Trump, trade, and integration: Could an Asian coalition protect the global economic order?

Picture of Dr Shiro Armstrong

Dr Shiro Armstrong

Dr Shiro Armstrong

The order that brought prosperity and a significant measure of stability to world affairs for three-quarters of a century after the Second World War is under threat. The US anchor on which order in the Asia Pacific has relied is in doubt. Trump has introduced huge global uncertainty at a time of major changes in the global balance of power and when stability and certainty are at a premium.

The institutional edifice on which the economic certainty and political confidence in the US-led global order has been built – the postwar institutional framework that guaranteed economic openness and the prospect of economic and political security – might be torn down.

There is no region in the world for which this threat is more dangerous than Asia. The foundation of Asia’s prosperity, economic integration and political stability is the global liberal economic order. The US military-security alliance framework provides political insurance, but it is the open global economic order that has made partners out of enemies and delivered economic security across the Asia Pacific. Few appreciate what destruction of that economic order would do to the global security outlook. There is no preparation for it.

There is a palpable air of disbelief that Trump could actually follow through on his campaign rhetoric. But it has already begun.

Trump has ensured that the Trans-Pacific Partnership (TPP) economic agreement as we currently know it is dead. It was a campaign promise that was implemented within the first week of his presidency through an executive order that withdrew the United States from the 12-member Pacific Rim grouping.

Trump campaigned on threats of large punitive tariffs on Chinese and Mexican imports that would most likely trigger a trade war if they are realised. Trump’s America First policies are protectionist and a threat to regional and global prosperity.

Early signs point to risk that his inward-looking policies – beyond the withdrawal from the TPP – will be implemented. The administration’s trade team of US Trade Representative (USTR) nominee Robert Lighthizer, Secretary of Commerce Wilbur Ross and head of the new National Trade Council Peter Navarro all share Trump’s views that China’s trade policies are responsible for hollowing out US manufacturing. And the USTR’s 2017 Trade Policy Agenda has suggested the United States is happy to use the World Trade Organisaton’s (WTO) dispute settlement body to pursue cases against other countries but would disregard decisions against the United States. Such an approach would quickly erode the confidence in the one area where the WTO is functioning effectively and would undermine the rules that underpin global trade and commerce.

What are the implications for Australia and the Asia-Pacific region?

Mourning the TPP, hoping for a reversal or waiting it out are all futile ideas. Getting on with the business of keeping markets open and doubling down on the liberal economic order must now be the priority in Asia. Securing what can be rescued from the TPP is a start.

Many of the 11 TPP members signed on because of the preferential access they would gain to the US market, and proceeding without the hub is not an option for the spokes. The cost-benefit calculation for Vietnam, Malaysia and other countries changes significantly without the United States. Japanese Prime Minister Shinzo Abe has said a “TPP without the United States is meaningless”.

Japan will try to avoid a politically less palatable bilateral deal that Trump favours. The United States and Japan account for 80 per cent of the TPP economy so Trump taking Abe down a bilateral path will help deliver most of what TPP had to offer for both countries, economically and politically. But that is a narrow path that does little to secure openness in Asia and in the global system and should not distract from the massive task on both those fronts.

The other TPP members need to harvest the organs from a dead-on-arrival TPP. Nothing is stopping countries from taking what’s good about the TPP and implementing it unilaterally.

Opening up markets and undertaking reforms that make markets more contestable internationally without reciprocation by other countries is seen as too difficult a political ask. But without building the coalitions for reform at home, liberalisation is likely to be shallower. The backlash against globalisation shows that opening up at home, in whatever political system, requires adjustment measures and policy packages that provide community reassurance about change.

Where countries cannot act alone, say in setting new rules and standards in areas like e-commerce on which the TPP made some progress, coalitions of countries can band together in plurilateral deals. Sector-specific plurilateral agreements can be ratified under the WTO and expand with open membership.

Some elements of the TPP could be imported into the East Asian Regional Comprehensive Economic Partnership (RCEP) that is being negotiated by the 10 ASEAN members – Australia, China, Japan, India, New Zealand and South Korea. Not all of the rules and standards in TPP will be able to be transplanted into RCEP as they are advanced economy standards largely imposed by the United States that cannot quickly be achieved by developing economies.

China, India and developing countries in Southeast Asia may aspire to have advanced economy environmental standards, institutions and regulations, but nobody can expect them to be held to those standards immediately or to suddenly leapfrog stages of development. Instead, working with these countries to commit to implementing standards by a defined date and helping them reach those goals through building capacity and economic cooperation is more likely to empower regional reform.

This approach will have a higher likelihood of success in areas such as reform of state-owned enterprises (SOE) that is a deeply domestic issue with implications for international commerce. China is wary of international agreement on SOEs. Encouraging it to define its own path of reform towards an ambitious goal has more chance of success. The onus is now on President Xi and China to demonstrate its reform and leadership credentials following his Davos speech that championed globalisation.

More importantly, RCEP provides the natural platform for mustering the coalition that current circumstances demand in defence of the liberal economic order. RCEP is now the only game in town for broad trade liberalisation.

It is time for a coalition for openness in Asia. Asia’s securing the next phase of liberalisation and reforms would give ballast to the global economic system at a crucial time. The ASEAN-centred RCEP can be the instrument to reach that goal, but success requires an agreement that is credible, ambitious and has teeth.

Japan must extend and deepen the market opening made in the TPP to RCEP countries. China needs to walk the Davos talk. India needs to stop being the India of old and embrace Prime Minister Modi’s reform agenda. Delivery will require enormous political will on the part of ASEAN. There is now incentive for leaders to seize the moment in Asian economic diplomacy to save a global economic system in retreat.

No single Asian country, China included, can secure the open region that all need for development in the face of a hostile global economic environment. The alternative to success is continuing entrapment in poverty for some, stagnant middle incomes for others and a breakdown of the economic order that is holding the region together politically.

Now is not the time for any deal in Asia that turns its back on the United States or the global system. RCEP should be seen as a realistic base in face of great odds for engaging with North America when Washington is ready, in a broader Free Trade Area of Asia and the Pacific.

Many worry that the demise of the TPP means that China will write the rules of international commerce and define regional and global standards. China can do no such thing through RCEP without Australia, Japan and the other 13 members acquiescing. The hurdles are higher for it to do so through the Asian Infrastructure Investment Bank. And China’s Belt and Road Initiative will not reach Europe or get anywhere else very far without win-win cooperation for the partners involved. If China is providing international public goods, the rest of Asia should embrace them.

President Trump may see the world as a zero-sum game where one party has to lose for America to gain, but the rest of the world – and assuredly Asia – should not, and Asia’s response to the demise of the TPP can also be a positive sum game for the United States.

Updated:  24 April, 2017/Responsible Officer:  Dean, ANU College of Asia & the Pacific/Page Contact:  CAP Web Team