Asia wants to set the pace on trade, but cannot agree on how

WASHINGTON — Mr Donald Trump’s presidency was less than 100 hours old when he sat down in the Oval Office, signed an executive order and made China very happy. The order instructed United States officials to withdraw forever from the Trans-Pacific Partnership, a giant free trade area that would have spanned the world’s biggest ocean, covering Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.

With a stroke of his pen, Mr Trump wiped out 10 years of work on the so-called “Pacific” route to regional trade integration, anchored on the US market. At the same time, he effectively revitalised a separate “Asian” track, centred on China, in the form of another proposed trade area: The Regional Comprehensive Economic Partnership.

RCEP builds on existing trade deals between the 10 countries in the Association of South-east Asian Nations (Asean) and six of their more or less distant neighbours: Japan, China, South Korea, Australia, New Zealand and India.

Trade economists dream that Asia and the Americas will one day join in a single deal so large it could shape trade around the world. Whichever gets established first — be it the TPP, RCEP — it is likely to form the seed for this broader zone.

At stake, therefore, is nothing less than the design of a blueprint for the future global trading system.

The result has been a period of intense manoeuvring, as China pushes for rapid completion of RCEP; Japan and Australia try to rescue the TPP or remake RCEP as a version of the TPP; and the rest of Asia looks for a regional deal it can sign to offset the protectionist mode taking hold in the US.

“The world is in dire need of a positive signal,” the foreign ministry of the Philippines told the Financial Times in March. The country, as chair of Asean this year, is crucial to completing RCEP.

“Asia, especially Asean and the larger east Asian region, should take leadership in continuing economic integration amid a backdrop of anaemic growth and anti-free trade rhetoric in other parts of the world.”

The starkly different consequences of the Pacific and Asian tracks are shown in estimates prepared by academics Peter Petri and Michael Plummer. Under the TPP, the US economy was forecast to be 0.5 per cent larger by 2030 — an additional US$131 billion (S$183 billion) in output — thanks to additional trade. China’s economy would be US$18 billion or 0.1 per cent smaller, as trade diverted to the US-led bloc.

In their estimates of RCEP, the results are reversed. China’s economy would expand by an extra 1.4 per cent — an additional US$250 billion in output — while the US economy would be slightly smaller thanks to the diversion of trade. Mr Petri says that while RCEP has become somewhat less ambitious since he made the estimates, China still stands to benefit while the US would lose out.

The choice of track also affects the ultimate possible gains, because TPP was a more ambitious deal, setting rules in areas such as intellectual property. “I think the route you take does make a difference,” says Mr Petri, a professor of international finance at Brandeis University.

The TPP route leads to bigger ultimate gains in his simulations because of the benefit from China eventually signing up to its strict rules.

“Similarly, if RCEP is the route then there is a question about whether it will ever be in the interests of the United States to join,” says Mr Petri, given its relatively weaker provisions. This difference between the deals explains much of the diplomacy and posturing around the region.

China wants to complete RCEP by the end of the year and is positioning itself as leader of the group.

“China stands for concluding open, transparent and win-win regional free trade arrangements and opposes forming exclusive groups that are fragmented in nature,” declared President Xi Jinping in his landmark Davos speech in January 2017.

Japan and Australia, meanwhile, are aiming for a much deeper RCEP deal, covering rules in areas such as e-commerce and government procurement, even if that means it takes longer to conclude. The latest round of talks in Kobe, Japan, made only modest progress.

Tokyo and Canberra are also reviving the idea of bringing TPP into effect with only 11 members, minus the US.

Doing so is likely to involve a difficult renegotiation, but it holds open the possibility of the US rejoining in the future and makes RCEP less of an all-or-nothing proposition since the “higher quality” Pacific track will remain in existence.

After the disappointment of TPP, other countries in the region mainly want a deal they can sign in order to boost their economic growth.

“Vietnam believes that when (RCEP) comes into effect, it will create a new momentum for economic and commercial co-operation among countries, thus contributing to the integration of the Asia-Pacific region,” said the foreign ministry in Hanoi.

The exception is India, which is nervous about exposing its manufacturing sector to Chinese competition, but envisages opportunities for services exports if other countries also open their markets.

With Mr Trump actively opposed to multilateral trade deals, and the European Union making heavy weather of agreements even with close partners such as Canada, Asia is for the first time setting the pace on trade.

“RCEP is important for symbolic reasons. Asean wants it for their 50th anniversary this year; China wants it to begin showing leadership in trade,” says Mr Petri. “RCEP would be the most ambitious free trade area that developing countries have ever negotiated.” FINANCIAL TIMES