Trade liberalisation: down but not out

Sunday - 18/02/2018 16:13
Efforts by some signatories of the Trans-Pacific Partnership (TPP) agreement to save the trade pact following the election of Donald Trump as the next president of the US appear futile. Mr Trump confirmed on November 21st that he would withdraw his country from the TPP.
Trade liberalisation: down but not out
The decision has cast a shadow over the prospects for trade liberalisation. The Economist Intelligence Unit is sceptical about speculation that Japan or China might take on the free-trade mantle. We expect a proliferation of smaller trade deals, which could eventually lead to a new region-wide agreement.
The effects of the collapse of the TPP agreement will be far-reaching—a fact that is not lost on some signatories, who are keen to find ways to revive it. At a summit organised by the Asia-Pacific Economic Cooperation (APEC) forum on November 17th-19th, Malaysia, Singapore, New Zealand and Peru indicated that they would press ahead and ratify the pact. Japan has already won lower-house approval for the enabling legislation. Many of those involved in the negotiations lauded the pact as setting the "gold standard" for other trade deals.
The roots of the TPP go back to the P4 group, which comprised just Brunei, Chile, New Zealand and Singapore. This later expanded to include the US, Canada, Australia, Malaysia, Mexico, Peru, Vietnam and Japan, with the framework widening to include provisions aimed at strengthening safeguards for intellectual property, the environment and labour rights.
For the US, the pact became the economic centrepiece of its pivot towards Asia. Furthermore, the exclusion of China from the TPP allowed the US administration to help to set the rules of trade engagement in the region, as well as Asia's wider economic agenda.
Holding out
At the APEC summit, the prime minister of New Zealand, John Key, outlined three possible scenarios for the TPP to come into force, but after Mr Trump's statement on November 21st, only one of these options appears still to be available: attempting to carve out a less ambitious pact among some of the remaining signatories, without the US.
Mr Key estimates that such a pact would bring his country two-thirds of the benefits it would have received from the TPP. New Zealand is keen to push ahead with ratification, partly because it does not have existing trade agreements with countries such as Canada, Mexico and Peru. Other signatories are in similar positions.
However, a deal without the US would require like-minded signatories go back to the negotiating table. There is speculation that Japan, the second-largest economy in the TPP, would lead the push.
Its government may well take up the challenge, but owing to its historic reluctance to open up its domestic markets and an absence of Japanese counterparts to the charismatic US trade representative, Michael Froman, it will need to work overtime to build up its credentials as an advocate of free trade and to convince its partners the depth of its commitment.
Realistically, the prospects of a TPP without the US are slim, and a renegotiated deal—if it were achieved—would probably be much shallower that the existing agreement.
Can Asia be RCEPed?
If the TPP cannot be salvaged in any configuration, is there an alternative? Much has been written about another megaregional trade deal—the Regional Comprehensive Economic Partnership (RCEP), a proposed free-trade agreement (FTA) between the ten members of the Association of South-East Asian Nations (ASEAN) and six other countries with which ASEAN has existing bilateral FTAs: Japan, China, South Korea, India, New Zealand and Australia.
However, the RCEP is considerably less ambitious than the TPP, covering tariff liberalisation for goods and services, as well as non-tariff barriers. The eventual deal will not include provisions to harmonise regulatory standards on the environment or labour markets.
Although China has been a member of this proposed trade pact since negotiations began in 2012, it is not the main driving force and has done little to steer the group towards meeting key deadlines.
Negotiators failed to meet an initial deadline of end-2015 to conclude RCEP talks, and are now set to miss an extended deadline of end-2016. The issues under discussion remain notoriously complex, and consensus has been difficult to achieve among all 16 countries.
For instance, the grouping has yet to decide on whether services should be included in a single comprehensive agreement or be considered separately. Given entrenched differences, progress is likely to be slow, and it would not be a surprise if talks take as long as those for the TPP, which lasted ten years.
Pathways to something bigger
With the US turning away from trade liberalisation, China now has the opportunity to help set the rules of engagement for south-south trade, at least.
Recent comments from the Chinese government suggest that it wants to push ahead to promote an FTA of the Asia-Pacific (FTAAP), to which the 21-member APEC aspires.
Nevertheless, given that much of its domestic market remains closed to foreign competition, some countries might doubt the depth of China's commitment to trade and investment liberalisation.
In addition, the ratification of the TPP and RCEP, with their overlapping membership, would have provided a strong foundation from which to build an FTAAP.
The collapse of the TPP will obliterate one pathway, leaving just the RCEP in place. As things stand, plans to create an FTAAP are in their infancy, and a study on its feasibility has only just been delivered to APEC at the November summit.

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