by Mahamoud Islam, Senior Asia Economist, Euler Hermes
President Donald Trump made good on his campaign promise to withdraw the US from the Trans-Pacific Partnership (TPP). The 12-nation free trade agreement was an ambitious attempt to promote trade on a mega-scale. Now that US’s support is officially withdrawn, gone is the aspiration of bringing together 800 million consumers, close to US$28tr of wealth (36 per cent of global GDP), and US$11tr in trade (exports and imports i.e. 26 per cent of global trade).
This new trade framework could have boosted TPP member countries’ GDP by +US$38bn over the first two years of implementation. In addition to the extensive trade liberalisation in goods and services via the reduction of tariff and non-tariff barriers, the agreement was also intended to promote fair labour competition, freer investment movement, enforcement of intellectual property (IP) rights, and the harmonisation of legal and regulatory issues:
To increase
• Trade flows
• Economic growth
• Investment between partners
• Intellectual property protections
• e-Commerce protections
To decrease
• Taxes and tariffs
• Non-tariff barriers
• Labour abuses
• Differences in regulations
Weak global trade
The global trend of trade is already weak. For the full year of 2016, first trade releases point that US dollar denominated exports dropped in China (-7.7 per cent), in South Korea (-5.9 per cent) and Singapore (-4.9 per cent). We expect a limited improvement in 2017. Global trade volume growth will stay modest, below +4.0 per cent in the medium-term. We forecast +2.9 per cent in 2017, after a record low at +1.9 per cent in 2016.
Regime switch in demand (i.e. China’s rebalancing; energy autonomy in the US; adjustments in the emerging world), isolationism and servitisation, as well as digitalisation explain this daunting trend.
Protectionism has been intensifying over the past years: over 700 new restrictive measures were introduced each year between 2012 and 2015. Over 500 trade barriers were issued during the first nine months of 2016 while indirect protectionism is also on the rise (i.e. public procurement, subsidies and compensation). In that context, Asia will need to find new trade drivers.
Driver #1: The One Belt One Road Initiative
Firstly, for ASEAN TPP members, namely Singapore, Malaysia, and Vietnam, the Chinese-led One Belt One Road initiative could be a good alternative. The latter consists in improving connectivity and economic cooperation in Asia, Europe, the Middle East and Africa, thanks to massive infrastructure investment plans. The impact could be felt through a capital boost in countries, which could result in more funding to finance infrastructure projects. Secondly, it would go through a gradual increase in demand from China for strategic natural resources. Another channel would raise competitiveness as infrastructure for trade improves. Singapore could also leverage on its edge in financial services and logistics operations to advise and support companies expanding their business in the region.
Driver #2: Regional Comprehensive Economic Partnership
Secondly, Asia Pacific markets can bet on other partnerships. The countries can move towards further regional integration with the promotion of the Regional Comprehensive Economic Partnership (RCEP). This mega-trade agreement, which involves China, ASEAN, Australia, New Zealand, India, South Korea, and Japan, represents a market worth around US$22tr and gathers, gathers 3.5 billion people. It aims to liberalise goods and services trade, facilitate investment flows and promote best practices.
About the Author
Mahamoud joined Euler Hermes in 2010 as an economist for OECD countries, including Europe. Before that, Mahamoud worked for the banking sector in Paris. Mahamoud is now the regional economist for Asia Pacific and is in charge of macroeconomic and country risk analysis. Mahamoud has a keen interest in quantitative analysis, public policy and international trade.