Analysis of RCEP (and CPTPP)

 BRIEFING

The return of free trade

THE FREE-TRADE DEAL SERVES PRESIDENT XI’S INTERESTS NICELY

While Britain and the EU struggle to come to terms, 15 Asia-Pacific countries quietly signed the biggest free-trade deal in history. That’s a welcome development, says Simon Wilson

WHAT’S HAPPENED?

In the middle of last month, as the UK and EU were struggling to nail down the world’s first free-trade agreement explicitly aimed at putting up fresh barriers to trade rather than tearing them down, 15 Asia-Pacific economies quietly signed the world’s biggest free-trade agreement. The Regional Comprehensive Economic Partnership (RCEP) has been signed by China, Japan, South Korea, Australia and New Zealand – along with ten southeast Asian countries, all members of the existing Asean trade bloc. The agreement covers almost a third of the world’s population and about 30% of global GDP – and is the first ever free-trade deal between China, Japan and South Korea, the biggest, second-biggest and fourth-biggest Asian economies. Of the major Asian economies, only India has opted out, over concerns over cheap Chinese imports. But as one of the original negotiating partners, it has an option to join at a later date.

WHEN DOES THE DEAL TAKE EFFECT?

It’s likely to be years rather than months, and some of its provisions may not take effect for up to 20 years. After eight years of tortuous on-off negotiations, the deal was concluded following a four-day international summit in the Vietnamese capital, Hanoi, in mid-November. But it must now be ratified by each country, and will not take effect until at least six of the ten Asean nations, and three of the five non-Asean nations, have done so. The key aim of the agreement is the progressive lowering of tariffs to allow more free movement of goods and encourage investment.

HOW IS THIS DIFFERENT FROM THE TPP?

RCEP represents a bigger bloc, but a less comprehensive deal. Since President Trump withdrew the US from the Trans-Pacific Partnership (TPP) trade deal in 2017, it has been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and was ratified by its 11 remaining members in 2018-2019. The RCEP nations’ overall market size is nearly five times greater than that of the CPTPP, and the trade between them twice as big. Seven countries (notably Japan and Australia) are in both blocs. But crucially, the new bloc includes China and South Korea (and six southeast Asian economies that are not CPTPP signatories). It does not include the Americas members of the CPTPP (Canada, Mexico, Peru and Chile). However, compared with CPTPP, the RCEP is less comprehensive – and with much less emphasis on labour rights, environmental and intellectual property protections and dispute resolution mechanisms.

HOW IMPORTANT IS THE AGREEMENT?

RCEP was conceived as a grand “tidying-up exercise”, says The Economist, bringing together various smaller trade agreements in place between the Asean nations and Australia, China, Japan, New Zealand and South Korea. As such, only a limited amount of Asian trade is affected. Indeed, “of the $2.3trn in goods flowing between signatories in 2019, 83% passed between those that already had a trade deal”. The biggest benefits, in terms of trade liberalisation, will probably come of RCEP’s rules of origin – that is, the principles setting out how much regional content a product must have for it to enjoy lower tariffs. Currently, exports from an Asean state could face three different sets of rules when exported to China, South Korea or Japan. Now such companies will only need to comply with one and the rules are relatively liberal: many products will need just 40% of their value to be added within the region in order to  take advantage of lower tariffs”. 

WHO GAINS THE MOST?

The RCEP is not “China-led”, in the sense that it was the Asean nations that conceived the pact and have driven it forward. But it definitely serves China’s interests. The old TPP included provisions that reined in state-owned firms and included rules on labour and environmental standards. RCEP includes none of those constraints and is likely to strengthen China-centric supply chains. But a study by Peter Petri of the Peterson Institute and Michael Plummer of Johns Hopkins University estimates that Japan and South Korea will gain the most, with real incomes 1% higher by 2030 than they would have otherwise been.

SO A BIT OF DAMP SQUIB?

It has certainly been over hyped, says Salvatore Babones in Foreign Policy. The RCEP is a “straight tariff-reduction agreement at a time when base tariffs are already low, and countries don’t hesitate to impose punitive tariffs whenever it suits their foreign-policy objectives”. Moreover, it avoids hard issues such as state subsidies, intellectual property theft and investor-state disputes. Yet it remains the biggest free-trade deal in history, says Petri and Plummer for the Brookings think-tank. Together, CPTPP and RCEP are the only major multilateral free-trade agreements signed in the Trump era. And as now configured (ie, without the US) both of them “forcefully stimulate intra-East Asian integration around China and Japan”. RCEP will “help China strengthen its relations with neighbours”, and accelerate northeast Asian economic integration. 

WHAT SHOULD AMERICA DO?

In terms of pushing back against China, and reasserting US leadership on trade, the “obvious move”, says the FT, would be for the Biden administration to take the US into the CPTPP. Alas, while “such a move would make sense in diplomatic and economic terms”, it is probably “politically impossible in the current US climate”. There is an interesting geostrategic dilemma for India, too, with its goal of emerging as this century’s second Asian superpower. The Modi government has stood aside from RCEP, but India “must take care it does not relapse into the defensive, inward-looking attitude that has served the country so badly in the past”. And for the Western world as a whole, RCEP presents a salutary reminder. Whatever the prevailing mood of scepticism towards economic liberalisation, “free trade is the best route to greater prosperity”.

MONEYWEEK

Economist article on TPP - great material on trade agreements

Free exchange blog

A serviceable deal 

 TPP is intended to spark a boom in trade in services, but it will be decades in the making Nov 14th 2015 | From the print edition Timekeeper IT DID not take long for America’s presidential candidates, busy though they must be, to digest the 6,000 pages of the agreement creating the “Trans-Pacific Partnership” (TPP). America and 11 other countries of the Pacific Rim struck the trade deal in early October, but the full text was not released until November 5th. Within days Bernie Sanders, a Democrat, had rendered judgment: “It’s even worse than I thought.” Donald Trump, a Republican, labelled it “insanity”.

 Even people of a less protectionist bent are unimpressed, complaining that TPP’s short-term benefits will be indetectably modest. One estimate suggests that in its first ten years it will cause its members’ exports of goods and services to rise by just $308 billion in total. In 2003-13 global trade in goods and services grew by more than $1 trillion a year on average. A ten-year horizon misses the point, however. TPP’s real promise lies in the liberalisation of trade in services. Just as it took decades for supply-chain integration to flower into the rapid goods-trade growth of the 1990s and 2000s, the pay-off from TPP, and deals like it, is further off. TPP cuts tariffs for some important industries, such as cars and agriculture, but its main concern is to eliminate non-tariff barriers, such as onerous customs procedures, buy-domestic rules for government agencies and regulatory barriers to trade in services. Indeed, Hillary Clinton, another Democratic presidential candidate, who was for TPP before she was against it, once said it set “the gold standard” in this respect.

 Not all services can be traded: outside of border-straddling cities, the international trade in manicures, say, is limited. Yet parts of other service industries, including finance, telecommunications, education and health care, are increasingly tradable thanks to advances in information technology. Such services account for an enormous share of GDP and employment in most rich countries, but only a tiny sliver of trade. Liberalisation could open them up to global competition. Hospitals in America, for instance, could outsource patient monitoring to nurses in Malaysia, diagnostics to technicians in India, and consultations to doctors in Canada, to the benefit of all four countries.

 Fulfilling that hope will be hard. Trade typically grows in step with GDP. It grew rapidly in the decades after the second world war, for example, largely because the world’s big economies were expanding so fast. So TPP’s benefits may be held in check in the short-run by weak demand around the rich world.

 But instigating a trade boom takes time as well as a propitious environment. Beginning in the 1980s trade began behaving strangely, growing twice as fast as GDP. This burst originated in a revolution in supply chains that had been decades in the making. For most of industrial history, countries traded raw materials or finished goods, with the process of turning the one into the other located entirely within a single country, and often within a single factory. From the 1980s, however, a large and rapidly growing share of trade consisted of “intermediate goods”. Rather than produce a computer from scratch in one country, for example, a tech firm would source components from several different countries, bring them together in yet another country for assembly, and then ship the completed good to consumers around the world. As a result, rising GDP led to even greater jumps in trade.

 The great supply-chain revolution was slow in coming, however. Tariff rates fell precipitously from the 1940s to the 1980s, by which time the duties imposed on most goods traded between rich economies had fallen to negligible levels. The shift to container shipping, which made transit by sea much faster and more reliable, was largely over by the early 1980s. From 1950 to 1985 the cost of a long-distance phone call dropped dramatically. Yet it was not until the 1990s that the supply-chain boom really got going, abetted in part by China’s economic opening.

 About half of the current slowdown in trade growth represents the exhaustion of this process. At the turn of the century, for instance, imported parts accounted for nearly 55% of goods exported by China. By 2012, that share had fallen to 35%. Some large economies, like America and China, are keeping more of their supply chains for themselves. As China’s rich coastal cities have progressed from the assembly of electronics to the development of more sophisticated components and designs, assembly work has often moved to poorer inland cities rather than to China’s poorer neighbours. Hence the importance of services.

 Long-haul service 

There are lessons here for those awaiting a service-trade boom. TPP in its present form is just one element of several which must fall into place. Barriers to trading services remain prohibitively high, equivalent to an average tariff of 15-17% in Canada, Australia and Japan and 44% in Mexico, according to the Peterson Institute for International Economics, a think-tank. Provisions within the TPP deal to work toward mutual recognition of some professional certifications still need to be seen through. Adding China, which is currently excluded, would greatly help. So would completion of the Trans-Atlantic Trade and Investment Partnership, a mooted trade pact between America and Europe which is also preoccupied with services, and a multilateral Trade In Services Agreement being negotiated at the World Trade Organisation.

 Technological change is also needed. Cross-border internet traffic grew 18-fold between 2005 and 2012, according to the McKinsey Global Institute, an arm of the consulting firm. Further advances—to enable even better digital translation, for example—would help overcome the cultural and personal barriers to trade in services. One day service industries may be as efficient and as globally integrated as manufacturing is today. TPP is a step toward that ideal, but just one of many that are needed.

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Global economy -evaluation material

All the US presidential candidates are decrying free trade. Looks like TPP will be obstructed, so what hope TTIP? Therefore, it could be argued we will be more successful negotiating limited specific agreements as opposed to coming under the umbrella of EU negotiated pacts:

American Account: We now know the election’s loser — free trade 

Irwin Stelzer Published: 13 March 2016

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The former Packard factory in Detroit, Michigan. Hillary Clinton lost the Democratic primary in the state, where voters blame her husband for the destruction of its manufacturing sector (Leynse/Corbis)

One thing has changed in the battle for the presidential nominations. Until now, all eyes were on the Republican side, both because it became clear early on that Jeb Bush’s $100m war chest could not buy the nomination and because Donald Trump proved a master at garnering media attention. In the Democratic race, Hillary Clinton was considered a certain winner over socialist Bernie Sanders, making that contest a bore. Then came Sanders’s victory in Michigan, in the course of which free trade was consigned to the dustbin of history, a phrase with which Sanders, who honeymooned in Russia, is familiar but for obvious reasons chose not to deploy. 

According to some estimates, Michigan has lost about 150,000 manufacturing jobs because of the North American Free Trade Agreement (Nafta). Blame it on the then-president, Bill Clinton, who signed the trade pact into law in 1993. The auto industry was decimated not only by Mexico but by Japan, and misrule by Democratic liberals drove Detroit to bankruptcy. The city was once home to 1.8m people and the motor industry, the pride of the nation’s manufacturing sector. Then came competition from overseas. Jobs disappeared, the population fell to 700,000, and the average house price sank to about $6,000. 

But Michigan voters have not become socialists. The majority were simply unprepared to vote for anyone called Clinton, the name of the destroyer of the state’s manufacturing sector. Hillary’s husband brought ruin, and voters would not return him to the White House, even as First Man. No matter that she is opposed to President Barack Obama’s legacy-seeking Trans-Pacific Partnership (TPP) and last week, in a debate with Sanders, burnished her shiny new protectionist credentials in preparation for Tuesday’s primaries in Illinois and Ohio, where free trade is unpopular. The rust may be coming off the Rust Belt as the jobs picture brightens, but the memory of the suffering lingers. 

Cut through the smoke from the gunfire of the candidates’ debates, and we see much of a muchness.

• All candidates are to varying degrees protectionist, and so is a majority of Congress. Trump would do unspecified bad things to companies taking jobs overseas and build tariff barriers higher than his wall with Mexico to disadvantage currency manipulators. Clinton would charge companies that move their headquarters to lower-tax jurisdictions an “exit fee” geared to the amount of tax relief they received while resident in America. TPP RIP.

• All candidates are to varying degrees hostile to the financial community, with Sanders calling for a break-up of the big banks and jail time for malefactors of great wealth, as well as a tax on financial transactions to fund his education plan. Trump is hostile to hedge fund managers and their special tax treatment, while Clinton, more sensible on this as on many other issues, is calling for reforms that include placing insurance-style burdens on banks proportionate to their threat to the stability of the international financial system.

• All candidates are to some extent dissatisfied with the healthcare system, with all Republicans calling for repeal and replacement of Obamacare, Sanders wanting to convert it into an NHS-style system, and Clinton looking to repair what she believes are its flaws.

• All candidates want to ease the cost of higher education. Sanders would offer free tuition at public universities at an annual cost of $75bn. Clinton says: “No family and no student should have to borrow to pay tuition at a public college or university. And everyone who has student debt should be able to finance it at lower rates.” Trump says student loans are “one of the only things the government shouldn’t make money off — it’s terrible that one of the only profit centres we have is student loans”. Details to follow — maybe.

There are two important differences among the candidates. First, Clinton is calling for a de facto ban on fracking and for the nation to convert to 100% renewables to fight global warming, while Republicans promise to remove regulations on the fossil-fuel industries and end efforts to prevent climate change, which they deny is occurring. That may be a hard sell in Tuesday’s primary in often-flooded Florida.

Second, all Republicans propose lowering the tax burden on wealthier Americans, the theory being that this cut will stimulate sufficient growth and generate tax revenues to pay for itself while creating millions of jobs. Ted Cruz is the most radical reformer: he would have a 10% flat income tax rate and substitute a 16% VAT-style tax for all corporate taxes. Sanders and Clinton would increase the burden on the wealthiest to finance infrastructure improvements and a variety of benefits for low and middle earners. No one talks very much about the national debt, now at $19 trillion and rising. 

And none of the candidates sees fit to remind voters of the wisdom of our Founding Fathers, who erected a system of checks and balances that will require them to persuade Congress to make an honest man or woman of them by enabling them to deliver on their promises. What comes out of the legislative sausage factory may be far different from what went in. 

We will, of course, know more on Tuesday, when more than 350 delegate votes are up for grabs, most of them in winner-takes-all states such as Florida and Ohio. Then the fun heads north, to regions less favourable to Cruz, and to states in which Trump’s typical 40% share of the vote earns him 100% of the delegates. The so-called Republican establishment is hoping that Cruz and John Kasich can deny Trump a majority, allowing party regulars to cobble together support for some compromise candidate at the national convention in Cleveland in July. In which case the millions Trump has brought to the voting booths for the first time will storm out, sending the Clintons back to the White House. Unless, of course, Hillary’s misuse of emails results in an indictment, which is why some call this an “FBI primary”. 

Irwin Stelzer is a business adviser

irwin@irwinstelzer.com