Rajiv Biswas, Asia Pacific Chief Economist, IHS Global Insight
President Trump’s signing of an executive order confirming that the US will withdraw from the TPP will accelerate a significant shift in the trade policy landscape in the Asia Pacific region. China is likely to play a much stronger lead role in the future Asia Pacific trade architecture through a number of multilateral trade liberalization initiatives, notably the RCEP (Regional Comprehensive Economic Partnership) and FTAAP (Free Trade Area of the Asia-Pacific).
China’s President Xi Jinping made a strong call in his speech at the World Economic Forum in Davos last week signaling that China will position itself as a champion of trade liberalisation. Initially, the US withdrawal from TPP will galvanise momentum for the successful conclusion of the RCEP, an Asia-Pacific trade liberalization initiative led by China that includes the ASEAN ten members as well as Australia, New Zealand, Japan, South Korea and India. At the APEC Summit held last November in Lima, Peru, two Latin American TPP member countries, Chile and Peru, also expressed interest in joining the RCEP negotiations on expectations that TPP would stall. APEC leaders also have reaffirmed their commitment to move forward with a longer term vision of creating FTAAP, with next steps set out in the Lima Declaration on FTAAP. As the FTAAP would be realised outside of APEC, but in parallel with the APEC process, this creates greater flexibility in case some APEC members do not wish to pursue the FTAAP vision.
A number of Asian TPP signatories were expected to derive significant economic gains from the TPP and the final decision by President Trump to withdraw from TPP is a blow to their trade liberalization plans. However, this has been anticipated for some months already since President Trump clearly signaled his plans to withdraw from TPP during his election campaign. The Vietnamese and Malaysian manufacturing export sectors were expected to be among the largest beneficiaries due to the much improved market access to North America. The TPP agreement would have significantly reduced tariff barriers for Vietnam’s and Malaysia’s electronics manufacturing industries,as well as providing a large boost to Vietnam’s textiles exports. Due to the significant gains that both Vietnam and Malaysia were expected to achieve through the TPP for improving market access for their manufactured exports, the outlook for future export growth for both these two countries has been significantly impacted by the US decision to withdraw from the TPP. The TPP was also important for Japan as a key pillar of the Third Arrow structural reforms under Abenomics, so the US withdrawal from TPP is also a blow to Prime Minister Abe and his economic reform plans for Japan.
While the other 11 TPP members could create a parallel agreement without the US and move forward, the economic benefits will be significantly reduced without the US participating. Therefore, some TPP member countries may prefer to refocus on the RCEP as an alternative large-scale regional trade liberalization initiative. The US withdrawal from TPP will help to strengthen China’s economic leadership position in the Asia Pacific, with its leadership on the RCEP and FTAAP building on its other regional economic initiatives, such as the One Belt One Road regional strategy as well as China’s leadership in creating new development finance institutions such as the Asian Infrastructure Investment Bank (AIIB).
However, the silver lining in the US decision to withdraw from TPP is that the President Trump has also signaled that his Administration will pursue bilateral trade negotiations with the other TPP member countries to try to strengthen bilateral trade ties, so this bilateral approach may also provide opportunities for further trade liberalization between the US and other TPP member countries.