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Trade is dead; long live trade

The United States has made its decision and as a result, it looks like the end of the road for the Trans-Pacific Partnership (TPP).

While this is a setback and lost opportunity, especially for Vietnam and Malaysia which were expected to be the biggest beneficiaries from TPP, it is not the end for multilateral agreements.

" While this is a setback and lost opportunity… it is not the end for multilateral agreements."
Khoon Goh, Head of Asia Research, ANZ

There is an alternative in the form of the Regional Comprehensive Economic Partnership (RCEP), which should be the main focus for the region.

The economic benefits of RCEP may not be as large in aggregate compared to TPP, but it is likely to be the superior outcome for Asia. The inclusion of China and India, the two most populous countries in the world and two of the fastest growing economies, will help to make up for the loss of the US.

The biggest winners are clearly those countries not part of the TPP – Thailand and South Korea in particular. But the smaller Mekong economies will also be winners from RCEP as they stand to benefit from differentiated treatment and technical assistance.

Perhaps most importantly is that a successful conclusion to RCEP will send the signal Asia remains committed to multilateralism and the benefits of free trade.

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NO SURPRISE

Donald Trump’s decision to bail on the TPP should not come as a surprise as the President has been openly critical of multilateral agreements, preferring to do bilateral deals.

There has been talk the remaining TPP countries could ratify the deal and leave the option open for the US to join at a later stage. However, according to the final provisions of the TPP, the agreement can only go ahead if at least six of the 12 original members, which together account for 85 per cent of the combined GDP as of 2013, ratify the agreement.

Given the US alone accounts for 60 per cent of the GDP of the 12 countries in 2013 it is difficult to see the TPP progressing.

It’s unlikely the collapse will negatively impact the Asian region’s trade prospects (as opposed to starting a trade war, which will be a different story altogether). The TPP had not been in force and many countries in the TPP have existing free trade agreements (FTA) which will continue to operate in the meantime.

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It was the US which stood to benefit the most from the TPP in real dollar terms, at $US131 billion by 2030. In terms of the benefits, Vietnam and Malaysia were expected to be the biggest beneficiaries at 8.1 per cent and 7.6 per cent of GDP, respectively.

Not surprisingly, the winners from TPP’s demise are those countries outside of the agreement. Members within an FTA tend to gain, while those outside it could see trade and investment diverted away, especially if they are in close geographical proximity and have similar economic structures.

For Thailand, which could have seen a loss of 0.8 per cent of GDP, the US move would have been welcomed.

The coverage the RCEP provides also pales against the TPP. The TPP had been held up as the ‘gold standard’ or ‘21st Century’ FTA because it not only focuses on new market access in goods and services, but also spread good regulatory practices.

It set high standards in labour and environmental rules, food safety, competition policy, state-owned enterprises, government procurement, regulation of intellectual property, rules for the internet and the digital economy.

AGGREGATE GAINS

The TPP had deeper commitments than the RCEP in two aspects. First, in the core issues covered by both, the TPP had deeper commitments – faster and more comprehensive liberalisation of trade. Second, the TPP covered more areas than the RCEP in a bid to substantially reduce barriers to trade.

Although the gains from RCEP will not be as large in aggregate compared to TPP, it’s likely the RCEP has a higher chance of success.

The principal aim of the RCEP is to bridge two existing and long-standing proposals by adopting an open ascension scheme: the East Asia Free Trade Agreement which focuses on ASEAN plus China, Japan, and South Korea; and the Comprehensive Economic Partnership which added three economies, Australia, New Zealand, and India to ASEAN.

In our view, it is relatively easier for smaller groupings of ‘like-minded’ economies to negotiate trade outcomes than a full multilateral trade round, especially when there are already existing agreements in place between members.

The RCEP is less ambitious in terms of trade issues covered and utilises a clear step-by-step approach.

Furthermore, unlike TPP, which applies the same standards across all countries, RCEP has differential treatment for developing countries and provides for development assistance through economic and technical cooperation provisions. These make it easier for the developing Frontier Mekong countries to join.

SUPERIOR OUTCOME

With the US pulling out of TPP, it is time to move on and focus on getting the RCEP concluded as quickly as possible.

The economic benefits of RCEP may not be as large but it is likely to be the superior outcome for Asia. The inclusion of China and India, the two most populous countries in the world and two of the fastest growing economies, help to make up for the loss of the US.

While we can rue Vietnam and Malaysia’s lost opportunity from the TPP, both will benefit from greater access to the Chinese market.

Khoon Goh Is Head of Asia Research at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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