Asia Leads the World's Response to Protectionism

Japan-EU pact highlights new urgency propelling action on regional trade accords

Peter A. Petri (PIIE) and Michael G. Plummer (Johns Hopkins University and East-West Center)

July 19, 2018
Photo Credit: 
Martin Bureau/Pool via Reuters

As US President Donald Trump's risky world trade war escalates, a global response has become urgent. The best proposals so far are coming from Asian economies in the form of three significant trade policy projects. These reaffirm international trade rules and are creating new coalitions to fight for a rules-based trading system.

The Asian approach is especially noteworthy because it takes the high road: It answers conflict with cooperation. In the latest move, Japan and the European Union on July 17 signed a large, comprehensive Economic Partnership Agreement (EPA).

A few weeks earlier, on July 1, the trade ministers of 16 Regional Comprehensive Economic Partnership (RCEP) nations agreed to deliver a "package of outcomes" later this year to move toward a preliminary trade agreement.

Negotiators will also soon begin work on enlarging the 11-member Comprehensive Progressive Trans-Pacific Partnership (CPTPP), with Thailand, Indonesia, South Korea, and Taiwan among those interested in joining.

Until recently, most observers and policymakers did not see these initiatives as urgent. They saw Trump's threats against the international trading system as a negotiating tactic. They expected populist rhetoric to give way to real-world solutions.

How wrong they were. US trade policy has taken a sharp turn for the worse. Trump has purged pragmatic advisers and has imposed high tariffs, with little basis in international law, on many countries and thousands of products.

The United States has also ratcheted up demands for intrusive policy changes by its trade partners. Trump has sharply criticized the European Union for its value-added tax, Canada for farm supports similar to those of the United States, and China for a technology upgrading effort.

This strategy seems designed to yield confrontation, not agreement. Trump and his advisers may truly believe that America can win from deeply protectionist outcomes.

In reality, abandoning trade rules will be costly for American producers and consumers, as General Motors, US soybean farmers, Apple, and many other businesses are telling anyone who will listen. But a dysfunctional global system will do even more harm to trade-oriented countries around the world, including the mid-sized and smaller developing economies of Asia.

That is why Asia's constructive responses are so important. Asian economies are building partnerships around improved trade rules and, in the case of the CPTPP, upon an ambitious coalition that could eventually bring together trade-oriented countries around the world. This is exactly what will be needed to stop the protectionist tsunami.

The multilateral components of this strategy—the Japan-EU EPA, RCEP, and CPTPP—are ideal first steps since they build on years of negotiations. Even so, these are difficult projects and they gained energy and momentum only in response to recent protectionist policies. According to observers and participants, they are now moving faster than anticipated even a few months ago.

These Asian responses are unusually interesting because they are not retaliatory, unlike other initial early reactions to Trump's policies. Canada, China, Mexico, the European Unon and others have all attempted to counter US tariffs by imposing similar punitive tariffs of their own.

Retaliation is a useful policy tool, but it is designed to force an aggressor to back down. If that strategy fails, retaliatory tariffs become just as self-defeating as the tariffs that they were designed to fight. Much of the damage in the world trade war of the 1930s was done by the cycle of retaliation that followed the 1930 US Smoot-Hawley tariffs. No one wins from the escalation of protection.

In contrast to retaliation, Asia's multilateral strategy is neither protectionist nor self-defeating—it will generate economic benefits for participating countries and the world as a whole. Although regional trade liberalization may impose costs on some nonmembers—through so-called trade-diversion effects—these costs will usually be small compared to members' gains.

According to our research, the real incomes of CPTPP countries would be $157 billion higher than otherwise in 2030 due to increased efficiencies and competitiveness generated by regional supply chains under the pact. If the agreement were to include Indonesia, South Korea, Philippines, Taiwan, and Thailand as well, the gains would triple to $486 billion.

The less-ambitious but larger RCEP would yield $201 billion for its members. In general, the size and ambition of agreements matter. Economic analysis suggests that RCEP should become more ambitious like the CPTPP, and the CPTPP should become larger, welcoming members with open arms.

Evidence that the Asian strategy is gaining traction is offered by the growing list of countries that want to join the CPTPP. Economies that have already expressed interest include most of Southeast Asia, Colombia, Costa Rica, and others in Latin America, and even the United Kingdom.

Will China join the CPTPP? The jury is still out. China is a member of RCEP and, prompted by aggressive US actions earlier this year, resumed trilateral trade policy discussions with Japan and South Korea. But China still seems unwilling to take on rigorous commitments required by the CPTPP, especially in areas such as state-owned enterprises and data flows.

If China cannot manage bilateral economic attacks from the United States, it will need to reconsider its options. Arguably, its priorities will need to shift to deeper regional relationships and new global coalitions that support rules-based trade. Participating in these multilateral efforts may require Chinese concessions, but the resulting agreements would have great significance for the global system in which China will have to survive in the future.

Despite these compelling arguments and growing support, the Asian multilateral response faces difficult challenges.

Asia cannot count on US support in building a coalition for the global system, regardless of America's true economic and strategic interests. America's anti-trade politics are hardening under the leadership of nationalists on the right, many of whom once supported robust trade, and with the acquiescence of anti-trade groups on the left.

European politics is similarly conflicted with the resurgence of populism. The new Italian government, for example, has threatened to block the pending EU-Canada Comprehensive Economic and Trade Agreement.

In short, there is no alternative to Asian leadership in today's geopolitical environment. But the region has solid credentials for this role: great economic energy, the power of large markets and despite its diversity, a historic commitment to open development models.

Asian leadership could, in time, create a new "zone of discipline" in the world, in which countries follow rules that ensure competition and make investments more secure. This would be a large achievement, recalling the General Agreement on Tariffs and Trade in 1948. It would offer, again, an alternative to a world in which every trade or capital flow is at the mercy of arbitrary government action and international contests for power.