US president-elect Donald Trump shocked the aspiring Trans-Pacific Partnership members last week by announcing that the first priority of his presidency will be to withdraw from the trade deal.
The TPP was the principal instrument of President Barack Obama to ensure a foothold in the Asian region, not only in the economic arena but also geopolitically. Trump jettisoned in one stroke the outcome of 10 years of hard-fought negotiations between 12 countries of the Pacific Rim.
The disappointment is deepest in Japan, which had ratified the TPP just days before Trump’s election. Japan had hoped that the TPP would substantially promote trade between Japan and the US; the two by far largest economies in the planned trade group, accounting for almost 80% of the economic power of TPP members.
Trump’s announcement is a big blow to Prime Minister Shinzo Abe. He had hoped that the TPP would provide the necessary outside trigger to push for reforms in sectors where Japan is lagging, especially agriculture.
In his announcement, Trump also offered some hints on his future trade policy stance. He favors bilateral trade agreements in which the US uses its economic and political power to impose deals on its counterparts.
Currently, the US has 14 free-trade agreements in place, but only two bilateral deals in Asia: Singapore and South Korea. In the future, the US might attempt to negotiate further bilateral openings in Asia.
These agreements help to open up trade, but they also come with various problems. First, in today’s world the applied tariffs by countries are already low.
The most burdensome trade barriers are behind the border and consist of differences in standards and regulations. Bilateral trade deals can reduce these differences; however, the best solution would be to develop common regional standards. Otherwise, there is risk of overlapping or even contradicting rules.
Furthermore, international trade is organized along global value chains that span across many countries within Asia and beyond. The TPP would have helped to create a harmonized economic space in which global value chains can operate smoothly.
Trump’s decision to withdraw from the TPP in favor of bilateral deals also means he jettisons the vision of regional integration of the Asia-Pacific in which the United States plays a leading role
In doing so, Trump has given both China and Japan the baton to become the front-runners of regional trade integration. This happened probably more unintentionally than intentionally. In any case, it is now up to both countries to benefit from this opportunity and to work together to build a unified free-trade agreement in Asia.
Currently, China has 14 FTAs in place, as many as the United States. Japan counts 16 FTAs.
However, the most important regional trade initiatives in which both countries are involved, such as the China-Japan-South Korea free-trade agreement or the Regional Comprehensive Economic Partnership, have been under negotiations for many years with little progress so far.
The moment has now come for China and Japan to substantially step up their efforts and develop a joint strategy to build an integrated Asian region where goods, services, and ideas can freely cross borders to the benefit of all.
As growth in China is slowing down and Japan continues to fight against deflation, a more integrated and competitive Asia would be the best recipe to guarantee its current and future prosperity.
Matthias Helble is a research economist at the Asian Development Bank Institute in Tokyo