As trade tensions sweep across the world, Asia is opting to keep its doors open

There may not be an end in sight to the ongoing United States-China trade war, but countries in the Asia Pacific see a way out with free trade agreements.
13 October 2019

When the United States slapped steep tariffs on imported washing machines and solar panels in January last year, the world sat up to watch.

The aim, said the U.S. government, was to impose a “global safeguard” to protect local manufacturers beset by imports of cheap products from countries such as China.

The move marked the beginning of a bitter tit-for-tat trade war between the U.S. and China, the world’s two most powerful economies. And after more than 18 months, the trade war has only intensified, with no end in sight.

The U.S. to date has placed tariffs on US$250 billion (€222.72 billion) worth of products from China, which retaliated by imposing a maximum 25 percent on US$60 billion worth of U.S. goods.

Although a tariff truce was agreed between both countries at the G20 summit in June, global trade has taken a hit and is expected to lose further momentum in the months ahead, according to the latest DHL Global Trade Barometer forecast.

DHL Global Trade Barometer_2019 global September

In fact, if the trade war continues to intensify, and both countries extend tariffs to cover all U.S.-China trade, the global economy will take a US$600 billion hit in 2021.

Asia will not be spared. The Asian Development Bank has named the ongoing trade conflict as the biggest risk for the region’s economy as it threatens to “undermine investment and growth in developing Asia”.

But Asia is fighting back. Instead of building more walls, the region is embracing open borders, with cooperation and economic integration a top priority for Asian governments.

As the Philippines’ communications secretary Martin Andanar said at a recent meeting of South-east Asian leaders: the U.S.-China trade row has resulted in “the entire world catching a cold”.

“Free trade is definitely what we need here in this region,” he said.

Mutual support, mutual gains

The primary vehicle driving this push for more open borders is the development of more free trade agreements (FTAs).

Malcolm Cook, Senior Fellow at Singapore-based think-tank ISEAS-Yusof Ishak Institute, shared that such deals benefit member economies by liberalizing the movement of goods and services, and even people, while providing a more predictable market environment for the sectors covered by the FTA.

Cook noted that FTAs, in fact, are “the only means to further liberalize markets” currently, given that the World Trade Organization (WTO) system is stalled in terms of new trade rounds. The last successful round, the Uruguay Round, had taken place more than a quarter of a century ago.

Uruguay Round

From 1948 to 1994, after World War II, the General Agreement on Tariffs and Trade was formed as a provisional organization to boost economic recovery. Its aim was to liberalize world trade, with the help of multilateral negotiations known as “trade rounds” that looked at lowering trade barriers, such as customs duties or tariffs.

The Uruguay Round was the eighth round of such trade negotiations, taking place between 1986 to 1994 and involving 123 countries. As the largest and most extensive round to date, it set the rules for almost all of global trade, from toothbrushes to banking to the genes of wild rice. It also led to the creation of the World Trade Organization.

Issues with the WTO dispute settlement mechanism also mean that FTAs with their own dispute settlement mechanisms have become more important for making trading relations more predictable and enforceable, he added.

Economies in Southeast Asia have also been actively pursuing free trade agreements with like-minded partners. As a bloc, the Association of Southeast Asian Nations (ASEAN) has long been active in inking deals with its trading partners, such as the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA), the ASEAN-Japan Comprehensive Economic Partnership, and the ASEAN-South Korea FTA.

Other major FTAs in Asia Pacific include the ASEAN-China Free Trade Area and the ASEAN-Hong Kong, China FTA.

One notable agreement, which entered into force in December 2018, was the landmark Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Known as the Trans-Pacific Partnership until the U.S. pulled out, the wide-ranging deal was salvaged by the 11 remaining members — Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore, and Vietnam.

The CPTPP now covers a market of nearly 500 million people and economies that account for about 13 percent of the world’s gross domestic product (GDP). Its most significant feature sees the removal of tariffs on as much as 95 percent of goods traded between member countries.

In a recent article, economists Peter Petri and Michael Plummer said that the CPTPP could even be the answer to the trade war for China.

“By adopting CPTPP trade rules, China could ease tensions with the U.S. and other countries. By joining a dynamic regional trade network, China could accelerate its economic growth and diversify its markets. And by committing itself to high international policy standards, China could energize its own reforms in building a modern, open economy,” they said.

None of this would be easy, stressed the two economists, nor would it spell the end of global trade tensions.

“But joining the CPTPP would mitigate the risk that trade conflict, which can lead to constructive agreements, from becoming a trade war, which is always destructive.”

Keeping Asia’s doors open

But while the networks of major FTAs have been useful in keeping free trade alive, Asian governments are not yet done.

Some of the biggest economies in the region are now pushing for another massive trade pact: the Regional Comprehensive Economic Partnership (RCEP), which involves all 10 ASEAN economies, China, India, Japan, South Korea, Australia, and New Zealand.

If passed, the RCEP would create the world’s largest trade bloc, accountable for a quarter of the global economy and nearly half of the world’s population. It would also grow the global economy by over US$285 billion annually — almost twice as much as the CPTPP — if in place by 2030, according to Petri and Plummer.

U.S. President Donald Trump
U.S. President Donald Trump

But taking on such a mega-deal has been an uphill task. Cook said such “mega-regional” FTAs are hard to negotiate, particularly when they involve the largest economies in the world and it is evident with the ASEAN-led RCEP negotiations going into their seventh year.

India’s fears over cheap Chinese goods entering its consumer market, for instance, have left negotiations in an impasse, while Australia and New Zealand have raised concerns over a lack of labor and environmental safeguards.

With the U.S. and China standing firm in the trade war, the pressure is mounting for regional economies to find another outlet for free trade to take place.

“The winds of protectionism are hurting our multilateral trading system,” Thailand’s Prime Minister Prayut Chan-o-cha said.

“ASEAN must hold our hands tightly in negotiating the RCEP, so it is concluded this year. It will help offset any impact from the ongoing trade conflict.”

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