Free trade banner still flying
The US is paddling against the current of further trade liberalisation in Asia-Pacific. By Douglas Lippoldt
Trade policy reform that leads to greater market opening tends to yield positive results. When trade flows increase, nations on both ends tend to benefit. At the business level, in a trade transaction both parties usually perceive a benefit; otherwise the transaction would not take place.
As well, trade often delivers benefits domestically, thanks to increases in productivity from economies of scale and specialisation, competition, and returns to investment in innovation.
The economic gains generally outweigh any trade-related adjustment costs by a large margin. According to one big historical study, countries that liberalised their trade regimes were able to accelerate annual economic growth on average by about 1.5 percentage points.
Among the Asia-Pacific nations we can see this in action. Global, regional and bilateral accords are delivering increased market openness. This rules-based framework is helping to reduce policy uncertainty and impose discipline against unfair trade practices.
Clearly, there is room for improvement, but overall this framework works well. The region has seen real GDP growth of 4% or more annually since 2010, well ahead of the global average.
Over the same period, export growth in the region has beaten the global average every year except for 2015 and 2016. HSBC forecasts these trends will continue this year and next. Asia-Pacific is demonstrating the potential of trade to contribute to improved welfare.
However, the US administration is resisting such an open approach to trade. In striving for balanced bilateral trade flows, the US appears willing to limit imports as it promotes exports.
Under President Donald Trump it has withdrawn from the Trans-Pacific Partnership. It has proposed reforms of the North American Free Trade Agreement (Nafta), but announced its intention to withdraw if US requirements are not met.
Washington is not keen on new regional deals, preferring bilateral negotiations where it hopes to use its clout to win more concessions from partners. US authorities have launched numerous trade actions under anti-dumping, countervailing duty and safeguard provisions.
Perhaps more unsettling for the multilateral trading system, the US has employed a tough interpretation of certain World Trade Organization (WTO) rules.
In March, it invoked national security concerns to impose new tariffs on steel and aluminium, going beyond the traditional view of the relevant WTO provisions. Despite granting some exclusions and temporary exemptions, this still set a potentially damaging precedent.
In the case of China, the US also used a domestic law (already the subject of challenges at the WTO) to allege unfair trade practices and propose further tariffs on Chinese imports and investment.
Fortunately, trading partners continue to have discussions with the US on these issues. Formal consultations have been requested at the WTO by US partners including some Asia Pacific nations. Direct bilateral talks have been launched with China, South Korea and Japan (among others).
Indeed, South Korea concluded a revision of its bilateral agreement with the US, providing for some liberalisation. However, this also entailed Seoul’s acceptance of restrictions on exports of steel to the US.
Enforcement concerns have also been raised at WTO, where the US has questioned the purview of WTO dispute resolution findings.
While the use of strong trade actions may enable the US to gain negotiating clout, its willingness to exit existing accords creates uncertainty about present and future deals.
So far, most American trade partners have responded with moderation. China is a positive illustration, practising the “Art of non-war”, as HSBC’s China economics team has noted.
Potentially more important economically are trade developments across the rest of the world.
As the US share of global goods and services imports has slipped below 15%, countries representing much of the other 85% are still working towards liberalisation, including in Asia-Pacific. Here are a few examples:
Eleven countries signed the revised Trans-Pacific Partnership in March 2018, a big trade deal covering a region with a GDP of US$10 trillion, even without the US.
The Chinese-led Belt and Road Initiative is under way, promoting trade-related investment that could total $1.4 trillion or more.
Negotiations f or t he 16-country Regional Comprehensive Economic Partnership are advancing, with the 22nd round completed in May. The next round is set for July 17-27 in Bangkok.
Implementation of the WTO Trade Facilitation Agreement and related measures is progressing (the UN Economic and Social Commission for Asia and the Pacific estimates full implementation could cut the cost to trade in the region by a quarter).
In May, the EU authorised trade negotiations with Australia and New Zealand. It also adopted a ratification path for trade deals that could move pending accords with Japan, Singapore and Vietnam.
As trade liberalisation advances in AsiaPacific, the US risks missing out.
Through negotiated market opening, the US could better tap into markets growing at 4% annually or more, a mutually beneficial prospect. Failure to do so could leave the US sidelined from one of the world’s most dynamic regions.
According to one big historical study, countries that liberalised their trade regimes were able to accelerate annual economic growth on average by about 1.5 percentage points.