The rising possibility that the US will shift towards trade protectionism – beyond the likely collapse of the Trans-Pacific Partnership (TPP) – has become a credible downside risk to the economic outlook for the Asia-Pacific (APAC) region, says Fitch Ratings.
There is a growing risk that APAC economies will be negatively affected by a US shift toward trade protectionism. President Donald Trump has threatened to label China a currency manipulator and to place large tariffs on Chinese imports, and has criticised the US-Korea FTA. Some Republicans are also pushing for tax reforms that would impose a levy on US imports from all countries. Fitch would expect China to respond with counter-measures including, but not necessarily limited to, tariffs on US imports. A ‘trade war’ would have adverse spillovers for APAC economies, particularly those that are closely connected to regional supply chains and that are most dependent on exports.
We believe this could potentially be more relevant to the APAC economic outlook than US withdrawal from TPP. The TPP, had it been implemented, would have set important foundations for economic integration in APAC, and delivered a significant long-term boost to some economies. That said, US Congressional approval of the TPP was unlikely even before President Trump’s formal withdrawal this week; TPP was not directly factored into Fitch’s baseline growth forecasts or ratings. We also did not view the agreement as a potential game-changer for members’ short-term economic prospects.
The TPP would have lowered tariffs among its 12 member countries. It also aimed to address other wide-ranging barriers to trade by setting rules governing intellectual property rights, business competition policies – including those related to state-owned enterprises and public procurement policies – and labour standards. The TPP therefore had the potential to help drive structural reforms that could have raised productivity and lifted foreign investment in a number of economies, particularly those with weaker business environments.
Various studies suggested that Vietnam would have been among the biggest beneficiaries of TPP. One study by the US-based Peterson Institute estimates that it would have delivered an 8% boost to Vietnam’s GDP by 2030 – relative to the baseline. Malaysia and Singapore were also expected to be significant beneficiaries – because of their export exposure to TPP members – while Japan was expected to benefit from the agreement serving as a catalyst for domestic structural reform, particularly in the agricultural sector, under the third arrow of Abenomics.
Member countries will miss out on potential benefits, but non-participants will be spared the potentially damaging effects that could have ensued from trade and investment being diverted to TPP participants. China, Indonesia, the Philippines and Thailand were notable non-participants in APAC, although some may have come under pressure to join later on (Indonesia had recently signalled an eagerness to join at TPP’s outset).
China is pushing its own Regional Comprehensive Economic Partnership (RCEP) as an alternative to the TPP. However, of the other participants – ASEAN, Japan, India and Korea – ASEAN and Korea already have free trade agreements (FTA) with China. Moreover, with its narrow focus on tariffs, the RCEP is unlikely to be the catalyst for structural reform that TPP could have been. Furthermore, it is unclear to what extent RCEP, without the participation of the US and its strong import demand, can replicate the same boost to regional economic growth prospects that was expected under TPP.
