Regional leadership needed to save trade regime

July 5,2018

Regional leadership needed to save trade regime

by Mari Pangestu, University of Indonesia, and Christopher Findlay, University of Adelaide

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The world in which Asia Pacific economies operate is changing. Two main forces are driving this change — one ‘top-down’, the other ‘bottom-up’.

The top-down force is the emergence of a world with a larger number of key economies. In recent decades, growth rates around the world have diverged. For much of Asia, this has meant dramatic improvements in incomes and a huge reduction in the number of people living in poverty. It has also meant a new order among countries — a multipolar world.

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Prof. Christopher Findlay, University of Adelaide

The bottom-up force is the change in the way production is organised, driven by progress in communications and information technology. Technological improvements have shifted the location of production, with production processes becoming increasingly fragmented across countries. The nature of work and the composition of skills within economies have changed.

Given the new order of production and trade, the Trump administration’s mercantilist focus on reducing merchandise trade deficits will end up hurting the United States, as well as disrupting global production networks.

As trade flows change, pressure for domestic structural change can arise. In the United States, a decline in support for international trade and openness has been exacerbated by a lack of adjustment support for geographically concentrated bearers of the burden. Their reaction via domestic political processes has shocked the international system.

In the United States and elsewhere, good macroeconomic outcomes no longer win elections. Much economic policy is now driven by nationalistic and protectionist politics. This is particularly evident in US initiatives to protect its domestic production and seek adjustments from China.

These political conditions were preceded by waning support for openness at a multilateral level. As multilateral negotiations stalled, the response has been the emergence of ‘mega-regional’ platforms such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP or TPP 11) and the East Asian Regional Comprehensive Economic Partnership (RCEP).

These initiatives sit atop a ‘noodle bowl’ of messy bilateral agreements. Before the current US America First regime, these mega-regional and bilateral agreements still operated under the lid of the World Trade Organization. The rules-based trading system was still an anchor for economic integration, especially the dispute settlement mechanism.

Today, the principles of openness, non-discrimination, transparency and open regionalism — which have helped generate prosperity in the region, especially for developing economies in Asia — are being severely challenged. When the United States leaves the TPP, undertakes unilateral action and declares that the multilateral rules have not served US interests, the anchor of the trading system is challenged. At most international forums like the G20, policymakers’ time is being wasted on phrasing defensive communiques instead of cooperating on the substantive trade and investment issues of the day.

At the same time, new issues are emerging in relation to trade and investment, such as the taxation of international income flows, the treatment of data flows and the management of intellectual property. Responding to climate change and finding appropriate policies to deal with inequality are also among the challenges.

Progress will be difficult in the multipolar world without clear leadership from the major economies.

Waiting for a consensus to emerge among key economies about the importance of maintaining these anchor principles — while at the same time dealing with the new issues that have emerged — is not an option. There are no obvious forces now at work to resolve this lack of consensus within a reasonable timeframe. Lower-income people in rural ASEAN areas, for example, should not have to wait for the rest of the world to figure out how to shift their own economies and communities to new sources of growth.

In the absence of leadership from the advanced economies, a shared leadership model in the region should be the answer. The key then is the response of the increasingly influential ‘second-tier’ economies. No actors are more important than Indonesia and Southeast Asia, operating through ASEAN and the ASEAN-plus regional agreements that are already in place and being consolidated under RCEP.

Recent statements by leaders in Indonesia indicate recognition of the role it can play and wants to play. But Indonesia’s contribution will be so much greater and more effective if it acts in concert with others. Concerted action could take multiple forms. It might include unilateral reforms, or working on sustainability initiatives that are in both local and global interests.

Effective concerted action depends on a few factors. Foremost, it depends on shared principles. Part of this is agreeing on a purpose, such as the basic principles of non-discrimination, transparency and support for the rules-based trading system. Other principles can relate to specifics, such as the management of open data flows. These principles provide important reference points as countries take their own actions. There is value in sharing experience and aligning countries’ expectations about each other’s reform programs.

These are not new approaches. Readers with long memories will recall efforts like the APEC non-binding investment principles and Individual Action Plans. But this is the point — we already have relevant structures for mobilising this cooperation that can be rejuvenated.

APEC is the most relevant example. Putting weight on APEC does carry a risk. But APEC has a well-developed network of second-track structures that can be engaged more deeply. Given the complexities of the new issues facing the regional economic order, it is even more imperative that there be wide, multi-stakeholder participation and input.

Even more importantly, APEC remains a forum in our region where key economies in the multipolar world and the leading second-tier countries can interact effectively, and where the major protagonist, the United States, can still be engaged.

Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia. Christopher Findlay is Professor and Executive Dean of the Faculty of the Professions at the University of Adelaide.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Trade Wars in Asia’.




3 thoughts on “Regional leadership needed to save trade regime

  1. Let us hope this issue will be discussed at the ASEAN Foreign Ministers’ Meeting in Singapore at the end of July, 2018. We are in danger of losing our centrality in regional affairs. Apparently, unlike EU, ASEAN is unable to stand up to Trump’s bullying tactics on trade and security issues. What is happening, Singapore? –Din Merican

  2. Trump publicly criticized the WTO during his election campaign in 2016, describing the organization as a “disaster.” He believes that other countries are using the WTO to take advantage on the US. Trump has recently slapped 25% and 10% tariffs on steel and aluminium coming from many countries, leading these countries to lodging relevant complaints with the WTO’s court.

    Axios has earlier reported that Trump told his aides on several occasions that he wants the US to pull out of the WTO, branding US membership in the organization as harmful for the country. Very recently, the news website Axios said it had obtained the draft of a bill that Trump ordered to hammer out to stipulate Washington to abandon fundamental WTO rules. The bill is titled “the United States Fair and Reciprocal Tariff Act” or “FART Act”. If approved by Congress, it would “provide Trump a license to raise US tariffs at will, without congressional consent,” Axios reported.

    Additionally, the FART ACT would enable the Trump Administration to ignore the WTO’s two most basic principles, specifically related to tariff rates, and sit down with any country for talks on a one-on-one basis. “It would be the equivalent of walking away from the WTO and our commitments there without us actually notifying anyone of our withdrawal,” Axios quoted a source familiar with the bill as saying.

    The bill is insane, and it is unlikely the Congress would ever consent to it. While the US can exit the WTO, it’s uncertain whether Trump could do so without approval from Congress, where many lawmakers – including Republican proponents of free trade – would likely put up a fight. Trump was briefed on the draft in late May, Axios said, and most officials thought it was unrealistic or unworkable, apart from Trump’s trade adviser Peter Navarro. Whether the name of the FART Act was intentional, internet users responded with jokes, memes and even poetry:

    “The POTUS would like, for a start,
    More power to rip trade apart,
    Reported the press
    Upon its success
    In catching a draft of his FART.”

  3. With increasingly forceful unilateralism of the Protus in Trump, the world,including US is heading for a difficult, uncertain and distructive period. It is becoming very much less reliable.

    The rest of the world needs to be more prepared and search for alternative plans in order to be more self-reliant, joint and severally or regionally to grow for the benefits and welfare of their people. They need to create more jobs, address over-growth in population and reduce poverty(especially those living in under-developed and developing countries).

    The tools in information, STEM are available, but education is the key to make full use of the resources.

    In the meantime, lets hope that Trump is an unfortunate anomaly. He is likely to set the clock back for at least the next decade with the continued dispense of his disruptive actions and got away with it. But the sad thing is he is most powerful man on earth.

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