The Economist Intelligence Unit
With US President Donald Trump quickly making good on campaign promises to end or renegotiate the country’s participation in major trade deals, and Brexit calling European integration into question, free trade has fallen out of fashion across much of the developed world. President Trump’s pledges to slap punitive tariffs on exports from countries like China and Mexico have also raised the spectre of a broader trade war. Yet some experts see reason for optimism - and an opportunity for Asia to fill the void left by the historical advocates of trade liberalisation.
The region is a natural for this role in part because of its recent and largely positive experience with free trade. Over the past few decades as markets such as South Korea, China and now Southeast Asia have opened up, millions of people have been lifted out of poverty and economies have expanded at rapid rates.
“Asia has benefited from globalisation and there is a general recognition of this point,” says Ben Simpfendorfer, managing director and founder of Silk Road Associates, a Hong Kong-based research and advisory firm focusing on the region’s emerging markets. “The re-emergence of trade protectionism should have everyone from politicians to factory workers thinking that within this region, we need globalisation and we can’t roll it back.”
There are some caveats -- a prolonged economic downturn that impacts employment, for example, could encourage some countries to introduce controls like local production requirements for goods sold in their markets. However, even if Asian exporters become embroiled in trade disputes with key Western markets, within the overall region the liberalisation trend is likely to remain intact, as Asian economies and companies redouble focus on trading with each other.
“In 10 years we may look back and realise that this is an inflection point,” Mr Simpfendorfer says. “The fact that Asia may go backwards in relations with Europe or the United States will result in a very distinct trade bloc in this part of the world. That’s important for the global economy because the region is two-thirds of the world’s population, and it’s where consumer demand is emerging.”
This process will be supported by the region’s existing and planned trade pacts. According to Mr Simpfendorfer, the Association of Southeast Asian Nations (ASEAN) Economic Community, formally launched in late 2015, and ASEAN’s free trade agreements (FTAs) with major Asian markets such as China, South Korea and Japan, have already seized much of the “low-hanging fruit” in terms of reducing tariffs on goods and encouraging the integration of regional supply chains.
The hope now is that this ‘spaghetti bowl’ of multiple multilateral and bilateral agreements can be consolidated and built on via a more ambitious regional platform. There has been some debate over whether this role would be best played by the Trans-Pacific Partnership (TPP), which (until recently) included the United States, some ASEAN members, Japan and other Pacific Rim nations such as Canada, Chile and Peru; or the Regional Comprehensive Economic Partnership (RCEP), a proposed wider pact between ASEAN and its existing Asian FTA partners that, unlike TPP, includes China and India.
President Trump’s decision to withdraw the United States from the TPP has in the eyes of many deprived the initiative of its biggest backer and will inevitably shift focus to the RCEP. That may be the preferable outcome, according to Mr Simpfendorfer.
“RCEP focuses specifically on goods and services; it’s less concerned with more ambitious issues like labour, environment and government procurement,” he explains. “These are all worthwhile areas, but ambitious given the state of the global economy and where many Asian countries are today. They’re perhaps not ready to negotiate these issues. There’s some overreach with TPP to be blunt.”
While the RCEP negotiations have also proven fractious and the deadline for the conclusion of the deal has been repeatedly extended, in the eyes of some officials the effective demise of the TPP has given the process new urgency, making it more likely RCEP will be largely concluded this year.1 The main short-term benefit for businesses from Mr Simpfendorfer’s point of view would be greater uniformity of trade standards in areas like customs procedures and electronic documentation.
“That premise will become even more compelling over the coming years because of the strength of domestic demand,” he says. “Whereas the region was once exporting to the world, its consumers are now buying goods produced in the region. Trade integration will only grow, so there’s a lot to be said for enforcing consistency of standards. The closer we get to that the better it is not only for global multinationals, but also for the region’s emerging multinationals.”
RCEP should also be viewed as one element of a far bigger trend of Asian governments bolstering ties with the rest of the region, and Asian companies looking to their own backyards for investment or expansion opportunities. This is evident also in China’s One Belt, One Road (OBOR) initiative, aimed at revitalising the former trade routes that connected Asia with the Middle East and eventually Europe.
Mr Simpfendorfer sees OBOR as a “mission statement” for which RCEP will serve as the policy “toolbox” -- and says it should also serve as a “wakeup call” for Hong Kong.
“Hong Kong was over the last decade, perhaps understandably, very focused on China; we’re arguably less international today than we were 10 years ago,” he says. “(OBOR) encourages us to rethink our international role. Rather than act as just an entry point to China, we should act as China’s entry point to the world.”
In Mr Simpfendorfer’s point of view this means capitalising on Hong Kong’s proximity and well-established links to Southeast and South Asia, serving as the “global office”, arbitration and financing centre for Chinese firms expanding in those markets.
“Hong Kong is an easy first step for Chinese companies looking to go abroad,” he says. “We really are the ultimate special economic zone -- it doesn’t get much better than this in terms of freedom of capital movement, people or goods. As the region grows more integrated, Hong Kong will certainly have a role to play.”
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