The new global economic environment under Trump, and the future of economic integration in the Asia Pacific region

The administration of US President Donald Trump is set to bring an economic environment where protectionism would be the norm. If we look at the Trump cabinet members in charge of trade, as the US Trade Representative, the Secretary of Commerce and especially Peter Navarro, the Director of the new created National Trade Council, all of them are in favor of imposing restrictions in countries like China that run a trade surplus with US.

In his first day in office Trump signed an executive order to withdraw the US form the TPP, the Transpacific Partnership agreement, TPP. TPP included 12 member countries: Canada, US, Mexico, Peru and Chile in the American continent and Japan, Vietnam, Malaysia, Singapore, Brunei, Australia and New Zealand in the Asia region. Without the US, a remaining 11 member countries agreement will have not much meaning as all countries in the TPP were expecting to gain additional access to the big US market. TPP was being sold as the most advanced trade agreement because it would open the markets for trade in goods and services without restrictions, liberalize investment regime and establish common standards for government procurement, labor standard, environment issues, and so on.

The negative of the Trump administration of withdrawing from the TPP also has another consequences as this scheme was part of a strategy of the Obama administration of getting more involved in the East Asia region. The so called US “pivot to Asia” included also an increase in the number of military units in the region and more political engagement with it, but the masterpiece was the TPP. This was important not only in economic terms, especially to increase US trade and investment in the region and in this way balance China increasing presence in it, but also the TPP was considered, by the Defense Secretary of Obama, Ash Carter, as equivalent to have another aircraft carrier in the region.     

So, what would bring the Trump administration for the members of APEC and the Asia Pacific countries? A lot of uncertainty regarding the continuity of an open trade and investment system and a possible confrontation with China. This could be a severe blow to the economies in the region as most of them have been able to grow fast thanks to an open trade and investment regime that APEC particularly was promoting.

In this scenario and in order to avoid or minimize the upheaval that the Trump Administration could bring to the region what is needed is for countries to reaffirm their commitment to an open environment for trade and investment. Also there is need for a new leadership to continue this process. Up to now US was that leader, pushing other countries to open their markets. That will no longer be the case, as US will put barriers on its own market and withdraw from signing trade agreements or even could renegade of some of them (or perhaps United States would negotiate bilaterals FTAs and put tough conditions for the other country).

APEC has established a goal of achieving a Free Trade Area of the Asia Pacific, FTAAP, and this commitment was reaffirmed in the APEC Summit last November in Peru. To achieve the FTAAP the APEC Leaders` Declaration mentioned that two pathways could be used, one the TPP, and the other the Regional Comprehensive Economic partnership, RCEP, that comprises sixteen countries, all of them from the Asia region (the 10 countries of the ASEAN group plus six: Japan, China, South Korea, India, Australia and New Zealand). But with the TPP out of the scenario the one that remains is the RCEP. So RCEP should be a meaningful agreement so the other APEC members not included in the RCEP, especially from the American continent, find it attractive to consider it as a pathway to the FTAAP. So far that is not the case, as still negotiations have not finished among the RCEP countries and especially because it is considered that the level of liberalization pursued by RCEP countries is too shallow and the consequence could be an agreement of “low quality”. Contrary to the TPP, RCEP mainly looks for liberalization in trade of goods (and even in this subject the agricultural sector will not be totally open), will partially consider liberalization on services, and does not consider other issues that TPP deals with. The responsibility for concluding soon a meaningful agreement in the RCEP rest in the two largest developing economies in the group, China and India, because they are reluctant to open their markets in some sectors and they protect it from foreign competition.

But China and India should be interested in opening more their markets. China economy has grown very fast but there are many companies, especially state owned ones that are no competitive and survive thanks to government subsidies and protection from foreign competition. China cannot afford to keep anymore all of those companies, as they generate not only an increasing debt that is overburdening the economy, but also they are the cause of overinvestment, the pollution and even corruption, that are becoming a daunting problem. In the case of India the reason for opening its economy is more evident because as for example India has a lack of many things compared to China, as physical infrastructure of transport and communications, energy, and, as opposed to China where the government invested a lot of money in these areas, India government has no capacity to do that so it should welcome foreign investment in these sectors. Also India should welcome more foreign investment in the manufacturing sector, as in China, to use its abundant cheap labor force (though this will also demand a more flexible use of the labor force in India that actually is not possible yet).        

Regarding the need for a new leadership the natural candidate should be China, as the second largest economy in the world and as the country that have benefited the most from an open trade and investment system. More than 150 countries in the world have now to China as its mayor export market or largest trade partner (even for US now China is its biggest trade partner), China increasingly invests more abroad (now invests more abroad than what receive as foreign investment). So China has now a biggest stake in the welfare of their partners and in the world economy. And the world economy needs to China, as can be seen in the fact that in the last decade this country has contributed with more than one-third to the growth of the global economy.