US Retreat Should Not Stop Asian Economic Integration

Peter A. Petri (PIIE), Michael G. Plummer (Johns Hopkins University and East-West Center) and Fan Zhai (Former Managing Director, China Investment Corporation)

November 2, 2017

If the Asia-Pacific region is to sustain its remarkable economic integration over the next few years, it will have to go it alone without leadership from the United States.

The political prospects for intraregional cooperation as leaders gather in Vietnam for the 25th Asia-Pacific Economic Cooperation (APEC) Summit on November 11 are auspicious. Asia has strong leaders: Prime Minister Shinzo Abe of Japan just won reelection by a landslide and Chinese President Xi Jinping has further consolidated power ahead of his second five-year term. Asian economies are humming too. The region's growth rate is accelerating and the International Monetary Fund and Asian Development Bank have each raised their growth projections in recent months.

Hopefully key Asian leaders will see their strong domestic positions as creating opportunities for bold, constructive moves in foreign policy, including smoothing fraught diplomatic relations, which could then foster closer regional economic cooperation.

The question is whether Asia is up to the challenge of advancing without the United States, given that President Donald Trump, who will be joining the APEC Summit, has pulled his country out of the Trans-Pacific Partnership (TPP) and threatened to withdraw from the South Korea-US Free Trade Agreement (KORUS), the North American Free Trade Agreement (NAFTA) and even the World Trade Organization (WTO).

The answer is "yes," if Asia-Pacific governments follow their economic interests. Empirical estimates in a report we recently published with the Peterson Institute for International Economics show clear potential income gains from three large regional trade and investment projects now underway. Success on these initiatives might also attract new partners, especially in Europe.

Different paths

The three regional projects include the negotiations continuing among the 11 remaining TPP countries, the Regional Comprehensive Economic Partnership (RCEP) talks among 16 Asian countries, and the China-led Belt and Road Initiative. Each could significantly benefit its members.

Japan's preferred project is the so-called TPP 11, which will set high standards for tariff reductions and other rules. It will of course generate more modest benefits than the original TPP agreement that included the United States. But even a smaller TPP agreement could generate income gains of $157 billion annually for its members by 2030, mainly by increasing trade in machinery and agricultural products as well as through higher levels of investment.

If the TPP 11 were expanded to include five additional economies that have expressed interest in joining, namely Indonesia, South Korea, the Philippines, Thailand, and Taiwan, then the gains from the resulting 16 member economies could rise to $486 billion annually, exceeding the benefits members stood to receive under the original TPP.

Negotiations for the RCEP are running in parallel with the TPP process. Japan, South Korea, Australia, New Zealand, and six Southeast Asian nations that would be part of TPP 16 are participating in RCEP talks alongside China, India, and the four remaining members of the Association of Southeast Asian Nations (ASEAN). The group has never included the United States, but as the United States is disengaging from the region, RCEP is gaining momentum under the leadership of China. RCEP will likely result in smaller reductions in trade barriers than the TPP, but given its large scale, it would still generate $286 billion in annual income gains.

The third regional project underway is the Belt and Road Initiative. This envisions massive infrastructure investments to connect China with Europe via territories along the way. The realization of this project would create new rules and vast production systems led by Chinese companies. Many of these investments may be supported by the Asian Infrastructure Investment Bank, another Chinese-led initiative of which neither the United States nor Japan is a member.

In sum, all three approaches could deliver significant benefits to Asia-Pacific economies and deserve attention from policymakers. Among them, the TPP 11 is of particular interest, because it could be concluded relatively fast, it could likely be extended, and it would buttress high-quality rules for the region's trading system. But all three projects could proceed in parallel, expanding the range of future options for the region.

Artless dealing

The Trump administration is not interested in regional projects and intends to negotiate only bilaterally. Moreover, observers have become very pessimistic about bilateral talks with the United States as a result of the extreme proposals that Washington is making in negotiations with Canada and Mexico, such as a demand that NAFTA effectively be re-ratified every five years.

Important as American markets are, the role of the United States in the global economy is declining. The growth, technological capabilities, and global reach of Asia-Pacific economies have risen dramatically and are generating integration opportunities within the region itself. Meanwhile, the share of TPP 11 exports headed to the United States has dropped to 35 percent from 40 percent over the past two decades.

In fact, the United States might emerge as the most significant loser if Asia-Pacific regional integration proceeds without it. By 2030, the TPP's 12-member version was expected to increase US incomes by $131 billion annually. These gains will not appear. Neither will the tighter rules on labor rights or intellectual-property protection or other parts of the level international playing field that US negotiators fought hard to include in the TPP. Instead of becoming the biggest winner under the pact, the United States stands to suffer income declines of up to $6 billion per year.

The best way to bring the United States back into Asia-Pacific engagement is to develop a strong regional trading system with clear, high-quality rules. In time, given the dynamism of Asian economic growth, the United States is likely to realize the costs of letting its close relations with Asia decay, and another generation of American leaders could well reverse the impulsive decisions of the current administration.

Meanwhile, other large regional partners might step into the breach, further benefiting the region. The European Union has already concluded bilateral agreements with South Korea and Singapore, is close to a deal with Japan, and has negotiations underway with five other Asian countries. The disengagement of the United States presents it with a rare opportunity.

Working with the United States on Asia-Pacific economic integration would be better for all states concerned, but the region should not abandon its commitment to open markets and international trade just because of current US policies. Integration is beneficial, and the stronger the regional economy becomes, the greater the influence that Asia will have in keeping the world trading system itself open.

Beyond benefiting Asia, regional integration will keep trade on the global agenda. International trade agreements often behave like dominos: Any new major accord tends to cause others to be negotiated as well. With successful new initiatives, Asia will gain influence in shaping global rules. If it uses that power wisely, a more stable and prosperous global system will result.

Prime Minister Abe has expressed his hope that the United States will rejoin the TPP at some point while remaining cautious about Washington's request for bilateral negotiations. Certainly, economic and strategic arguments would support Abe's wishes. In the meantime, however, the region has much to gain from forging ahead with its own initiatives. Japan and other Asia-Pacific economies should take an active leadership role in this process.