While 2018 is unlikely to earn the description of a time of significant global trade cooperation, the year did end on a note of cautious optimism for advocates of open trade, when, at the G20 summit in Buenos Aires, the US declared a 90-day truce in its 10-month-long trade war with China. It is hoped that this ceasefire will stand, leading to talks between the world’s two largest economies in 2019. Whatever the outcome, it is likely to have a major impact on business and politics across Asia Pacific. The new year may also see an intensification of a result of the trade war that became apparent in 2018: greater cooperation and interdependence between economies in the region. Indeed, there are two new multilateral trade deals on the agenda 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 US imposed a 30% tariff on all solar panel imports, a major Chinese product. The following month US President Donald Trump signed a memorandum ordering the imposition of tariffs on Chinese imports in areas such as aerospace, ICT and machinery. Chinese investment in key technology sectors in the US was also restricted, while the US filed a case against China with the World Trade Organisation (WTO) alleging discriminatory licensing practices. This was quickly followed by a 25% tariff on all steel imports, except for those from Argentina, Brazil, Australia and South Korea, and a 10% tariff on all aluminium imports, with those from Argentina and Australia once again excluded.
China retaliated in April 2018, imposing tariffs of 15-25% on 128 US products, including some food and wine, recycled aluminium and other manufactured goods. These proved to be just the opening moves, despite efforts to find a solution in May and unfruitful trade talks in June. In July 2018 the US imposed its first entirely China-specific tariffs, with three lists of items attracting rates of either 10% or 25%. China, in response, placed tariffs on US automobiles and agricultural products, and as the summer wore on, filed its own cases against the US with the WTO. By November the US had imposed tariffs exclusive to China on some $250bn worth of goods, with China doing the same on roughly $110bn worth of US items.
In November 2018 the US announced it was also considering imposing restrictions on emerging technology exports, such as artificial intelligence, robotics and quantum computing, citing potential “dual-use” issues and security implications. While not explicitly aimed at China, many observers saw this step clearly within the context of the trade war. Then, at the G20 summit in Buenos Aires at the end of November, the countries took a step back from the brink. After meeting with China’s President Xi Jinping, President Trump declared that he would hold off on a planned tariff hike from 10% to 25% on some $200bn worth of Chinese goods. In return, China reportedly agreed to begin talks on a range of contentious issues, ban exports of the synthetic opiate fentanyl to the US, and buy more US agricultural and manufactured goods.
Our Country First
However, by the end of 2018 the truce was far from a reassurance that the hostilities were over – indeed, many analysts noted the lack of any concrete details regarding what, precisely, China had pledged to do. Furthermore, if any deal is to stick, it will have to address a number of key issues for Washington, many of which are highly structural. These include reducing the US trade deficit with China; Chinese acceptance of investment restrictions in certain technologies; an end to technology transfers as unofficial requirements for entering the Chinese market; increased protection of US intellectual property rights; and greater allowance of US investment in China.
While President Trump has been pushing hard on these points, he is by no means the first to have expressed concern about them. Indeed, his view solidifies long-standing objections by many nations to the way China does business.
What is different this time, however, is the link between these objections and the political wave within the US and other countries of populist, protectionist policies, which have gained particular traction since the 2008 global financial crisis. An early victim of this wave was US support for the Trans-Pacific Partnership (TPP), a proposed trade deal the previous US administration had advocated for and signed up to, along with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. However, upon election, President Trump pulled the US out of the deal. Yet instead of abandoning the agreement, the remaining countries produced a revised version, the CPTPP, or TPP11. This was officially signed by the remaining eleven nations in Santiago, Chile on March 8, 2018.
Version Two
The CPTPP differs from the original agreement in that some 22 clauses the US favoured in the TPP, but which other nations opposed, were suspended. The new deal is also far more open to future members than the original, with the UK closely studying the idea of joining after Brexit. The CPTPP still eliminates 98% of all tariffs within the bloc, with the vast majority of the rest of the original provisions kept in place.
It creates the third-largest trading bloc in the world – even without the US – after the North American Free Trade Agreement and the EU, covering 500m people and 13% of the global economy. For Brunei Darussalam, Vietnam and Malaysia, the CPTPP promises a boost in trade. In August 2018 Malaysia’s Prime Minister Mahathir Mohamad said that with the US withdrawal, the contentious issue of companies being able to sue governments had also ceased being a sticking point, and the agreement is now less dominated by any one country.
While as of December 2018 Malaysia, Brunei Darussalam, Chile and Peru had yet to ratify the pact, by that month enough countries had signed on to put it into force at the end of 2018. Singapore was the first to ratify, in July 2018, while Vietnam officially ratified it in November. Major exporters such as Vietnam and Singapore stand to benefit the most from the agreement, with the latter’s minister of trade and industry, Chan Chun Sing, saying that the CPTPP “sends a strong signal of our commitment to trade liberalisation and a rules-based trading system”. An October 2018 statement from Hanoi said it is an important step in combatting “the rise of protectionism in major economies”.
Regional Partnership
The CPTPP is not the region’s only major free trade agreement (FTA) under way. Negotiations have been ongoing since 2013 on the RCEP, an ASEAN-led initiative including 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 all the Asian economic giants together, including China and India – countries left out of the CPTPP. The prospective members account for some 3.4bn people and a combined GDP of some $49.5trn, some 50% and 40% of the global total, respectively.
Given the size of the pact – and the diversity of economic and political models within it – RCEP negotiations have naturally faced considerable obstacles, with a year-end 2018 deadline for a deal due to lapse. The proposed agreement has 18 chapters, but only seven were concluded by November 2018. India, Thailand and Indonesia will hold elections in 2019, which may further complicate efforts to finalise the RCEP. What is reportedly the primary hold-up of negotiations is an issue central to the wider global debate on trade: market access.
A division over the concepts of managed and free trade exists between the more advanced economies, which want a high level of trade liberalisation, and the emerging economies that are lobbying for greater protection of certain domestic industries. Press reports in November 2018 suggested that the size of tariff cuts, rules-of-origin clauses and extent of opening service markets were the sticking points, along with details on investor protection.
At the same time, however, there is clear political agreement that the deal is an important step in reaffirming the 16 nations’ commitment to a liberal, rules-based regional trading order, often explicitly cited as opposition to the US’ rising protectionism.
Resulting Impact
The effects of the CPTPP and the possible RCEP on Asian economies remain to be seen, as does the impact of the US-China trade war. If these nations’ trade talks in the first quarter of 2019 fail to produce a settlement, heightened tariffs and restrictions will create many losers, but also some winners in South and South-east Asia. Sri Lanka and Myanmar, for example, may benefit from manufacturers that shift capacity away 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 increasing Chinese interest as the trade war heightened.
The automotive industries of Malaysia and Thailand may also benefit, ramping up their production of luxury cars for export to China, while additionally taking market share from Chinese auto parts firms in the US. Garment industries could gain as well, as China is a major exporter of apparel to the US. Vietnam and Sri Lanka will likely be top beneficiaries of any such switch in suppliers.
With ICT a particular focus of the US, ASEAN manufacturers of ICT products may also benefit from shifts away from Chinese production. This means Malaysia, Thailand and Vietnam in particular, although Indonesia, too, may reap some rewards. This will be the case particularly where there are existing ICT clusters that are well linked to global supply chains and benefit from existing FTAs.
Countries with comparatively poor ICT and logistics infrastructure, meanwhile, such as the Philippines, may struggle to gain share. Agriculture exporters currently in competition with US farmers may also benefit. The CPTPP and the RCEP, combined with the US-China trade war, may see lucrative regional markets such as Japan switch to more regional food imports, potentially benefitting Thailand, Indonesia and others.
US Fed Rate Hikes
At the same time, the impact of trade slowdowns in the US as a result of the dispute may alter the case for interest rate hikes by the US Federal Reserve. Lower US rates mean less depreciation risk for vulnerable currencies such as the Sri Lankan rupee and Indonesian rupiah. In China, the central bank has been accused of letting the yuan weaken to mitigate some of the export losses from the trade war. This in turn has a negative impact on ASEAN economies such as Indonesia, which have long spoken of unfair competition caused by an undervalued Chinese currency.
Perhaps the most significant short- to medium-term impact of the trade war, however, will be the disruptive process of reorganising supply chains and enterprises. This is made worse by uncertainty over how long the dispute will continue. If projected to be long term, South and South-east Asian businesses and investors may have to take fuller account of this conflict and its impact on trading relationships in the coming years, with the CPTPP and the RCEP likely to become even more of a focus in an increasingly turbulent global trading environment.
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