May 17, 2016 Cora Jungbluth

Who Will Shape the World Trade Order of the 21st Century — East or West?

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Our new GED Study Series “How do Mega-Regional Trade Agreements Affect Emerging Markets” sheds light on the effects such pervasive changes in the global trading game will have on various regions around the world.

Part two of this three-part series analyzes the effects of TPP, FTAAP and RCEP on 20 Asian economies and argues that Asia could be a major player in forging the rules for international trade in the 21st century.

Asia has the potential to become the most important region in world trade in the 21^st

The region’s share of world exports and imports currently amounts to 32 percent and 31.5 percent, respectively (Europe: 36.8 percent and 36.4 percent).

Sixty percent of the world’s population lives in Asia, forming a consumer market with huge potential.

Three of the 10 largest economies measured by gross domestic product (GDP) are Asian: China, Japan and India. In 2014, they accounted for about 22 percent of world GDP.

The Asian Development Bank estimates that Asia’s share of GDP will increase to 52 percent by 2025. So it seems to be just a matter of time until Asia becomes the center of the global economy, and leaves Europe behind in international trade.

The negotiations on the Transatlantic Trade and Investment Partnership (TTIP) could be regarded as an attempt by the West to mitigate this development and to become a pioneer in the establishment of deep standards for a new world trade order. Meanwhile, Asian countries have not been idle either and a number of them are involved in the negotiation of three other mega-regional trade deals: the Trans-Pacific Partnership (TPP), the Free Trade Area of the Asia-Pacific (FTAAP) and the Regional Comprehensive Economic Partnership (RCEP). Whereas the TPP and FTAAP strive for closer integration of the Asia-Pacific region, the RCEPopts for closer integration between Asia and Oceania with the Association of Southeast Asian Nations (ASEAN) as the center. Since the three mega-regionals differ in the composition of their members, their economic effects consequently differ with respect to both member states and third countries within Asia. In addition, scenarios are possible where several agreements exist at the same time.

The TPP includes the least number of Asian countries. Also, China, the world’s most important trading nation, is excluded. According to our analysis, this results in more negative effects on real income in Asia than the other two trade pacts, even though these effects stay within narrow limits. The TPP could also lead to an economic split among ASEAN states, since only four out of 10 members are part of the TPP, and might hamper the ASEAN integration process in the long run. It therefore makes sense for the ASEAN states to push their own integration initiative in the form of the RCEP. Compared to the TPP, the RCEP yields more positive economic effects for Asian countries, including non-members, and thus is more advantageous for the economic integration process within Asia. The FTAAP as the most inclusive initiative could have significant positive effects and provide major momentum for trade in the region and beyond for non-participating Asian countries as well, especially through the elimination of non-tariff barriers to trade. Considered over the medium to long term, the FTAAP is consequently a more sustainable path to economic integration for Asia due to its broader inclusiveness.

However, since it is unlikely that the FTAAP will be concluded in the near future, the TPP and the RCEP could be concluded parallel to one another and could possibly pave the way for the FTAAP, which would then integrate India as well. Our analysis of the parallel scenarios with the TPP and RCEP indeed shows that Asia would profit most if both agreements were concluded. Also, both agreements could be an effective “antidote” to the TTIP, in which the region is only a passive observer, and help Asian countries mitigate the negative effects of the transatlantic initiative to some degree.

The participation or non-participation in 21^st century trade deals, which aim to create new rules especially in regard to non-tariff barriers to trade, will influence the role of Asian countries in the setting of international standards. Who will actively shape the world trade order of the 21^st century—East or West? Or to put it more bluntly, China or the United States? This question is key to the political agenda underlying the mega-regionals analyzed here beyond economic effects.

Interested in more? Click here to read more about part one of our Series! Click here to read about Chinese investment in Europe!