The Trans-Pacific Partnership (TPP) trade deal was supposed to be a boost for Singapore’s slowing economy. Instead, it’s American electoral roadkill, run over by the rumbling lorry that is the U.S. presidency-in-waiting of Donald Trump.
Donald Trump is bad news for global trade, especially in Asia. But while the U.S. is looking like it’s going to pull away, China is taking a greater leadership role in regional economic integration. And there are a number of free trade deals on the Asia-Pacific horizon. As we’ve written before, this part of the world isn’t turning its back on globalisation.
This might mean that the collapse of the TPP is a missed opportunity, but not a catastrophe for Singapore’s economy. (And some markets might actually do well… click here to find out more about one of the most attractive stock markets in Asia.)
The TPP’s slow death
Singapore was one of the four initiators of the TPP trade agreement. Singapore, Brunei, Chile and New Zealand came together to negotiate the Trans-Pacific Strategic Economic Partnership in 2006. Two years later, the U.S., Australia and Peru joined negotiations. By February of this year, 12 countries had signed the trade agreement.
The TPP was intended to further integrate participating economies. It was designed to reduce tariffs, foster trade and support economic growth. It also included regulations on intellectual property rights, state-owned enterprises, competition and the environment.
The 12 countries that were to be part of the TPP make up about 40% of world GDP. These countries also account for 25% of global exports. The agreement could have added 1.1% to each country’s GDP by 2030, as estimated by The World Bank.
For Singapore, the TPP participants represent a large market. They accounted for 30% of its total trade in goods in 2013. Thirty percent of foreign direct investment in Singapore also comes from TPP members.
Throughout his campaign to become the American president, Donald Trump railed against the deal in his presidential bid. On the campaign trail, he said, “the TPP is a horrible deal… It’s a deal that was designed for China to come in, as they always do, through the back door and totally take advantage of everyone.” (And he may be right, as we wrote here). Trump said he will begin his administration by serving notice of U.S. withdrawal from the trade deal. And no America means no TPP.
Trump’s “America first” rhetoric suggests that the country will turn towards isolationism. Large free trade deals involving America are on shaky ground. He campaigned on the promise of bringing jobs back to the U.S. from parts of the world where labour is cheap. On November 6 at a campaign rally in Florida, Donald Trump criticised Singapore, and other Asian countries, for stealing American job opportunities. If Trump’s words turn to action, Singapore should look towards other free trade agreements for an economic boost.
Singapore’s existing – and potential – trade deals
With 21 free trade agreements to date, Singapore’s economy has boomed from decades of trade liberalisation. Trade through Singapore accounted for 326% of the country’s GDP in 2015. We recently wrote about the important role trade plays in Singapore’s economy. And as a trans-shipment hub, Singapore relies on international supply and manufacturing integration to help boost its economy.
However, renegotiating America’s involvement in the TPP may not directly affect Singaporean exports. Singapore already has free trade agreements with 9 of the 11 other TPP countries, including the U.S.
But ultimately, trade agreements led by China may provide more immediate benefits to Singapore’s economy. Chinese president Xi Jinping recently said that “China will not shut the door to the outside world but will open it even wider.”
This suggests that China may wind up taking America’s place in future trade agreements. If China takes on a greater leadership role in free trade, the slow and inexorable shift of economic and political power from west, to east, will only accelerate.
How would this play out? Let’s look at three deals that could stand in for the TPP.
1/ Regional Comprehensive Economic Partnership (RCEP)
Beginning this December, chief negotiators from 16 Asia-Pacific countries landed in Jakarta, Indonesia for the next round of RCEP negotiations.
RCEP negotiations started in November 2012. The deal intends to sync and streamline existing trade deals between ASEAN (Association of South East Asian Nations) and its free trade partners. ASEAN includes Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam. The bloc’s free trade partners are India, China, Japan, South Korea, Australia and New Zealand.
Backed by China, the RCEP will be a massive trade deal for ASEAN members and their trade partners. On its own, ASEAN accounts for a sixth of the world’s economy. It also has a favourable demographic dividend, ensuring robust economic growth for some time.
Together, RCEP countries share more than one fourth of global trade and a fourth of global GDP. And with China, India and Indonesia participating in RCEP, the trade agreement includes half the world’s population.
The U.S. doesn’t have a free trade agreement with ASEAN. And it isn’t included in the RCEP either (although it could – in theory – join the deal later).
However, U.S. participation in RCEP is unlikely. The deal doesn’t meet U.S. standards for trade, labour practices and environmental protection. These standards were present in the TPP and some argue they were the reason the TPP was so complex.
But the complexity of the TPP is what made the trade agreement so different.
The RCEP maintains free trade agreement “status-quo.” It would eliminate, or reduce, tariffs on thousands of goods and services, and cover investment rules, economic cooperation and intellectual property rights. But unlike the TPP, the RCEP fails to address key issues such as state-owned enterprises, the environment and the digital economy.
Of the three deals that we’ll talk about here, RCEP looks most likely to eventually go into effect. And in light of the recent U.S. presidential election, a senior fellow at the Brookings Institution in Washington says, “countries [like Singapore] have realised very quickly that (RCEP) is the only major Asia trade deal on the table.”
2/ Free Trade Area of the Asia-Pacific (FTAAP)
The FTAAP is a trade deal linking Pacific Rim economies from China to Chile, including the U.S. The deal was initiated by the U.S. in 2006. The FTAAP includes 21 APEC (Asia-Pacific Economic Cooperation) member countries, including China. China championed the agreement at a 2014 APEC summit. This move was most likely a response to ongoing TPP negotiations, which excluded China.
APEC is a regional economic forum that promotes free trade between Asia-Pacific countries. By including all APEC members, the FTAAP would include major economic players such as Japan, Hong Kong, Singapore, as well as China and the U.S. Numerous regional and bilateral free trade agreements already exist between APEC members. The FTAAP aims to harmonise the group’s “spaghetti bowl” or “noodle bowl” of free trade agreements.
The FTAAP could be one of the biggest free trade deals in history. First, it would encompass the world’s two largest economies, the U.S. and China. Second, it would include the world’s “factory” in China and Southeast Asia. Third, it would represent the world’s biggest consumer economy. And finally, FTAAP countries collectively possess a vast base of natural resources.
According to a 2014 study, the FTAAP could result in income gains for member nations of nearly $2 trillion dollars by 2025 – representing almost 2% of world GDP in 2025.
The FTAAP is much larger than the TPP. President-elect Trump didn’t like the TPP. And the people who voted him into office weren’t fans of it either. So, it seems safe to assume that the FTAAP won’t be popular in America at this time. Without U.S. participation, global gains from the FTAAP will be delayed for some years.
3/ A proliferation of bilateral and new trade agreements
Even if the TPP dies, free trade will carry on. With Trump in power, the U.S. may enter into more bilateral trade agreements (involving only two countries), rather than multilateral trade agreements (involving more than two).
Through new agreements, Trump hopes to “repatriate” manufacturing jobs to the U.S. He wants to implement policies and negotiate trade deals that encourage manufacturing companies to provide jobs to Americans rather than employing low-cost labour abroad.
If Trump implements his policies, Americans will actually lose the most. Globalisation of production brought American consumers very low prices. These will rise once production returns to American soil. Although low energy prices from Trump’s policies may offset some of the costs.
Countries like Singapore can expect Trump to either negotiate a new trade deal or a series of trade deals with Asian countries. China may even be included in trade agreements.
But in the meantime, Singapore, along with the rest of Asia stands to lose.
But that doesn’t mean there aren’t fantastic investment opportunities in Asia at the moment. There are three Chinese companies in particular that are poised for tremendous growth.
You can learn all about them – and the best way to invest in the Chinese market – by clicking here.