The controversial Trans-Pacific Partnership, a 12-nation free trade deal championed by US President Obama, seems to be dead in the water.
But the retreat on the part of the US has created an opportunity for China, which was not part of the TPP negotiations, to increase its Asian influence, analysts say.
Nonetheless, a China-led trade pact may not compensate for the failure of TPP in terms of its likely impact on the economic prosperity of other economies in the region, they argue.
After the Obama administration suspended its efforts to bring the TPP to Congress for a vote before Donald Trump takes office, the landmark trade deal, which embodies the US strategic pivot to Asia, now appears to be beyond rescue.
The failure of the TPP is good news for China, which has been increasingly flexing its muscles in a battle of might with the US for power and influence in Asia.
“China benefits from what appears to be the likely disengagement of the US (from TPP),” said Marc Chandler, global head of currency strategy with Brown Brothers Harriman.
China is already in negotiations on a parallel free trade agreement in Asia, the Regional Comprehensive Economic Partnership (RCEP), which includes all the Asean (the Association of Southeast Asian Nations) countries plus Australia, New Zealand, Japan, Korea, India, but excludes the US.
This is China’s “strategic counterweight to TPP”, Chandler said.
Donald Trump’s shock election victory is likely to give renewed momentum to the RCEP talks.
“We believe that the victory of Donald Trump is ushering in a period of increased protectionism in the US economy,” said Joseph Incalcaterra, an economist with HSBC, in a recent research note.
“At the very least, we are likely to see a withdrawal from the TPP and the US is unlikely to initiate other trade initiatives over the next four years, which will provide additional impetus for accelerating the RCEP negotiation.”
RCEP would be a “lofty” achievement for China, even if it falls shy of the higher bar set by TPP, said Chandler.
The pact would be the first pan-Asian trade agreement, covering nearly a third of the world’s GDP and half of its population.
“What is at stake is the Great Game, which is what the great power rivalry of the 19th century in Central Asia is called by some historians,” Chandler said.
He noted that countries like China and Russia have long “chaffed” under what they see as the US’s attempt to achieve hegemony, and are looking to move into any space from which the US withdraws.
“US disengagement, if that is what the demise of TPP and the threat to withdraw from NAFTA (North American Free Trade Agreement) entails, could see the return of spheres of influence, which is the approach that Russia and China have championed,” he said.
However, for Asian countries, the benefits of a China-led regional trade deal are likely to be much smaller compared with what the TPP would have offered, analysts said.
“The demise of the TPP is a blow to economic prospects in emerging Asia,” said Gareth Leather, senior Asia economist for Capital Economics, in a separate research report.
Particularly hard hit would be Vietnam and Malaysia, who were set to be the biggest beneficiaries of the TPP due to the elimination of non-tariff barriers to US markets, he added.
These barriers include rules on government procurement, investment restrictions, and hidden subsidies.
It is true that closer ties with China have the potential to offer a bigger boost to the rest of Asia, Leather said, as China is already a bigger export market than the US for large parts of Asia, and its growth prospects are much better.
Besides, RCEP talks involve more Asian countries, like Korea and the rest of Asean.
However, the TPP was focused on reducing tariff and non-tariff barriers, while the RCEP is focused primarily on cutting tariff barriers. And most countries in Asia already enjoy preferential access to the Chinese market.
The China-Asean free-trade agreement in 2010 cut the average tariff rate on Asean exports to China to 0.1 per cent from 10 per cent. The free-trade deal between Korea and China in 2014 had China promise to eliminate tariffs on 91 per cent of its imports from Korea.
The main beneficiaries of the TPP’s failure and the improved prospects for RCEP are only those Asian economies that were due to be excluded from TPP, namely the Philippines, Korea and Thailand, Leather said.
The boost to growth for Vietnam, Malaysia and Singapore from RCEP would be smaller than that under the TPP, he said.
For the region as a whole, these “loses” are unlikely to be fully compensated for by gains from RCEP, Leather said.
Source: South China Morning Post.