July 18, 2016 Samuel George

VIDEO: Mega-Regional Trade Deals and Asia

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It seems tough to believe, but not all that long ago East Asia was not a dominant player in global trade. China and Vietnam were inward-looking command economies and Japan and South Korea needed to rebuild from war before they could build the world’s electronics.

Over the next decades, however, the region experienced rapid economic integration. Hong Kong, Singapore, South Korea and Taiwan leapt forth as the Asian Tigers, while China emerged as a prominent player in global manufacturing.

Production chains, linked together by intricate webs of free trade agreements, played a fundamental role in this expansion. But these bilateral and multilateral agreements created insiders and outsiders. And as the WTO proved incapable of setting global rules of trade, these side deals became convenient, second-best solutions for countries that wanted to pursue liberalized trade.

As these blocks get bigger and bigger, more and more is at stake. Increasingly, these blocs are not overly focused on tariffs. After all, countries that pursue free trade tend to have lower tariffs to begin with. Thus, the mega-trade deals aren’t so much about removing tariffs as they are about setting the rules of the game; setting the rules on intellectual property rights, on trade sanctions and rules of origin.

Basically all the things the WTO can’t agree on.

So what we now have is a broader competition between East and West, and a narrower competition between the US and China to set those rules of the game for 21^st-century trade.

And, while officials would never admit it publicly, this is what drives the US’s interest in the Transatlantic Trade and Investment Partnership (TTIP), a potential trade deal with the European Union, as well as in the Trans-Pacific Partnership (TPP), a proposed deal with Pacific countries.

If both of these agreements materialized, the US would have a key voice in setting the rules on over 60 percent of global commerce. Countries left out, notably the BRICs—Brazil, Russia, India and China—would be forced to either fall in line with the existing rules, or potentially be left out of the loop.

This is why some major Asian economies support TPP – if the west is concerned about China’s rise, imagine how its neighbors feel. Japan, for example, is a country with high labor and product standards – it does not want China setting the rules of trade.

So how would TPP effect Asia? According to our model, the four participating Asian countries would benefit greatly from a deep TPP. Vietnam and Malaysia in particular could see strong per capita GDP gains because they would have increased access to the Americas.

Interestingly, the model suggests only modest declines for China (.32 percent of per capita GDP) in a deep TPP scenario. This is because if participating Asian countries want to send more final goods to the Americas, they will have to increase intermediate trade with China.

However, Asian countries have no intention of letting the US and EU write the rules of global trade: A group of Asian countries have combined to develop their own deal called the Regional Comprehensive Economic Partnership (RCEP).

In western media, RCEP is reported as a counter-weight to TPP, but the history of the pact runs deeper than that. RCEP is built out from ASEAN, a successful free trade agreement between South East Asian countries. Critically, RCEP includes China and India, and not the US, and it pays limited attention to labor, quality or environment standards.

Again our model indicates Vietnam and Malaysia could be big winners of RCEP – these are countries already deeply embedded in Asian trade, and they stand to benefit by expanding their network. However, China and India also stand to gain. In fact, we forecast RCEP to be a winning deal for nearly all Asian countries.

But this is just the beginning. After all, TPP and RCEP are not mutually exclusive, and it is entirely feasible that both could be implemented simultaneously. Who wins then? Who loses? And what happens to Asia if we throw TTIP in the mix?