The Trans-Pacific Partnership (TPP) was supposed to be the centrepiece of the next stage of globalisation. Instead, it’s American electoral roadkill, run over by the rumbling truck of the U.S. presidency-in-waiting of Donald Trump.
But Asia won’t be shedding any tears for the TPP. In particular, China – which was conspicuously left out of the TPP – is already filling the void.
The end of the TPP
Negotiations for the TPP started in 2006. It was signed by all 12 participating countries, including the U.S., Japan, Singapore, Malaysia and Vietnam, this February. (It was not yet implemented, though, pending ratification by some countries, including the U.S.) The deal was meant to strengthen economic ties between member countries, reduce tariffs, foster trade and support economic growth. It also included regulations on intellectual property rights, state owned enterprises, competition and the environment.
All together, these 12 countries account for approximately 40 percent of world GDP and 25 percent of global exports. The World Bank estimates the agreement would have raised GDP by an average of 1.1 percent in each country by 2030.
But Trump doesn’t think much of the deal. At one point during his presidential campaign, 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.” Shortly after winning the U.S. presidential election, Trump announced that one of the first things he will do as president is withdraw from the TPP. Without U.S. involvement, the deal is dead.
Trump’s “America first” rhetoric suggests that the U.S. may become more isolationist, especially with respect to trade deals. Bringing jobs back to the U.S. – generally from parts of the world where labour costs are lower – was a centrepiece of his presidential campaign.
China, though, sees opportunity where Donald Trump sees danger. 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 will be happy to replace the U.S. in any potential trade deals. And that will likely speed up the ongoing shift of the global political and economic centre, from west to east.
How will this happen? Here are three deals that could fill the void left by the TPP.
1. Regional Comprehensive Economic Partnership (RCEP)
RCEP negotiations started in November 2012 as a way to harmonise and streamline the trade deals that ASEAN (Association of South East Asian Nations) has with free trade partners India, China, Japan, South Korea, Australia and New Zealand. (ASEAN is composed of Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam.)
The deal is still being negotiated with the next round of negotiations scheduled for next week in Jakarta, Indonesia.
If the deal happens, RCEP will be a mega trade deal. The 16 countries involved account for more than a quarter of global trade and a quarter of global GDP. Plus, with China, India and Indonesia involved, it would cover almost half of the world’s population.
The big missing piece is the U.S., which doesn’t have a free trade agreement with ASEAN. In theory, it could join the deal at a later point.
But the U.S. may never become party to the deal because RCEP standards for trade, labour practices and the environment aren’t up to American expectations of a trade deal – standards which some people say was one of the reasons behind the complexity of the TPP.
The RCEP will be inclusive and very big, but the depth of the agreement will fall short of that of the TPP. RCEP 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 it would brush over key issues including 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.
2. Free Trade Area of the Asia-Pacific (FTAAP)
Proposed by the U.S. in 2006, FTAAP would involve the 21 APEC member countries. China also made a push for the agreement at an APEC summit in 2014 (likely in response to the ongoing TPP negotiations, which excluded China).
APEC (Asia-Pacific Economic Cooperation) focuses on economic issues involving Pacific Rim countries. That means the FTAAP would include Japan, Australia, Hong Kong, Singapore, as well as China and the U.S. Its ultimate goal would be to harmonise all the regional and bilateral trade agreements that already exist between APEC members – often called a “spaghetti bowl” or “noodle bowl” of trade agreements.
If it were to happen, FTAAP would be the trade deal to end all trade deals. It would encompass the world’s two biggest economies (the U.S. and China), the world’s “factory” in China and Southeast Asia, an enormous base of natural resources, and the world’s biggest consumer economy.
According to a 2014 study, the FTAAP could result in income gains for member nations of nearly US$2 trillion by 2025 – which would be nearly 2 percent of world GDP in 2025.
FTAAP is TPP on steroids. If President-elect Trump – and the people who voted him into office – didn’t like TPP, they certainly won’t like FTAAP. So it’s unlikely to happen, at least with American participation, for some years.
3. Bilateral trade agreements… or something else
Even though he wants to cancel the TPP, Trump has not written off trade with Asia. Instead, he said he would look into doing more bilateral (that is, involving only two countries, instead of multiple) trade deals with Asian countries.
Part of this is that Trump wants to “repatriate” manufacturing jobs to the U.S. – to help “Make America Great Again,” in the words of his campaign slogan. American companies that currently manufacture elsewhere – at a lower cost than in the U.S. – would need to be persuaded to bring jobs back. If this happens, one of the biggest losers – via higher prices – will be the American consumer, which has been the biggest beneficiary of lower prices thanks to the globalisation of production.
Most likely is that Trump will try to negotiate a new trade deal, or a series of trade deals, with Asian countries, maybe even China. In the meantime, much of Asia stands to lose from Trump’s possible policies. We wrote about this in a free report that’s available here.