mega FTA comprising mostly developing countries, it is not as transformative as the CPTPP. But its conventional free trade agenda focusing on improving market access, harmonizing rules of origin, and reducing discriminatory measures against foreign investment would still confer significant benefits. Our estimates show that RCEP would generate welfare gains of $127 billion, compared to $35 billion from the CPTPP. Cambodia and Thailand are likely to benefit the most from RCEP.
Enhancing Regional Connectivity
In addition to pursuing mega FTAs, Asia-Pacific countries have stepped up joint efforts to enhance regional connectivity through infrastructure development, which creates new trade routes and revives old ones by reducing transportation costs.
The headline-grabbing activity is China’s Belt and Road Initiative (BRI), spearheaded by President Xi Jinping since 2013. The BRI aims to leverage Chinese outbound investments and foreign reserves to connect more than seventy countries across the Afro-Eurasian supercontinent via large-scale projects including railways, roads, bridges, ports, and pipelines. Criticism of a lack of transparency and China’s debt-trap diplomacy notwithstanding, the BRI is largely seen as an attractive proposition for developing countries that are in need of investment but have limited access to international finance. The Chinese Ministry of Finance, assisted by six multilateral development banks, recently established an international cooperation center for the BRI, underscoring the multilateral nature of the grand initiative.
In 2016, ASEAN unveiled the new Master Plan on ASEAN Connectivity [PDF]. The plan envisions a “seamlessly and comprehensively connected and integrated ASEAN” by 2025. It includes major region-wide infrastructure projects such as the ASEAN Highway Network, ASEAN Power Grid, and Trans-ASEAN Gas Pipeline, as well as an ASEAN telecommunications single market, a roll-on/roll-off shipping network, and integrated waterway networks. Australia recently welcomed these initiatives to enhance ASEAN connectivity.
There are two other connectivity proposals that can be viewed as alternatives to the BRI. India is collaborating with Japan under the Asia-Africa Growth Corridor proposal launched in 2017 to develop maritime connectivity across Africa, India, and Southeast Asia. Australia, India, Japan, and the United States are involved in another partnership, known as Quad 2.0 or the Indo-Pacific Partnership. This was revived during President Trump’s visit to Asia in November 2017. Unlike the BRI, which has identified six land corridors and one maritime corridor, the Asia-Africa Growth Corridor and the Indo-Japan Partnership proposals are still at the consultation stage.
In a recent report, the Asian Development Bank increased its earlier estimate for infrastructure financing needs in Asia to $1.7 trillion annually until 2030. There is, therefore, room for all.
Deepening Inter-Regional Economic Cooperation
The third prong of the Asia-Pacific response to rising U.S. protectionism is the promotion of interregional economic cooperation.
On March 5, 2018, the Philippines ratified its FTA with the European Free Trade Association. Several months earlier, Australia signed an FTA with Peru and Indonesia signed a comprehensive economic partnership agreement with Chile. Australia and New Zealand hope to conclude their FTAs with the European Union this year, and ASEAN hopes to resume its stalled region-to-region FTA negotiations with the European Union in the next few months. Singapore is negotiating an FTA with the Pacific Alliance, which comprises Chile, Colombia, Mexico, and Peru.
Among East Asian countries, South Korea signed FTAs in February with a number of Central American countries and is presently negotiating with the Eurasian Economic Union (EAEU) and Israel. Japan and the European Union are expected to finalize an economic partnership agreement this summer. China, for its part, recently embarked on a series of negotiations with the EAEU, Moldova, and Mauritius, to name a few.
An Evolving Regional Trade Architecture
Going forward, Asia-Pacific countries’ three-pronged response to a protectionist shift in the United States will most likely continue. What shape could the evolving regional trade architecture take?
Our CGE model suggests that instead of joining just one mega FTA—either the CPTPP or RCEP—countries would benefit from joining both. In mega FTAs, there is no so-called spaghetti bowl effect, or increased transaction costs from crisscrossing, complex, and regionally fragmented trade rules. For example, Vietnam’s real GDP would increase by either 1.5 percent from the CPTPP or 3.3 percent from RCEP, but if the country joins both, its real GDP would increase by 4.2 percent. This means that once the CPTPP is ratified, the CPTPP-only countries (Canada, Mexico, Peru, and Chile) should seek RCEP membership. Similarly, the RCEP-only countries (Cambodia, China, India, Indonesia, Laos, Myanmar, Philippines, South Korea, and Thailand) should seek CPTPP membership. This would result in a twenty-country bloc in the Asia-Pacific region with membership in both the CPTPP and the RCEP. The advantage of dual membership would be access to the huge and booming Chinese and Indian markets for CPTPP members and valuable exposure to high-quality trade rules for RCEP members. Additionally, countries would not have to choose sides between the Japan- and Australia-led CPTPP and the ASEAN- and China-led RCEP.
Given a choice, Asia-Pacific countries would have preferred the more open United States of the past. They cannot do anything about rising protectionism in the United States. They do, however, have a number of ways to respond. Perhaps President Trump has done more to promote regional and interregional cooperation in the Asia-Pacific than these countries would have done on their own.
Pradumna B. Rana is associate professor and coordinator of the International Political Economy Programme in the Centre for Multilateralism Studies at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. Xianbai Ji is a PhD candidate at RSIS holding the Nanyang President’s Graduate Scholarship.