Why Asia needs to show the way on trade strategy

BY Peter Drysdale

Some may think that the Trump shock is a passing moment and the US leadership in international trade and economic policy can be quickly restored. But there is little doubt that the post-war trade regime and the primacy the multilateral order delivered are now vastly less certain. That was clear for all to see at the Hamburg G20 summit.

The question is how Asia — that has benefited so much from the certainties of economic openness that the World Trade Organisation (WTO) and other global institutions have provided — can protect its strategic economic and political interests in the face of the retreat of leadership by the world’s largest economy. Even if Trump and his White House advisers do not embrace all of the policies that they’ve foreshadowed in trade policy, policy uncertainty will undermine global economic and political security as well as damage the US standing in the world.

Trump’s withdrawal from the Trans-Pacific Partnership forewent the potential lift to the US incomes which that deal would have delivered mainly through the opening of the Japanese markets to the US farm and services trade. The threats to impose trade barriers against the US trading partners will actually reduce the US incomes. The costs of imposing punitive tariffs on China and Mexico or slapping tariffs on the US imports such as steel are calculable. 

Now he threatens to tear up the US–Korea free trade agreement. All these actions would damage trade and incomes in the US trading partners but they’ll also reduce American incomes substantially. On one scenario, the US income will be cut by one percent for every year putative higher the US tariffs stay in place — paring close to half a year’s growth from the US incomes annually.

The US protectionism empowers protectionists globally. But other countries would only aggravate the costs to themselves and others if they retaliated in kind. A better strategy is to maintain open trade in the face of the United States’ self-inflicted harm and, a better strategy still, in coalition with other countries, is to protect the open global trade regime by maintaining the momentum of global liberalisation and economic reform.
The rest of the world has a continuing and strategic interest in new commitments to openness however Trump’s United States might choose to damage itself.

No one country — even China, which is the second biggest economy and largest trader in the world — can make the difference alone in holding the line as the United States turns inwards. But there is a powerful interest in pushing collective leadership on trade openness from Asia.

Asia has its problems but it remains the most dynamic part of the global economy. There is intense focus on Asia’s response in the unfolding uncertainty about global trade policy because of its size and importance to future global growth and because of what it can deliver to the world through further opening up.

Asia’s economic dynamism depends, in turn, upon success with its own programmes of economic reform, programmes that will be made more difficult in a hostile international policy environment. Confidence in the global trading system is important to Asia. It has underpinned the growth of Asian interdependence, economic prosperity as well as its political security.

In guarding these strategic global interests, the Association of Southeast Asian Nations (ASEAN) has a critical role to play, through the ASEAN-led Regional Comprehensive Economic Partnership (RCEP). The RCEP includes not only the 10 ASEAN economies but also Japan, South Korea, China, India, Australia and New Zealand. It is a coalition of countries with considerable economic weight, able to deliver a powerful message to the world. But without movement in ASEAN, the RCEP is likely to go nowhere.

The RCEP trade ministers and officials are now meeting in Manila to meet their deadline to deliver East Asian trade reform this year or wimp it.

It might seem strange in this time of global crisis to turn to ASEAN, dogged as it is by perceptions of weakness and vulnerability and distracted by the political and security problems in the South China Sea. But ASEAN, with Indonesia at its core, is a regional enterprise with a distinctly global outlook and objectives, an experiment in open regionalism that has succeeded. ASEAN’s economic cooperation strategy has persisted despite its perceived weaknesses and slow pace. It is still the crucible for action on regional cooperation within Asia and across the Pacific.

The RCEP was designed by ASEAN policy strategists to buttress regional trade reform and lift Asia’s growth potential in the global economy. It is now the only active, credible multilateral endeavour anywhere in the world positioned to deliver significant push-back on the retreat from globalisation, soon.

The RCEP is not simply another free trade and investment arrangement. It is structured to be open to easy sign-on by other partners. Importantly, it incorporates a cooperation agenda, an essential element in building capacity for economic reform and mutually reinforcing regional development over time. That agenda has an important political and security dimension. That will assist in ameliorating regional tensions and managing relations with the bigger powers, like China, Japan and India (on geo-economic issues such the Belt and Road Initiative for investment in connectivity and geo-strategic territorial issues) and those outside it, like the United States and Europe (in staking out Asia’s interest and claims to ownership in the global public good of an open economy).
The RCEP offers ASEAN and the Asian region a critical line of defence against fragility in the global political economy. There is too much at stake strategically at this turning point in global economic history for Asia’s leaders to fail to step up and deploy it. 

(Courtesy East Asia Forum)

(Peter Drysdale is Emeritus Professor in the Crawford School of Public Policy at The Australian National University and Head of the East Asian Bureau on Economic Research)