Life without TPP

When Donald Trump enters the Oval Office in January, it is very likely that the Trans-Pacific Partnership (TPP) will be among the first casualties in the new US Congress controlled by his Republican Party. Modern-day Republicans think free-trade agreements have hurt the US manufacturing sector and caused Americans to lose their jobs.

Such thinking is in stark contrast with the strategy of the outgoing Obama administration, which saw the TPP as a major component of its “pivot” to Asia. In a speech delivered in June, Mr Trump vilified the TPP as “the death blow for American manufacturing”, saying it would further open the US market to aggressive currency cheaters such as China.

In other anti-TPP tirades the president-elect said the TPP would make it easier for competitors to ship cheap subsidised goods into the United States and create a back door for China to supply auto parts to Mexico, endangering the American workforce by shifting more production bases to low-wage developing countries.

The TPP, which involves 12 Pacific Rim countries excluding China, is intended to eliminate barriers, such as tariffs, to free trade of goods and services. It also aims to ensure good labour standards and protect intellectual property patents together with copyrights. It must be ratified by at least six countries with an aggregate gross domestic product (GDP) of at least 85% of the total GDP of the 12 signatories. This will be impossible without approval by lawmakers in the United States, which accounts for 60% of the group’s GDP.

Thus it is no surprise that questions are being raised about the outlook for US-Asia trade relations under a Trump presidency. Export-oriented Asian countries need to rethink their trade policies with the US if Trump-led America embarks on anti-free trade, inward-looking policies to “make America great again”.

The Obama administration last week bowed to the inevitable, suspending the TPP ratification process and leaving it to the next administration, knowing that the current Congress was in no mood to commit a new president to the deal.

“However, the collapse of the TPP does not mean that global trade would in the future slow down,” said Kaewkamol Pitakdumrongkit, a Singapore-based assistant professor at the S Rajaratnam School of International Studies’ Centre for Multilateralism Studies.

“Companies are aspiring for trade mega-deals, as seen in their effort to push forward the Regional Comprehensive Economic Partnership (RCEP),” she told Asia Focus.

“And we should not forget the World Trade Organization as it has been able to make agreements on certain aspects of international trade. The future of global trade would be dependent on these deals.”

The scrapping of the TPP would be negative for Asian members including Malaysia, Vietnam and Japan, said Jimmy Koh, the head of global economics and markets research with United Overseas Bank. Asian exports, he noted, were already heavily dependent on the US even without the TPP.

In the event of increasing trade friction with the US, Vietnam, Malaysia, Taiwan, South Korea and Thailand (not a TPP member) would be particularly vulnerable given these countries’ trade exposure to the US and their high dependence on trade as a percentage of the economy, said Mr Koh

Japanese Prime Minster Shinzo Abe acknowledged that the TPP had “hit difficult circumstances” following Mr Trump’s election victory, while Singaporean Prime Minister Lee Hsien Loong said he was “disappointed” that the deal would not be approved. Both Japan and Singapore are part of the TPP. Malaysian Prime Minister Najib Razak admitted it was unlikely the TPP would take effect without the US.

Meanwhile, Peruvian President Pedro Pablo Kuczynski, who hosted the Asia Pacific Economic Cooperation (Apec) summit in Lima over the weekend, suggested participating countries should opt to forge a new trade deal, with China and Russia included. That could pave the way for the Regional Comprehensive Economic Partnership (RCEP) to emerge as a replacement for the TPP, or countries could forge closer ties with China to deepen intra-regional trade.

Deunden Nikomborirak, research director for economic governance with the Thailand Development Research Institute, said failure to ratify the TPP would affect Vietnam the most since it had become the main destination for Asian investors to set up garment factories, with low wages and anticipation of tax privileges under the TPP.

“Foreign direct investment going to Vietnam is likely to recede as a result of the TPP collapse, while Singapore is seen as the least vulnerable to a TPP failure since it has a free trade agreement with the US,” she told Asia Focus.

The RCEP could be an alternative, but regional geopolitical tensions in the South China Sea and growing animosity between China and Japan could act as impediments to a successful negotiation, she noted.

“The RCEP also has no champion to lead the deal as China is not fully open to financial, banking and services liberalisation and limits its scope on trade in goods,” said Dr Deunden. “Japan has the potential to be the RCEP champion due to its liberal approach to trade and services.”

However, Wallop Vittanakorn, a Thai businessman who owns garment factories in Vietnam, Laos and Cambodia, said the Vietnamese textile industry was not expected to be severely affected if the TPP fails.

Vietnam has signed a free trade agreement (FTA) with the European Union, which is expected to come into force in 2018. It could take advantage of tariff privileges under the EU pact to bolster its trade, said Mr Wallop, who is also the vice-chairman of the Federation of Thai Industries.

“Vietnam will eventually become a regional textile hub since garment production capacity in China will be reduced due to increasing minimum wages and workers’ demands for more labour rights,” said Mr Wallop.

According to Deutsche Bank, the implications of reduced trade with the US are enormous for Asia. Exports by Asian countries to the US, both direct and indirect, range from 11% to 21% of their total.

“Singapore, for instance, derives only 6% of its export earnings directly from the US, but acknowledging the existence of global production chains would reveal a more substantial US exposure of 14%,” said Deutsche Bank chief economist Taimur Baig.

“A 30% drop, for instance, in export earnings from the US, holding all other factors unchanged, would materially weaken most Asian economies.”

Hong Kong and Singapore run the risk of a sharp economic contraction, as annual export growth could fall at least 6%. A 2-3% reduction in Taiwan, Thailand and South Korea could lead to negative GDP growth next year.

Malaysia’s economic growth could be halved to around 2%, while the Philippines, despite its relatively high domestic orientation, could slow down to sub-5% growth. India and Indonesia are relatively resilient to US protectionist measures, although India’s vulnerability in services exports is considerable, given that 60% of its service exports go the US.

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