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Trading up

Tuesday,Jul 07, 2020

Backers of CPTPP see it as an economic tonic for the post-pandemic era, but free trade is a tough sell in a nervous world.




The Covid-19 pandemic has set off a wave of destruction in the global economy and it could be years before full health is restored. Global merchandise trade could fall by as much as 32% this year under the worst-case scenario outlined by the World Trade Organization (WTO) in April.

The economic outlook for the next two years remains highly uncertain. This year, the World Bank says, global output could decline by 5.2%, and other international organisations' gross domestic product (GDP) forecasts are also increasingly negative.

Tensions between the US and China are intensifying, along with the rise of protectionism and "re-shoring" of widely distributed supply chains. Some people feel it is no longer desirable, or even possible, to integrate countries that possess differences in economic and political systems.




Against this backdrop, free trade has become harder to sell, despite advocates' best efforts to show how it could speed the post-pandemic recovery.

One ambitious multilateral trade pact that is now coming under increased scrutiny is the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Billed as a "next-generation" agreement, it covers 11 nations and features comprehensive trade liberalisation, including tariff elimination, investment protection and high standards for rules and regulations on services trade.

"With global trade tensions worsening, joining the CPTPP can provide some opportunities for member economies to gain access to a trading bloc of 500 million people, with a GDP of more than US$10 trillion," said Cyn-Young Park, director of regional cooperation and integration in the Economic Research and Regional Cooperation Department at the Asian Development Bank (ADB).

The CPTPP, according to Ms Park, represents an upgrade in terms of coverage and ambitions compared to most other deals that preceded it. Since it took effect 18 months ago, it has aimed to encourage more trade, stronger cross-border investment and greater flow of talent by promoting comprehensive tariff elimination, regulatory harmonisation and reduced technical barriers.

But with greater opportunities come greater responsibilities and commitments for countries seeking to join. Thailand is among them, but the local debate has been highly contentious. The cabinet has set up a committee that is due to report back in September, but a decision on whether to seek membership will probably not come this year.

"Distribution of gains and necessary restructuring would be also costly. Policymakers should carefully consider if their socioeconomic and political conditions meet the requirements for necessary reforms," Ms Park told Asia Focus by email.

"Any mega trading deal would present both challenges and opportunities to an economy. Any country considering membership should carefully assess the implications of ratifying the agreement on domestic reforms and restructuring."

PROS & CONS

The CPTPP evolved from the 12-member Trans-Pacific Partnership (TPP), which never entered into force due to the withdrawal of the United States just after President Donald Trump took office in early 2017. The current members are Japan, Australia Canada, Brunei, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Several other countries besides Thailand are considering whether to join, and one of them is nowhere near the Pacific Ocean. The United Kingdom, which left the European Union on Jan 31, is preparing to launch bilateral trade negotiations with Japan, which Prime Minister Boris Johnson's government sees as a stepping stone to joining the CPTPP.

"The CPTPP can provide Asean participants with strong advantages to invite foreign direct investment," said Atsushi Taketani, president of the Japan External Trade Organization (Jetro) in Bangkok and chief representative for Asean.

"They can show business environment improvement through the CPTPP such as trade facilitation by smoother customs procedures, transparency of investment conditions and promotion of digitisation."

As well, adherence to CPTPP standards including those related to the environment will attract companies that have grown more conscientious about environmental, social and governance (ESG) issues, he added.

The CPTPP, said Mr Taketani, aims to establish a huge economic zone with a population of 512 million and a GDP of $14.8 trillion, representing 13.5% of the global total. For Thailand, the government forecasts the CPTPP will create additional GDP growth of 0.37%.

"They made this calculation before the Covid-19 pandemic. Therefore, this figure may grow larger because many enterprises have recently started or contemplated reorganisation of their supply chains," he explained to Asia Focus by email.

"The importance of the CPTPP is increasing now because Covid-19 has urged us to revisit global supply chains and utilise digital technology. Both the Japanese government and industry would like Thailand to join the CPTPP."

Deputy Prime Minister Somkid Jatusripitak has said that joining the agreement would boost Thai GDP by 0.12% or 13.3 billion baht, citing a feasibility study. Not participating could mean a loss of 26.6 billion baht or 0.25% of GDP.






Critics such as FTA Watch and BioThai, meanwhile, fear the pact could lead to stronger enforcement of intellectual property rights that would inevitably favour multinational companies in the agricultural and pharmaceutical industries over local farmers and smaller domestic companies.

As well, they say, export gains might be limited as all the CPTPP members except Canada and Mexico already have bilateral free-trade agreements (FTA) with Thailand.

Leading Thai business groups have urged the country to enter negotiations despite the challenges the farm and healthcare sectors might face.

Joining the talks will help the country learn more about the conditions so that it can adjust to competition, said Predee Daochai, chairman of the joint standing committee on commerce, industry and banking. "The process of seeking membership will take at least four years and Thailand can withdraw at any stage if it finds it unbeneficial," he told a briefing in early June.

The ADB's Ms Park acknowledged that there will be pros and cons for Asean members joining the CPTPP. For countries that have comparative advantages vis-à-vis other members, the pact can provide opportunities. For example, Singapore could become a local centre in accounting, consulting and engineering for CPTPP members.

Vietnam will be able to sell more footwear, textiles and electronic products to Canada, Mexico and Peru, where it has limited trade relations. Thailand could rise as a tourism and services trade hub. "However, it requires domestic reforms and structural changes which may not be beneficial for everyone and every sector," she noted.

"As the CPTTP requires higher standards on services and regulations, compared to the Regional Comprehensive Economic Partnership (RCEP) for example, reforms could be difficult and challenging given the stage of development in many Asean Plus Three economies.

"A key risk is that should the CPTPP agreement be ratified by all its members, some non-member countries in Asean could lose as members like Canada and Japan redirect trade from non-participants such as Indonesia, the Philippines and Thailand to benefit from lower tariffs," Ms Park pointed out.

Mr Taketani from Jetro agreed, saying that when Japanese companies decide on investments, an economic partnership agreement (EPA) is a factor they take into account.

"And more importance is being attached to EPAs recently because they have started reorganising their supply chains in this Covid-19 or post-Covid-19 era," he noted. "As a result, it is quite clear that CPTPP participation will surely have an impact on the investment strategy of Japanese enterprises in the Asean region."

Whenever the Japanese Chamber of Commerce (JCC) in Bangkok and Jetro survey Japanese companies in Thailand, they state that Vietnam is the top future market for exports, representing 49% of responses in the first half of 2020.

"If Thailand will not join the CPTPP, it is very possible that Japanese companies will change their strategy," said Mr Taketani. "They may not continue to export from Thailand to Vietnam as they do, but instead invest and produce in Vietnam, thinking such investment will be more advantageous because they can fully utilise the CPTPP there."

CHINA ACCESSION

While the world was focusing on the Hong Kong national security law imposed by Beijing last week, the international community also took note of Chinese Premier Li Keqiang's earlier declaration to the National People's Congress that China "has a positive and open attitude toward joining the CPTPP".

That is the first time such interest has been conveyed publicly by the Chinese leadership, which up to now has been focusing on seeing the 15-country RCEP agreed in by the end of this year.

After the US pulled out of the TPP, Japan took leadership to get the CPTPP passed at the end of 2018. Since then, China has quietly approached certain members to learn more about it and informally explore their views on possible Chinese accession.

Experts cited a couple of factors drawing Beijing's interest. First, the CPTPP could help China reduce its reliance on the US market, and possible vulnerability to further tariffs and other sanctions from Washington.

And with Washington on the sidelines and the RCEP heading toward a long-delayed conclusion later this year, the CPTPP would provide another avenue for China to integrate its economy with others in the Asia Pacific region. Besides, CPTPP participation could convince the world that China is serious about trade liberalisation and structural reform while the US moves toward protectionism.

Nonetheless, China's economic system doesn't yet meet the standards for membership, according to Wang Huiyao, the founder of the Center for China and Globalization in Beijing and vice-chairman of the China Association for International Economic Cooperation.

In an opinion piece written for Bloomberg last week, he wrote that rules on subsidies for state-owned enterprises, for example, as well as restrictions on cross-border data transfers, still need to be upgraded. Some domestic reforms have been taken such as a new Foreign Investment Law, opening of financial services, along with stronger intellectual-property protections, yet more will be needed.

Most current members appear open to the idea of having China in the CPTPP. Its entry would give the group over 28% of global GDP, more than quadrupling worldwide gains from the pact to $632 billion, according to projections by the Peterson Institute for International Economics. Chinese membership would also bring more of the regional economy under a formalised set of rules driven by multilateral consensus, supporting growth and stability.

CHALLENGES & RECOMMENDATIONS

Ms Park of the ADB reiterated that any large trading deal would present both challenges and opportunities. Every country needs to closely evaluate its own economic, social and political situation.

"Even when an international trade agreement would bring overall benefits, it will not benefit people, communities and sectors evenly," she said. "There has to be careful consideration about distribution of benefits, allocation of resources and structural changes associated with the trade deal."

The CPTPP strives to deepen integration more than the World Trade Organization (WTO) regime and other FTAs in areas such as intellectual property rights and the digital economy. But it does not seem set up to benefit small and medium enterprises (SMEs) very much, said Kaewkamol Pitakdumrongkit, an assistant professor at the Center for Multilateralism Studies at the S Rajaratnam School of International Studies (RSIS) of Nanyang Technological University in Singapore.

However, it does have potential to boost the economy in the post-Covid 19 world. "The CPTPP would increase the resiliency of its members' economies as firms could use the agreement to find new partners and fill their supply chain links broken by the disruptions caused by Covid-19 such as factory closures and air travel bans," Dr Kaewkamol told Asia Focus.

While the agreement has a chapter on SMEs (Chapter 24), it just requires members to set up a website providing information about the agreement to small businesses. She also warned that accession is not easy for countries wanting to join the pact.

"It will take time and they may need to make uncomfortable concessions in certain areas. For one thing, they will have to make good concessions to the existing members to convince the latter that adding them to the CPTPP would be a value-added thing," said Dr Kaewkamol.

"Then, they need to negotiate with existing members not the CPTPP text but their own tariff schedules and commitments. In short, they need to discuss … how much the tariffs will be cut and how long before the tariffs will drop to zero. This would take time and could not be pulled off quickly."

Pavida Pananond, a professor of international business strategy at the Thammasat Business School of Thammasat University, said the more important aspect of the CPTPP membership for Thailand is the opportunity for domestic reforms in key regulatory areas that could enhance Thailand's competitiveness, as the "trade-expanding effects are limited".

More domestic homework needs to be done to understand the CPTPP's full impacts. However, the government so far has not undertaken sufficient public consultation but instead seems to be rushing into the negotiation process based on the fear of missing out.

Nevertheless, joining the CPTPP would ultimately be positive her view. Being excluded means the country will not be part of a broader and more comprehensive scheme that offers a common regulatory framework among its members.

"That could undermine Thailand's competitiveness when investors and companies are seeking and strengthening regional trade and investment activities, compared to regional competitors like Vietnam and Malaysia," she explained to Asia Focus.

But without a clear understanding of potential impacts of intellectual property protection related to plant varieties, the government may not be prepared to come up with necessary policies to mitigate the negative impacts on local farmers.

"Without policies to promote more intellectual property protection in agriculture, Thailand will also risk not being able to introduce more value-added inputs and activities, keeping the country's participation in the agriculture value chain in low value-adding areas," she said.

Vietnam, she noted, is now exporting more rice varieties than Thailand does and is replacing Thailand as a major rice-exporting country.

Dr Pavida recommended the government engage in a serious public consultation process that allows proponents and opponents to debate their views based on studies of specific contentious issues.

"Having more neutral government/academic bodies engaging in this process, rather than leaving it entirely to the department that is tasked with completing the negotiation to communicate, will also help increase public trust and reduce conflicts of interest," she said.


From Trading up,2020-07-07
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