A US-less TPP leaves China to set Asia’s trade rules

Remaining signatories scramble for alternatives as Trump pulls out of trade pact

TAKASHI NAKANO, Asian Nikkei 

TOKYO — The remaining members of the Trans-Pacific Partnership are preparing for life without the U.S. following the country’s official withdrawal from the trade deal it once led. Though some members still hope the TPP can be salvaged, others recognize that the door is now open for China to take over as the rule-setter for trade in the region.

The TPP is a sweeping deal whose 12 signatory countries — including Japan, Australia, New Zealand, Singapore, Malaysia and Chile — collectively account for 40% of the world’s gross domestic product. Because of a provision requiring that signatories making up 85% of the membership’s GDP ratify the pact, U.S. participation is required for the TPP to come into effect.

 

Other options

 

Immediately after President Donald Trump inked the executive order withdrawing the U.S. from the pact, Australian Prime Minister Malcolm Turnbull reached out to his counterparts in Japan, Singapore and New Zealand. He made it clear that he considers implementing the partnership without the U.S. to be an option, saying, “certainly there is potential for China to join the TPP.”

Chilean Foreign Minister Heraldo Munoz has proposed holding a TPP ministerial meeting in March and inviting China and South Korea, another nonmember, to attend.

Australia and New Zealand are keen to maintain, as far as possible, the current TPP deal, which all 12 nations have already signed. Their thinking is that there would be no problem having China, a major Asian economic power, replace the U.S. China’s massive appetite for agricultural goods rivals that of the U.S., making it an attractive potential member for two countries looking to expand their farm exports.

Malaysia and Singapore, meanwhile, are leaning toward another trade pact currently under negotiation: the Regional Comprehensive Economic Partnership. Mustapa Mohamed, Malaysia’s minister for international trade and industry, said his country will shift focus to concluding the RCEP and negotiating bilateral free trade agreements. A spokesperson for the Singaporean Ministry of Trade and Industry said the city-state will take part in negotiations for other regional economic integration initiatives, including the RCEP.

Japan is one of the few TPP members hanging on to the faint hope that the U.S. under Trump will change its mind once more on the deal. In TPP negotiations, Japan successfully opened up the Malaysian and Vietnam markets while preserving its own tariffs on 19% of farm imports by category. The remaining 11 member states maintained tariffs on an average 1.5% of their agricultural imports, underscoring how advantageous the TPP is to Japan.

Being centered on the U.S. and Japan also gave the TPP the strategic significance of helping weaken the influence of China on the trade front. The Japanese Embassy in Washington is working hard to convince the new administration of the benefits of the TPP by contacting members of Trump’s staff.

Trump has dissolved the solidarity among TPP member states almost overnight. Yet the deal itself remains. The massive 30-chapter document does not contain a provision for a participating country to leave the pact before the TPP takes effect. So while Trump has made his unilateral decision to withdraw, the U.S.’s exit is not necessarily valid based on the rules of the TPP. This means there is the possibility that in four years, if Trump is replaced by a new president who proceeds to ratify the pact, the TPP will finally come into force.

On the other hand, the TPP contains no provision for admitting new members before the pact has become effective. So while Australia may want China to join, it is not clear what procedures that would require. Changing the members of the TPP would thus likely require the creation of a new trade pact based on the text of the current deal. And because such a change would affect the balance of power, many experts think that simply swapping one country for another will not work.

What now?

The most likely scenario now is that the rules of the RCEP, the region’s most expansive trade pact, will become the standard for trade in Asia.

Some members of the Association of Southeast Asian Nations are calling for the RCEP to be concluded by the end of this year, which marks the 50th anniversary of the establishment of ASEAN. As ASEAN nations account for 10 of the 16 countries participating in the RCEP negotiations, their push makes such a time frame increasingly likely.

Tariff elimination and deregulation under the RCEP are expected to be less drastic than under the TPP, a point that likely appeals to countries such as India that are unwilling to rapidly liberalize their markets. Even so, the China-led pact, whose members account for half of the world’s population, should be highly effective in invigorating regional trade.

Seven of the 12 TPP members are also participating in RCEP negotiations. As such, the RCEP somewhat resembles Australia’s proposed TPP, in which China replaces the U.S.

Another scenario is simply the end of the era of multilateral trade pacts and a return to bilateral free trade agreements. A large number of bilateral FTAs have already been concluded, and going forward, new ones will likely be ambitious deals aiming for the same level of liberalization as under the TPP. Signing many such FTAs would give a country a serious growth boost. Conversely, countries like Japan that balk at opening up certain sectors could suffer if they lag behind in sealing these kinds of deals.

With the end of the U.S.-led trade order in Asia, challenges such as tighter regulations for state-run companies and the promotion of e-commerce will likely be put on the back burner as China’s influence grows.

But it is far from certain that such a development would favor the Chinese economy. Yorizumi Watanabe, a professor at Keio University, noted that advocates of a regional economic partnership in China will lose some steam now that the TPP has collapsed and there is no pressure to produce its own competing deal.

The Chinese and ASEAN economies are losing steam. For them, free trade pacts can act as a lever to raise growth. If the momentum for inking these deals disappears, it will slowly but surely tell on the Asian economy as a whole.

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