Asian trade and investment liberalisation in the Trump era

Trade and investment liberalisation in Asia

Opening economies to international trade and investment has played a key role in the development of Asia’s GVCs. Some countries have unilaterally opened their economies. For example, Hong Kong and Singapore have the world’s most open economies in contrast to most of their trading partners. This is one reason why they are Asia's most advanced economies. China and indeed most Asian economies have made partial openings of their economies through special economic zones. They can be an effective way of attracting international business and starting liberalisation, but such zones also result in unbalanced, distorted economies.

Countries like China have liberalised their trade and investment as they joined the World Trade Organisation (China joined in 2001), while longer term members of the WTO/GATT have opened markets during multilateral trade deals like the Uruguay Round. And India, Indonesia, Korea and Thailand liberalised trade and investment in response to financial crises, often under pressure from the IMF.

Regional integration has also played a role. The Southeast Asian countries of ASEAN signed an ASEAN Free Trade Area agreement (AFTA) in 1992, and this is now being transformed into an “ASEAN Economic Community”. The AFTA was also enhanced through a series of separate FTAs between ASEAN and six other regional countries, namely China, Japan, Korea, Australia, India and New Zealand. For its part, Taiwan has been virtually shut out of most Asian FTAs because of pressure from China, although Taiwan does have an FTA with Singapore, New Zealand, and in 2010 it did sign the Economic Cooperation Framework Agreement with China. Taiwan is also pursuing a possible FTA with India.

Despite the apparent great success of Asia's trade and investment policies, most Asian countries have relatively closed economies, according to the OECD's FDI Regulatory Restrictiveness Index. Indeed, only Cambodia and Japan score better than the average for the advanced OECD countries. And the Philippines, Myanmar, China, Indonesia and India are highly closed to foreign investment, the key driver of GVCs.

In other words, there is much work that Asia needs to do to open its economies to trade and investment, and make the most of GVCs. In recent years, two separate sets of multilateral trade talks have offered the hope of a new wave of trade and liberalisation in Asia, namely the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

Trans-Pacific Partnership

The 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. On the presidential campaign trail Trump declared the TPP “another disaster done and pushed by special interests who want to rape our country".

No trade and investment deal is perfect. They are the product of compromises between participating governments. But this is a great pity. The TPP was very much the right agreement for today’s world of GVCs 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 was economically very important. Its signatories were 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.

While all countries including the US stood to gain substantially from the TPP, countries like Vietnam, Malaysia and Japan stood to gain the most through their promised market opening. And above all, the TPP was an important geopolitical initiative that would have enabled the US to set the standards for trade, investment and GVCs in 21st century Asia.

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.

Trump trade policy

During the election campaign and before his inauguration, Donald Trump had much to say about US trade and investment with Asia. He accused China of raping the US. He threatened to label China a currency manipulator, to levy an import tariff of 45 per cent on American imports from China, and to penalise companies that locate manufacturing investments in China rather than the US. But Trump’s rhetoric on trade policy has been evolving and softening from these defiantly protectionist messages. He is now emphasising his support for both free and fair trade.

According to the President’s 2017 Trade Policy Agenda, America has not benefited from its trade deals over the past couple of decades due to the lack of reciprocity in trading relations. He complains that many countries in particular have high trade barriers while their companies can export freely to the US. Indeed, there is a widespread consensus that China has been flouting world trade rules, stealing US intellectual property, conducting state-sponsored industrial espionage, buying up US companies while keeping its own markets closed, and discriminating against American companies based in China. In a retreat from a practice from the Cold War, the Trade Policy Agenda indicates that US will no longer turn a blind eye to unfair trade practices that disadvantage Americans for "putative geopolitical advantage", something which make Japan and Korea shudder.

The US's trade deficit is the lightning rod for Donald Trump. Indeed, the US has had a trade deficit since 1975, and today has the world’s largest trade deficit, some $763 billion in 2016. The US's trade deficit with China of $347 billion represents almost half, with Japan ($69 billion) and Korea ($28 billion) being among the other leading contributors.

Trump would now like US trade policy to focus on bilateral rather than multilateral deals. Through bilateral trade diplomacy an aggressive hegemon can extract maximum benefits from its relatively weaker partner, and can also unilaterally sanction any partner that causes it displeasure, without having to bother with international dispute settlement mechanisms and the rule of law. Trump clearly has China, Japan and Korea in his sights. The new Trade Policy Agenda highlighted the tripling of the US’s trade deficit with China since it joined the WTO, and the doubling of its trade deficit with Korea following their free trade agreement.

On the occasion of their summit meeting in February 2017, Trump and Japanese Prime Minister Shinzo Abe agreed to establish a new framework for economic dialogue, which is expected to lead to a bilateral free trade agreement. And when Trump met Chinese President Xi Jinping in April 2017, trade was also top of the agenda. Xi was very keen to avoid a trade war with its biggest trading partner as the two sides agreed to a rushed 100-day negotiation over some of their thorniest trade and investment disputes. And following the May 2017 presidential elections in Korea, Trump may well push to renegotiate their FTA.

With his emphasis on bilateral deals, Trump is hardly likely to be interested in FTAs with smaller Southeast Asian countries which were TPP signatories, namely Brunei, Malaysia and Vietnam, and countries like Indonesia, the Philippines and Thailand that were lining up to be second phase TPP members. In short, Southeast Asia, and above all US relations with the region, could be the big loser from Trump’s TPP debacle and its new bilateral approach to trade policy.

At the same time, there remains a strong protectionist undercurrent in the Trump administration, notably through his ‘buy American, hire American’ slogan, and his bullying of companies to invest in the US rather than Mexico or China. And Trump has threatened to disregard World Trade Organisation dispute settlement rulings.

Regional Comprehensive Economic Partnership

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). 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 create one agreement building on 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.

Asia’s lack of leadership for trade and investment liberalisation

Asia is in desperate need of a new wave of trade and investment liberalisation to dynamise its GVCs as a motor of development. But the US’s abandonment of the TPP and adoption of a bilateral rather than multilateral approach means a great loss of leadership in trade and investment liberalisation, and we can expect trade relations between the US and Asia’s leading countries to be fractious. While many assume that China will be able to step into the empty gap left by the US, there is no evidence whatsoever of Chinese leadership in trade and investment diplomacy. Like Japan and Korea before it, China practices mercantilism, as promotes exports and protects its domestic market from imports.