East Asian Economic Integration under the US Protectionist Trade Policy

The Trump administration’s protectionist trade policy, featuring the imposition of tariffs and aimed to maintain US advantages in bilateral competition, has severely affected the mainly export-driven East Asian economies. Building a developed market through internal economic integration will be an effective path for East Asian countries to achieve sustainable growth.

In pursuit of “America First,” the Trump administration has adopted a protectionist trade policy in an attempt to strengthen the competitive advantage of US companies, and has invoked domestic law to impose tariffs on trading partners, with the intent of forcing other countries to adjust their trade policies in a direction more favorable to the US. At the same time, the Trump administration is also actively promoting revision of international trade rules to maximize US interests, and maintain and consolidate America’s economic hegemony. The East Asian economy is deeply affected by Washington’s protectionist trade policy, but also faces opportunities for further integration.

The Trump Administration’s Protectionist Trade Policy

Since taking office, the Trump administration has been actively pursuing trade protectionism and calling for the formulation of “new rules” in international trade. Its protectionist trade policy features the imposition of tariffs and serves to seize an advantageous position for the US in bilateral competition.

Unilateral protectionist measures aimed at protecting domestic industries

In order to honor his campaign promises, Trump has adopted a series

Pan Xiaoming is Assistant Research Fellow at the Institute for World Economy Studies, Shanghai Institutes for International Studies (SIIS).

of trade restrictions to protect US industries, and for that purpose has not hesitated to launch national security probes rarely conducted by his predecessors.1 The focus is on protecting US traditional manufacturing industries which have been challenged by globalization, including washing machines, solar cells, automobiles, and steel and aluminum. Since these are mainly labor-intensive industries directly affecting people’s livelihood, Trump wants to preserve them as an arena for job creation, thereby stabilizing his political support.

First is the protection of steel and aluminum industries. In April 2017, the US Department of Commerce initiated a Section 232 investigation on steel and aluminum imports. According to its report in early 2018, the steel and aluminum imports are threatening US national security. In April 2018, the US government decided to impose a tariff of 25% on steel imports and 10% on aluminum imports from East Asian countries such as Japan, South Korea and China. After consultations, steel and aluminum products from Argentina and Australia were granted tariff exemption on both steel and aluminum while Brazil and South Korea were exempted from the steel tariff from June 1, 2018.2 Since then, 42 categories of steel products from China, Japan, Sweden, Belgium and Germany have also been exempted from high tariffs.

Second is the protection of washing machine and solar energy industries. In January 2018, the Trump administration imposed additional tariffs on $8.5 billion worth of solar cell imports and $8.5 billion worth on washing machine imports from all countries (including China and South Korea) on the grounds that relevant domestic industries suffered substantially from such imports, causing severe shocks to many well-known household

appliance companies.

In addition, the Trump administration plans to safeguard the US auto industry. Over the past two decades, imported passenger car sales have risen from 32% to 48% of total sales in the US. The rapid rise in the market share of imported automobiles and auto parts has raised the government’s concerns about the competitiveness of the US auto industry. In May 2018, the Trump administration announced a safeguard investigation into imported cars and auto parts,3 aiming at expanding domestic auto production and narrowing the difference in auto tariff levels between the US and its trading partners. As of February 2019, the US Department of Commerce had already submitted the results of its investigation to President Trump, but no decision on tariffs on related products has been announced yet.4

Advancing international trade rules in America’s interests

As a creator of the international economic order after World War II, the US has long made the maintenance of a multilateral trading system the prime concern of its foreign economic policy and the primary tool for realizing its national interests. However, since Trump took office, senior government officials have repeatedly criticized the multilateral trading system with the WTO at the core, and even threatened to withdraw from the WTO, in an attempt to dominate future WTO reform and the formulation of new rules for international trade.

Strengthening technology transfer and intellectual property protection. In order to safeguard its advantages in the high-tech field, the United States, together with other developed countries, have imposed a new round of technology blockade to curb the technological upgrade of emerging economies including China, by strengthening their intellectual property protection and restricting technology transfer. In a September 2018 joint

statement, the US, the EU and Japan agreed to deepen their investigation and analysis of the full range of harmful technology transfer policies and practices and their effects, affirmed their commitment to effective means to stop such policies and practices, and to this end, deepen discussions on enforcement and rule-making as tools to address these problems.5 Later in January 2019, they agreed to develop new rules on investment review for national security purposes and on export controls, and confirmed their agreement to cooperate on enforcement to ensure effective implementation of these new rules.6

Actively participating in new digital trade deal. At the WTO ministerial conference in 2017, the United States joined a consensus among WTO members to continue the Work Program on Electronic Commerce and actively promoted this temporary group to become a fixed mechanism.7 At the World Economic Forum Annual Meeting in Davos in January 2019, a group of 60-plus WTO members, including the US, expressed their commitment to new cross-regional trade negotiations on e-commerce, which are open to all WTO members.8 At the G20 summit in Osaka in June 2019, the US and other countries held a ministerial meeting on trade and digital economy, and issued a statement on digital trade rules, emphasizing security in the digital economy and the necessity to establish a reliable digital transmission system.9

Opposing “special and differential treatment” for China and other developing countries. The US is attempting to squeeze the policy space of China and other developing countries and restrict their economic development on the grounds of absolute equal competition and trade

reciprocity. It further advocates stricter rules and restrictions on emerging economies such as China to ensure its own active position in international economic competition. In January 2019, the Trump administration submitted a document to the WTO, stating that countries including China, Brazil and India as the world’s influential economies should graduate from the status of “developing countries” and no longer enjoy the WTO’S “special and differential treatment” for developing countries, calling for an “undifferentiated WTO.”10

Strengthening regulation on state-owned enterprises by international rules. In order to promote the competitive advantages of US enterprises, the United States advocates strengthening the regulation on SOES and accelerating the reform of relevant rules under the WTO framework. At present, it has joined the EU and Japan to pursue a basic framework covering industrial subsidies, with a view to strictly restricting government subsidies for SOES and seeking the participation of other WTO members.11

Protectionist measures directly targeting China

The rapid development of China’s economy and its rise in technology have been deemed a threat to the US technological lead. “The US policy toward China now appears animated by a judgment that the past trajectory of the bilateral relationship favored China and disadvantaged the United States in a long-run competition for global leadership. To try to break that trajectory, the Trump administration over the past two years has adopted an increasingly zero-sum, unilateralist, protectionist, and nativist ‘America first’ approach to the relationship.”

In order to maintain America’s technological edge, the Trump administration initiated the Section 301 investigation on China, related to intellectual property and forced technology transfer.13 In March 2018, the Office of the US Trade Representative released a report claiming that China had required, or exerted pressure on, companies interested in investing in China to transfer their technology and accusing China of having deficient intellectual property protection. On this basis, the US government decided to increase tariffs on imports from China and crack down on Chinese hightech companies. In April 2018, the US Department of Commerce imposed a denial order on US companies selling components, software, and technology to China’s ZTE Corporation for a period of seven years, before subsequently reaching an agreement with ZTE and lifting the ban “temporarily and partially” on condition that ZTE pay a $1-billion penalty, replace its board, and put another $400 million in escrow by July 2018. In May 2019, the Commerce Department added China’s Huawei and its 68 affiliates to the “Entity List,” which bars Huawei from purchasing parts and technology from US companies without US government approval,14 while a 90-day reprieve was announced at the same time to minimize disruptions to related US companies. The issue of Huawei has once again become a focus of Chinaus economic and trade relations. After Chinese President Xi Jinping and US President Donald Trump met at the Osaka G20 summit in June 2019, Trump claimed he would allow US companies to continue exporting parts and technology to Huawei without affecting US “national security.”

Furthermore, the United States has been extending its “sphere of influence” by pressuring regional trade agreements to restrict China’s economic cooperation with other countries. In November 2018, the United States-mexico-canada Agreement (USMCA) was signed by the three countries to replace the North American Free Trade Agreement. According to

USMCA, a party needs to fulfill its obligation to inform other member states before commencing free trade agreement (FTA) negotiations with a nonmarket country.15 Moreover, entry by a party into a FTA with a non-market country would allow the other parties to terminate the USMCA on six months’ notice and replace it with a bilateral agreement between the parties. This so-called “poison pill” provision was widely interpreted as “uniting the US, Mexico and Canada while isolating China”.

Challenges of US Protectionist Trade Policy to East Asian Economy

The Trump administration’s protectionist trade policy has tightened US market access, distorting the competitive advantages of more and more exporting countries and reducing their comparative edges. As the economic growth of East Asian countries is primarily driven by export, they are severely affected by the United States’ tariff measures, and thus inevitably become the major target of US protectionist measures.

General decline of exports in East Asian countries

The US tariff measures have produced a shock effect on the international trade of East Asian countries to different degrees. In particular, the China-us trade frictions have not only affected the two countries’ economies, but also caused a spillover effect on other East Asian economies.

The US protectionist trade policy has directly impacted the import and export of East Asian countries. In May 2019, China’s imports fell by 8.5%, and its exports grew by only 1.1% year-on-year.16 The decline in China’s trade growth rate was further transmitted to producers of raw materials and

parts in East Asia through the regional industrial chain, driving the overall decline in regional trade. Among those producers, Singapore was the most affected with its export falling 10% year-on-year in April and 15.9% in May 2019. The decline in exports of electronic products was particularly noticeable with a 16.3% year-on-year drop in April and 31.4% in May 2019.17 Japan and South Korea’s trade in goods has also been hit. Japan’s exports decreased for several months, with a 7.8% year-on-year decline in May 2019, and its imports in the same month also fell by 1.5% year-onyear. South Korea’s imports in the same month also decreased by 1.9% yearon-year, and its exports fell 9.4%.18 In addition, the imports and exports of Southeast Asian countries including Malaysia, the Philippines and Thailand

have also suffered, but it is recovering from the negative impact due to active policy adjustments. In April 2019, for example, Malaysia’s exports increased by 1.1% year-on-year, which reversed the negative trend since February and returned to the level in January, and its imports increased by 4.4% year-onyear and 6.7% compared with the previous month. However, Malaysia’s trade surplus continued to decrease substantially with a 24.5% year-on-year drop in April 2019,19 mainly due to slower growth in exports than in imports.

Investment diversion in East Asian countries

Trump’s protectionist measures and the China-us trade frictions have changed economic expectations and production costs of East Asian countries and triggered diversion in their investment. According to the newly-released Asian Development Outlook 2019 by the Asian Development Bank, investments in East Asian countries such as South Korea, Singapore and Malaysia are losing momentum, and their economies have suffered. In 2018, the Purchasing Managers Index (PMI), a measure of economic trends in manufacturing, fell to a new two-year low in these countries. The economic downturn has also had a direct impact on the government’s public investment, infrastructure investment, and foreign investment. Compared with 2017, the scale of overall investment for most East Asian countries in 2018 was shrinking, with a 3.7% decline in South Korea, 3.5% in Singapore, and 2.9% in Malaysia. In terms of foreign direct investment, the inflow in South Korea and Malaysia decreased by 19% and 14% respectively in 2018 compared with the previous year.20 However, Indonesia, the Philippines, and Thailand saw a slight increase in investment in 2018 compared to the previous year, increasing 1.0%, 1.4%, and 0.9% respectively.21 It is worth emphasizing that compared with 2017, the foreign investment inflow in both

Indonesia and Thailand increased in 2018, with a noticeable 62% increase in Thailand.22 The growth of investment in East Asia, especially that of foreign investment, will continue to vary from country to country under the impact of investment diversion.

Industrial chain in East Asian countries to be remodeled

Trump’s protectionist measures have hit the East Asian industrial chain and accelerated its reshaping. First, these measures, featuring the imposition of additional tariffs, have increased the costs of products from other countries and hence strengthened the competitiveness of US companies. For example, the price of LG washing machines from South Korea was increased by 4% to 8%, due to a 20% tariff on imported washing machines.23 Second, these measures and also the China-us trade frictions have forced global companies to adjust their supply chains to avoid costs and risks, hence accelerating investment diversion. According to a 2018 survey of American companies in China conducted by Amcham China regarding the question of “the impact of China-us trade frictions on business strategy,” 31.1% of the 430 companies surveyed claimed “delaying or canceling investment decisions” ranked first among all their options.24 In order to avoid the increasing costs and investment risks brought about by Trump’s tariff measures, global companies will transfer their subsidiaries to other competitive alternatives including Taiwan, Malaysia, Vietnam, and the Philippines.25 Last, although these measures have accelerated the reshaping of the East Asian industrial chain, the reshaping itself will be a long and complicated process, which largely depends on the comprehensive competition among East Asian

countries in areas from production capacity to consumer market, and from the “hard environment” in infrastructure to the “soft environment” in institutions and policy. While the protectionist tariff measures of the United States are an important external factor in the reshaping of East Asia’s industrial chain, the reshaping is still subject to many factors, such as consumers, raw materials, suppliers of important parts, workers’ technical proficiency, trade regulations, and policy stability.26

Advancing New Opportunities for East Asian Economic Integration

Although East Asia’s economic development has faced unprecedented pressure with the US promotion of trade protectionism and the trend of deglobalization, East Asian countries can still take the opportunity to speed up economic integration, actively cultivate and promote the development of the region’s internal market, and achieve stable economic growth by expanding “internal demand.” Building a developed market through economic integration will be an effective path for East Asian countries to achieve sustainable growth, and also a wise choice to enhance their economic influence in advancing and shaping a new round of economic globalization.

Opening up new space with expanded internal market

Developed countries are important export markets for East Asian products, and have a significant impact on the region’s economy. Due to the outbreak of the 2008 financial crisis and the recession of developed countries, the consumer market in the United States and Europe has shrunk sharply. Facing the shrinking external markets, East Asian countries have been actively adjusting in order to find alternative markets. As of the end of 2017, the market demand of developed countries such as the US and Europe accounted for only 25.6% of exports from East Asia, while the internal

market demand rose to 40.3% of the region’s exports. The internal market in East Asia has become the region’s most important export market. According to a Brookings Institution report, Asia will witness the fastest growth in the size of the middle class by 2030, whose population will then account for twothirds of the world’s total.27

In particular, China is becoming a major driver for the internal market’s development. In 2017, China’s per capita income reached $8826.994, which was 3.27 times that of the $2695.36 reached in 2007.28 The increase in China’s per capita income has directly led to the emergence of its large-scale consumer market. Since 2013, China has promoted economic restructuring with the driver of economic growth shifting from export and investment to primarily domestic demand, which has further unleashed the potential of its consumer market. In 2007, China’s market demand only accounted for 9% of East Asian exports, while the US market demand accounted for 28.9%. In 2017 however, China’s market demand rose to 15.9% of East Asian exports, which was close to 16.3% for the US.29 The rapid growth of China’s consumer market and the growing internal market in East Asia are changing the situation in which the region’s exports have always relied on Western market. Developing the internal market of East Asia not only has provided greater space and more autonomy for regional development, but will also become a core driving force for further rapid economic growth.

New impetus with China’s further opening-up

With de-globalization and trade protectionism sweeping across the globe today, China’s unswerving promotion of reform and opening-up have provided new impetus to the economic development of East Asia. The country’s reform and opening-up has entered a new journey, launching a

series of measures to open its door even wider.

First, China has expanded market access to the financial services sector on a large scale. This market, with great potential, is gradually opening up to the world. Specific measures include: a) lifting restrictions on foreign ownership of banks and financial asset management companies and treating domestic and foreign investors equally; b) further opening up securities, funds, futures and life insurance industries to foreign financial institutions, increasing the foreign ownership limit to 51%, and removing this limit altogether after 3 years; c) allowing foreign banks to set up branches and sub-branches in China at the same time; d) no longer requiring at least one domestic shareholder of joint venture brokers to be securities company.

Second, China has accelerated the introduction of the Foreign Investment Law to provide a fairer competitive environment for foreign enterprises. The law was approved by the National People’s Congress on March 15, 2019 and will be implemented on January 1, 2020. It combines three previous laws regulating foreign investment, and the key points include: a) extending the system of pre-entry national treatment plus a negative list, which was originally piloted by the free trade zone, to the whole country, and comprehensively lowering the access threshold of foreign investment; b) implementing an information reporting system on foreign enterprises and standardizing the management of foreign investment; c) strengthening intellectual property protection for foreign investors and foreign enterprises, and explicitly prohibiting forced technology transfer, which would provide a more stable institutional environment for foreign enterprises operating in China.

Finally, since 2018, China has reduced tariffs four times in a row, involving many items such as automobiles, pharmaceuticals, consumer goods, and industrial products, lowering its average tariff level from 9.8% in 2017 to 7.5%. China’s tariff level is already close to the tariff criteria for member states of the Comprehensive and Progressive Trans-pacific Partnership (CPTPP) agreement. China has also promised to hold regular international import expos to continually release domestic market potential and expand import.

China’s further opening-up has injected new momentum into the sustainable growth of East Asian economy. The large-scale expansion of market access to China’s financial services sector will drive the reform of its financial system, promote its integration with the financial system of other countries, and help East Asia resist various international financial risks under the US dollar-dominated system. China has continued to reduce tariffs, expand imports, and share the dividends of its economic growth with the region, which will accelerate the growth of a China-driven consumer market in East Asia, help the region gradually shed its dependence on developed markets of the US and Europe, and hence improve the autonomy of regional economy and the ability to resist external economic risks. Faced with a lack of momentum in global economy, an internally driven market in East Asia will become the new engine of regional economic growth, and inject fresh energy into the world economy.

Advancing regional FTA negotiations

The US protectionist measures have become a spur for East Asian countries to accelerate FTA negotiations. On the one hand, as the economic growth of East Asian countries is mostly driven by exports, international trade plays a pivotal role in their development. To a certain extent, the US trade bullying has prompted East Asian countries to deepen regional economic integration and pursue new growth points for trade. On the other hand, the “poison pill” clauses targeting non-market countries (an allusion to China) in the USMCA signed in November 2018 place East Asia in the dilemma of choosing between China and the US: if a country does not reach a quick agreement with China, but instead first signs a trade agreement with the US, that country will possibly lose the opportunity to sign a trade agreement with China.30

East Asian countries are accelerating the momentum toward regional

mega-ftas. Negotiations are moving forward on the Regional Comprehensive Economic Partnership (RCEP), an agreement aimed at expanding market openness and promoting trade and investment liberalization, which is vital to the process of economic integration in East Asia. By the end of September 2019, 28 rounds of negotiations on the RCEP had been held. In the latest development, a joint statement was released following the 7th RCEP Ministerial Meeting held in Bangkok in September 2019, in which the ministers “recognized that negotiations have reached a critical milestone as the deadline for the conclusion of negotiations draws near.”31 However, there is still disagreement on issues of trade openness such as tariff reductions, and some countries including India are still sticking to their individual positions. Moreover, the intention of some other parties such as Japan and Australia to develop a “high-quality” set of free trade rules for the RCEP has also added to the uncertainty of negotiation prospects. Despite the obstacles, all countries are actively engaged in consultations to explore an approach that would bring negotiations to a conclusion through the introduction of early harvests.

Conclusion

The Trump administration’s protectionist trade policy not only has an impact on foreign trade in East Asian countries, but has also triggered trade and investment diversion and even a reshaping of the regional industrial chain, which has far-reaching implications on East Asian economic development. Despite many challenges, economic development in the region still faces many opportunities. East Asian countries should seize the great opportunity for establishing a regional internal market, reduce trade costs by expanding market access and accelerating economic integration, thus fostering the regional “internal demand” and creating an endogenous driving force for East Asia’s economic growth.

Then Mexican President Enrique Peña Nieto, US President Donald Trump, and Canadian Prime Minister Justin Trudeau sign the United States-mexico-canada Agreement, which replaces the North American Free Trade Agreement, during the G20 summit in Buenos Aires, Argentina, on November 30, 2018.