How Washington Will Lose Its Influence in Asia

January 11, 2018 Topic: Economics Region: Asia Tags: Donald Trumpamerica firstMAGAAsia PacificChina

How Washington Will Lose Its Influence in Asia

There is no guarantee that President Trump will ask Congress to renew the Trade Protection Authority Act before it expires.

As Douglas Irwin said, if “truth” is the first to be sacrificed in the war, then “free trade” will be the scapegoat in the populist electoral politics. The most recent examples are the Brexit and the U.S. withdrawal from the Trans Pacific Partnership (TPP-12). While the British government is facing contentious negotiations with the EU, the United States under President Trump’s “America First” trade policy will be less supportive of outward-looking policy and more assertive on U.S. national interest.

Trade deficit in any country is fundamentally a sectoral imbalance in the macroeconomy between domestic saving and investment—as well as that between tax revenue and government spending. U.S. Commerce Department data shows that the percentage of manufactures in total GDP after the financial crisis of 2008 is rather flat around 12 percent with minor fluctuations within one percentage point between 2008 and 2015 periods. The estimated millions of manufacturing jobs lost since then are due to automation of production process. Hence, it is “technology” and not “trade” that caused the loss of manufacturing jobs for American people.

Bilateral vs Multilateral Trade Accords

President Trump prefers “bilateral” to “multilateral” trade deals. Other than domestic political consideration of fulfilling his campaign rhetoric, the probable rationale is the asymmetrical power between the United States and most of its trading partners; bilateral trade agreements would allow the dominant country, such as the United States, which has bargaining chips to bring its power advantages, to secure a trade deal that is more aligned to its own interests rather than those of the relatively weaker partner country.

Deepening bilateralism, if fully implemented, can plausibly lead to a hub-and-spoke relation centered on the dominant “hub” power. Moreover, it could generate a domino effect on other nonmember states to join the bandwagon of multiple free-trade agreements (FTAs) to avoid being an outlier. The other aspect of bilateral trade deal is the competitive liberalization among those trading partners who wish to benefit from preferential trade agreement from the “hub.”

To what extent would multiple bilateral trade deals affect the landscape of the trade regime in the Asia-Pacific region? In general, the broader the framework within which trade can take place, the greater will be the scope for division of labor and the higher the gains from international trade. But bilateral trade deals can’t grapple all the gains from a multilateral trade agreement, and they will unhelpfully cut across global and regional supply chains.

From geoeconomic perspective, the America First policy is blinded by the U.S. role in the Asia-Pacific region and global-trade system, not to mention that the geostrategic role that the United States has had in the region as a Pacific power under which much of the regional peace and stability relies. As Johnathan Stromseth and Ryan Hass have argued that “without an affirmative economic agenda for the region that takes into account the integrated nature of Asian supply chains, Washington will lose influence in Asia, no matter how many U.S. aircraft carriers operate in the region.” Though Japan will take the lead to push the TPP without the United States, the Comprehensive and Progressive Trans Pacific Partnership (CPTTP) agreement, the Asian drama is now just like “Hamlet without the Prince.”

As the largest center of production networks in the global economy, East Asia has much at stake in the push back by the United States against an open, global rules-based trading system underneath the current trading framework. No doubt that many Asian countries are very nervous about the trade policy undertaken by the Trump administration amid the parallel development from China’s “One Belt, One Road” initiative and its establishment of Asian Infrastructure Development Bank.

Four Pillars for the America First Policy

Under the America First trade policy, the United States Trade Representative lists four major components for the U.S. trade policy initiatives:

1. Defending National Sovereignty over Trade Policy

2. Strictly Enforcing U.S. Trade Laws

3. Using Leverage to Open Foreign Markets

4. Negotiating New and Better Trade Deals

These four pillars, if fully executed, could generate, at least two major legacies on the trading framework; the first one is the different “rules of origin” under various trade accords, and even different rules in different sectors within the same trade pact. That is the “spaghetti bowel” phenomenon which led to the low utilization rate of FTAs; a survey from Asian Development Bank showed that the utilization of FTA among the signatory in Asian countries such as Korea and Singapore is less than 25 percent because the administration cost of complying with the different “rules of origin” specified by the trade accord is higher than the marginal benefits of the FTAs signed.

The second is that multiple bilateral trade accords are no substitute for multilateral ones for regional economic integration. This is one reason why the original TPP-12 is intended to be the most comprehensive and integrated trade accord to link Asia and the Pacific states with those on the other side of the Pacific Ocean. Similar rationale is for the five ASEAN + 1 FTAs (ASEAN + Australia and New Zealand, China, India, Korea and Japan) to merge into a unified trade accord as the Regional Comprehensive Economic Partnership (RCEP).