Continental business: The region sees a raft of trade deals and disputes

While 2018 is unlikely to be remembered as a period of cooperation on global trade, the year did end on a note of cautious optimism for its advocates when, at the G20 summit in Buenos Aires, the US declared a 90-day truce in its 10-month-long trade war with China. Observers hoped that this ceasefire would endure beyond the proposed three-month timeline and lead to talks between the leaders of the world’s two largest economies. However, in May 2019 the US government hiked rates from 10% to 25% on $200bn worth of Chinese products and threatened increases on additional imports valued at $300bn.

In June 2018 more than 600 companies, including two of the largest retail companies in the US, Walmart and Costco, called for an end to the dispute. Later that same month, US President Donald Trump and his Chinese counterpart, President Xi Jinping, proceeded to meet on the sidelines of the G20 summit in Osaka, where they agreed to resume direct talks, as President Trump rescinded his latest ultimatum on further tariff hikes.

Regardless of its eventual outcome, the disruptive trade conflict has caused significant changes to business and politics in Asia Pacific. With a resolution yet to materialise as of mid-2019, one consequence has been the deepening of interdependence between the nations in the region. Indeed, two new multilateral trade deals have made it onto the agendas of a consortium of governments: the rebranded Comprehensive Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).

Words to Actions

Simmering tensions between the US and China came to a boil in February 2018, when the former imposed a 30% tariff on imports of all solar energy products manufactured in the latter economy. The following month, President Trump signed a memorandum imposing tariffs on Chinese goods related to aerospace, ICT and machinery. Restrictions were likewise introduced on Chinese investments in key technology sectors in the US, while the US filed a case before the World Trade Organisation (WTO) alleging that China had engaged in discriminatory licensing practices.

The US followed up by imposing a 25% tariff on all steel imports, excepting those manufactured in Argentina, Brazil, Australia and South Korea, as well as a 10% tariff on all aluminium imports not derived from Argentina or Australia. China retaliated in April 2018, imposing tariffs of 15-25% on 128 US products, including food and wine, recycled aluminium and various manufactured goods.

Continuing Tensions

Efforts to find a solution in May 2018 and trade talks in June proved unfruitful, and in July the US imposed its first set of tariffs specifically targeted at China, subjecting items on three separate lists to rates of either 10% or 25%. China responded by placing tariffs on US automobiles and agricultural products, and in August 2018 Chinese representatives to the WTO filed several different cases to request consultations with the US regarding photovoltaic materials and US energy subsidies, among other concerns.

By November 2018 the US had imposed tariffs on around $250bn worth of Chinese goods, while the value of exports to China subject to tariffs had reached $110bn. The same month, the US announced it was also considering imposing restrictions on exports of emerging technologies, including artificial intelligence, robotics and quantum computing, citing potential “dual-use” issues, as well as implications for national security. Although this was not specific to Chinese products, many observers saw this step within the context of the trade war.

In Buenos Aires, following a meeting with President Xi, President Trump postponed a further tariff hike, although the change did go into effect in May 2019, prompting China to allegedly target politically sensitive US exports, particularly those derived from important electoral swing states.

Our Country First

If any eventual US-China trade deal is to be successful, it is important that it addresses the US’ numerous concerns about the structure of the relationship between the two countries. The US administration’s main priorities include a reduction in its trade deficit with China; restrictions on Chinese investments in certain US technologies; an end to technology transfers as informal requirements for US companies to enter the Chinese market; increased protection of US intellectual property rights; and a greater allowance of US investments in the Chinese economy.

While the Trump administration has pushed hard to secure these changes, it is by no means the first government to do so. Indeed, its view reinforces long-standing objections from previous administrations and other national governments to the way that China does business. However, today these objections are supported by the wave of populism and protectionism that swept through the US and other countries, particularly after the 2008 global financial crisis. This trend claimed US support for the Trans-Pacific Partnership (TPP), a deal advocated by the administration of former US President Barack Obama to liberalise trade among a dozen countries located around the Pacific. Following his election, President Trump withdrew the US from the agreement, which was subsequently renegotiated as the CPTPP and signed by its 11 remaining supporters in Santiago, Chile in March 2018.

Version Two 

The CPTPP differs from the original deal in that it suspended 22 TPP clauses that were favoured by the US but opposed by other negotiators. The new agreement is also far more open to adding future members than the original. For example, the UK has closely studied joining the bloc after it leaves the EU. However, Australia’s minister of trade, Simon Birmingham, pointed out in February 2019 that the UK’s admission is unlikely, considering its distance from the Pacific.

Like the TPP, the CPTPP eliminated 98% of import tariffs among its member states. Even without the US, it covers approximately 500m people and 13% of the global economy by GDP, making it the third-largest trading bloc in the world, following the North American Free Trade Agreement – which remains in force, pending the ratification of the United States-Mexico-Canada Agreement – and the EU.

For Brunei Darussalam, Vietnam and Malaysia, the CPTPP promises a boost in trade. In August 2018 Malaysia’s Prime Minister Mahathir Mohamad said that the US withdrawal had resolved the contentious question of whether or not companies would be allowed to sue governments and created greater balance among the agreement’s members.

Mexico first ratified the agreement in June 2018, while Japan and Singapore followed suit in July. New Zealand, Canada, Australia and Vietnam became parties to the deal over the course of the year, and the CPTPP had secured enough members to enter into force by the end of 2018. Its remaining four signatories – Malaysia, Brunei Darussalam, Chile and Peru – had yet to ratify the pact as of July 2019.

However, other major exporters, such as Vietnam and Singapore, stand to benefit significantly from the agreement. Singapore’s minister of trade and industry, Chan Chun Sing, said that the CPTPP “sends a strong signal of our commitment to trade liberalisation and a rules-based trading system”. An October 2018 statement from the Vietnamese government said it marks an important step in combatting “the rise of protectionism in major economies”.

Regional Partnership 

The CPTPP is not the region’s only evolving free trade agreement (FTA). Negotiations have been ongoing since 2013 regarding the RCEP, an ASEAN-led initiative that includes all 10 members of the bloc, as well as the six Asia-Pacific states with which ASEAN currently has FTAs: Australia, China, India, Japan, South Korea and New Zealand. The RCEP thus brings together Asia’s largest economies, including China and India, which were left out of the CPTPP. Its prospective members are home to 3.4bn people and $49.5trn in GDP, according to data published by Nikkei in May 2019.

Given the size of the pact – and the diversity of the economic and political models used by its prospective member states – the RCEP’s negotiators have faced considerable obstacles to finalising a framework deal. As of November 2018 only seven of its proposed 18 chapters had been approved, leading representatives to postpone the negotiation deadline from end-2018 to end-2019, although officials have since expressed hope for negotiations to be completed by November 2019.

Even once the negotiations are concluded, several countries are likely to postpone their accession to the RCEP. A number of Asia-Pacific states have recently undergone political changes, with India, Thailand, Indonesia, Australia and the Philippines all holding elections in early 2019.

According to press reports, the primary cause of the delay is an issue central to the worldwide debate on the merits of trade: market access. A division over the concepts of managed and free trade exists between more developed economies, which tend to favour higher levels of trade liberalisation, and the emerging economies that are lobbying for greater protection of certain domestic industries. This dispute has turned a range of issues into sticking points in the RCEP process, including the size of tariff cuts, rules-of-origin clauses, the extent of service market liberalisation and details regarding investor protections. At the same time, there is clear political agreement among the 16 negotiators that the deal is an important step in reaffirming their respective commitments to a liberal, rules-based, regional trading order, often explicitly cited in opposition to rising protectionism in the US.

Resulting Impact 

The real effects of the CPTPP and the hypothetical consequences of the RCEP on Asian economies remain to be seen. The cumulative impacts of the US-China trade war are likewise unclear, though the dispute has already created significant potential for gains and losses in the economies of Asia Pacific. Sri Lanka and Myanmar, for example, may benefit from the relocation of manufacturing from China to avoid US tariffs. Indeed, in June 2018 Myanmar’s Directorate of Investment and Company Administration said that its Thilawa Special Economic Zone was becoming the focus of Chinese interest as the trade war escalated.

The automotive industries of Malaysia and Thailand may also benefit in the near term, as they ramp up their production of luxury cars for export to China and take market share from Chinese firms that produce auto parts. The garment industries in Vietnam and Sri Lanka are likely to be beneficiaries as well, given that China is a major exporter of textiles to the US. The US administration’s focus on Chinese ICT could be an additional boost for digital technology manufacturers in Malaysia and Thailand, where existing ICT clusters are well connected to global supply chains and able to benefit from trade agreements already in place.

Meanwhile, countries with comparatively poor logistics infrastructure and links to mainland Asia – such as the Philippines – may struggle to gain market share. The trade dispute, the CPTPP and the RCEP may also drive demand in lucrative regional markets such as Japan for food exported from Thailand, Indonesia and other countries that are currently in competition with US farmers.

US Rate Hikes

The impact of a trade slowdown on the US economy may alter the perspective of the US Federal Reserve regarding the target range for its benchmark interest rate, which has been trending steadily upwards since late 2015. Lower US rates tend to correlate with lower risk of depreciation for vulnerable currencies, such as the Sri Lankan rupee and Indonesian rupiah. On the other side of the dispute, the Chinese central bank has been accused of letting the yuan weaken to mitigate some of the losses resulting from the trade war, which makes the country’s exports more competitive at the expense of neighbours like Indonesia, which have long spoken of unfair competition caused by an undervalued Chinese currency.

Perhaps the most significant short- to medium-term consequence of the US-China trade dispute is the ongoing disruption to production processes by the reorganisation of supply chains. As the conflict continues and uncertainty persists regarding its possible duration, businesses and investors in the Asia Pacific region are increasingly likely to shift focus to the CPTPP and the RCEP as sources of stability within a turbulent global trading environment.