No small matter

No small matter

With the TPP all but dead, SMEs will continue to navigate a complex global trade landscape

By Haky Moon in Hong Kong
For China Daily Asia Weekly

Small traders, local manufacturers, independent accountants and lawyers, construction subcontractors, Web designers and architecture studios — these are some of the many sectors in which small and medium-sized enterprises (SMEs) operate in Asia Pacific.

Across the region, 90 percent of all businesses are SMEs, according to the Asia-Pacific Economic Cooperation (APEC) forum.

In Malaysia, 97 percent of businesses are SMEs and account for 65 percent of all jobs, 36 percent of the economy and 18 percent of all exports. In Vietnam, SMEs make up around 40 percent of GDP. And in Indonesia and China, SMEs account for almost 60 percent of their respective economies.

The Trans-Pacific Partnership (TPP) was signed by 12 countries earlier this year, including the United States, Japan and Vietnam, and represents nearly 40 percent of global GDP. The free trade agreement could potentially bring huge benefits to the region’s SMEs, including lower tariffs and greater access to new markets.

However, the deal’s future is now very uncertain.

On Nov 21, US President-elect Donald Trump announced he plans to pull the country out of the TPP when he takes office in January, a move likely to derail the agreement.

“There’s no reviving the TPP, and how it was originally conceived, without the US and Japan,” said Jayant Menon, lead economist at the Asian Development Bank.

While the death of the TPP could energize alternative deals, more needs to be done for SMEs.

“There are so many ‘noodle bowl’ agreements right now, probably more than 400, and the world trade system is becoming too complicated for SMEs to trade easily,” said Menon.

In full swing, he added, global trading creates a huge cost for businesses, especially SMEs.

“(The world trade system imposes) burdens on poorer countries having to administer and implement these multiple free trade agreements. Compared to multinational firms, it’s difficult for SMEs. They have to navigate this messy landscape.”

One alternative to the TPP is the Regional Comprehensive Economic Partnership (RCEP). The RCEP is a proposed free trade agreement between the 10-member Association of Southeast Asian Nations and six other countries, including China.

Deborah Elms, executive director of the Asian Trade Centre, a Singapore-based consulting firm, said that “the TPP would likely be easier for SMEs to use than RCEP”.

Elms broadly agrees with Menon’s concerns on the difficulties that SMEs face.

Day-labourers sit waiting for employers to hire them for the day, along a road in Hanoi on March 28, 2016. Vietnam's economy slowed in the first quarter of 2016, official figures shows on March 25, hampered by low oil prices and an ongoing drought that has hit the agricultural sector hard.  / AFP PHOTO / HOANG DINH NAM

Day-labourers sit waiting for employers to hire them for the day, along a road in Hanoi on March 28, 2016.
Vietnam’s economy slowed in the first quarter of 2016, official figures shows on March 25, hampered by low oil prices and an ongoing drought that has hit the agricultural sector hard. / AFP PHOTO / HOANG DINH NAM

For goods, the TPP, at least in the medium to longer term, would have cut nearly all tariffs to zero for all member markets. This includes rules of origin that are easier for companies to use, with multiple methods that can determine origin — a key component of benefits from the cuts in tariffs.

By contrast, the RCEP will not reach zero tariffs for many products. Rather, this deal would carve out large numbers of products entirely and keep them out of the pact, including the most sensitive products.

“This means that many of the goods categories that actually are traded, or that might be traded, will not have any benefits from the agreement at all. They can still be traded, but with no additional tariff savings,” said Elms.

“Standards, labels and regulations are unlikely to be addressed very much in RCEP. For smaller firms, these are really the barriers that trip (them up),” said Elms.

“For instance, if companies are required to test and retest products in every market in RCEP to prove product safety — or if every country in RCEP sets their own rules for product safety — small companies will not be able to afford the expensive tests to show that their products meet these standards.”

She added that if each RCEP country has its own rules for labels on products this will cause problems for smaller firms. Even finding out about regulations in different markets can be an access barrier.

“They do not have the time or manpower to sort through regulations that are not easy to find, understand or address,” Elms said.

“RCEP will likely not have requirements to make regulations transparent or accessible. They will not ask for company input in making new regulations and they will not be required to give firms time to adjust before new regulations come into force. Each of these points hits smaller firms harder.”

This rings true for the more developed countries, like trade-oriented Singapore, for example. The implementation of the TPP would be a huge boon for the city-state, especially when domestic growth has been slowing and a recession may be on the horizon.

Studies by the Washington-based Peterson Institute for International Economics suggest that the TPP could help Singapore’s real income rise 1.9 percent by 2025 and 3.9 percent by 2030.

Menon from the Asian Development Bank noted that because Singapore is already a duty-free market, it can only gain from better access to other markets provided by agreements like the TPP.

Singapore has been vocal about its dissatisfaction with the likely US withdrawal from the TPP. Prime Minister Lee Hsien Loong told Time magazine that failure by the US Congress to ratify the TPP would diminish Washington’s standing among Asian trade partners.

On the brighter side, some emerging economies in the region remain unperturbed. Take Malaysia for instance. Growth prospects, regardless of the withdrawal of the TPP, are positive.

Speaking to the Federation of Malaysian Manufacturers, Ong Ka Chuan, second minister of international trade and industry, said that from January to September, Malaysia “achieved 1.77 trillion ringgit ($397 billion) in trade volume (exports plus imports), compared to last year when it was 1.071 trillion ringgit during the same period”.

He added that Malaysia’s trade fundamentals are strong and the country can do better.

When asked about the uncertainty facing the TPP, the minister answered: “If the TPP had been implemented, then it would result in a negative impact. For Malaysia, this TPP has not been implemented and as such it will not impact us.”

Ong noted that 625 free trade agreements exist globally. The array of existing deals puts Malaysia in a position where it would not view the failure of the TPP with much anxiety. Malaysia already has half a dozen regional and bilateral trade deals signed or being negotiated.

For Vietnam, the loss of the TPP is likely to be much bigger.

The Vietnam Trade Promotion Agency under the Ministry of Industry and Trade expects the massive trade deal to lift the country’s GDP by as much as 11 percent in a few years and boost exports by 28 percent.

Key industries, such as garments and textiles, leather shoes and seafood, would have been almost instantly lifted by the TPP and these are all areas in which SMEs play important roles.

Menon noted that although many TPP provisions were geared toward multinational corporations, SMEs in developing countries like Vietnam were hoping to gain from improved access to the US consumer market.

“The likely collapse of the TPP suggests that many SMEs in light manufacturing, such as clothing, textiles and footwear, will not be able to have privileged duty-free access to the US market,” he said.

But even if the prospects for the TPP are now uncertain, Vietnam has other trade agreements that it can fall back on, such as the EU-Vietnam Free Trade Agreement (EVFTA), the Free Trade Area of the Asia-Pacific (FTAAP) and the RCEP. A big proponent of free trade deals, Vietnam has abundant options.

After EVFTA comes into effect, for example, 99 export tariffs from Vietnam to the EU market will be removed within a decade. The agreement is expected to increase Vietnam’s annual export turnover by 4 to 6 percent.

So with the demise of the TPP likely, which deals can the region look to?

“FTAAP to some extent will be filling the gap. Although the answer to that is a bit more complicated, it is impossible to know if it will take place or not,” said David Dodwell, executive director of the think tank Hong Kong-APEC Trade Policy Group and founder of consultancy firm Strategic Access.

“As an official, I wouldn’t quite know what to say in terms of FTAAP. (US officials) will have to wait for instructions from whoever will shape US policies after Jan 20.

“Where the US will go is uncertain. But China, having led the FTAAP, and with all the APEC members heavily involved, remains as committed as ever.”

That gives experts across the region some cause for optimism.

“You can be moderately confident that the APEC region will be the most economically dynamic region,” said Dodwell.

“If you’re thinking globally where the growth is going to be, you’re looking at Asia. If you’re still looking for free and open trade, Asia is also a region to look to. If there is a trade cradle, Asia is certainly likely to be the most significant part for the coming period.”

Other deals gain traction Efforts poured into the Trans-Pacific Partnership could yet bear fruit in the FTAAP and RCEP trade agreements

By HAKY MOON in Hong Kong
For China Daily Asia Weekly

The United States’ likely withdrawal from the Trans-Pacific Partnership (TPP) will be a blow to the countries that have invested much work toward ratifying the multilateral trade agreement. But, while it may seem the deal — originally driven by the US — has been thrown out the window, experts say not all efforts of the TPP will be wasted.

“If the TPP does die, it is the loss of a lot of work. Five years of negotiations, more than 20 formal rounds of talks and many more informal negotiating sessions, thousands of flights and countless hours in country capitals,” said Deborah Elms, executive director at the Asian Trade Centre, a regional policy strategy firm.

To put this in context, the TPP is more than 5,544 pages long and includes more than 2 million words. That makes it around three times as long as the Bible. It includes thousands of side agreements among the 12 participants. All that work is now likely to be sidelined, as least temporarily.

With the US and Japan likely to leave the trade pact, most Asian countries are now pessimistic about the TPP.

However, there are other trade agreements in the region, namely the Free Trade Area of the Asia-Pacific (FTAAP) and the Regional Comprehensive Economic Partnership (RCEP).

“Some aspects of the TPP may well reappear as sector agreements, just like with the Doha Agreement, which reappeared as the Trade Facilitation Agreement and the Trade in Services Agreement,” said Jayant Menon, lead economist at the Manila-based Asian Development Bank (ADB).

Indeed, much of the effort poured into the TPP is expected to reemerge and deliver results in both the FTAAP and RCEP. Recently, these two trade deals have been gaining added traction on the likelihood of the TPP being scrapped.

Pointing to all the hard work done on the TPP, David Dodwell, chief executive of communications firm Strategic Access and vice-chairman of government relations for the British Chamber of Commerce in Hong Kong, said there are more than 6,000 legally drawn agreements between the 12 participants.

“It will provide a reasonable template for any future trade agreement,” he said.

“My view is that the work done on TPP by the 12 participating economies will still underpin the discussion in the FTAAP. The architecture of the TPP would be America’s gift to the FTAAP, trying to make sure the FTAAP discussion stays closely linked with what they are trying to achieve with the TPP,” Dodwell said.

What differentiates the TPP from other trade pacts led by Asian countries is much of its legal content, such as that related to intellectual property and state-owned enterprises.

“They will want to make sure that (the legal content) is in. I don’t think China will disagree. The TPP agenda will be at the heart of the FTAAP discussion,” said Dodwell.

Chinese President Xi Jinping — speaking on Nov 21 in Lima, Peru at the Asia-Pacific Economic Cooperation CEO Summit — described the FTAAP as “a strategic initiative critical for the long-term prosperity of the Asia Pacific” and urged relevant sides to “firmly pursue the FTAAP as an institutional mechanism for ensuring an open economy in the Asia Pacific”.

The FTAAP is an international trade pact supported by 21 Asia-Pacific countries. Discussions began in 2006, and the pact is a long-term deal that aims to link Pacific Rim economies from China to Chile, including the US.

The goal is to harmonize the “noodle bowl” of regional and bilateral free trade agreements that proliferated following the collapse in 2006 of the World Trade Organization’s Doha Round of talks.

The plan is to finalize the agreement by 2025, and under the FTAAP, the US would gain about $626 billion in exports while China would gain $1.6 trillion.

Asia-Pacific policymakers say there are several pathways to realizing the FTAAP, including both the TPP and RCEP. However, Menon said that if the US is unwilling to participate in the TPP, the same stance would apply to the FTAAP.

“Without the TPP it’s hard to see how the US under the (Donald) Trump administration will agree on the FTAAP when they can’t even pursue an agreement like the TPP,” he said.

This leaves countries with a US-excluded pact, the RCEP, often described as ‘China-led’ but officially led by the Association of Southeast Asian Nations (ASEAN). Discussions on the RCEP were formally launched in November 2012 at the ASEAN Summit in Cambodia.

Elms of the Asian Trade Centre shares the same view as Menon.

“The default will become the RCEP. This negotiation has a different set of partners. They have been talking for a while, but negotiations got serious in late 2014. But this will not be the TPP. The quality of the RCEP is not the same as the TPP. The final product will not have the same level of deep, broad commitments,” said Elms.

The RCEP was long viewed as a rival deal to the TPP. It includes the 10 member countries of ASEAN along with China, Japan, South Korea, India, Australia and New Zealand.

As the world’s first pan-Asia free trade deal, the pact potentially includes more than 3 billion people, or 45 percent of the world’s population. RCEP countries have a combined GDP of about $21 trillion and account for as much as 40 percent of world trade.

In 2007, the combined GDP of potential RCEP members already surpassed the combined GDP of TPP members. Continued growth, particularly in China, India and Indonesia, could see total GDP in the RCEP grow to over $100 trillion by 2050, roughly double the projected size of TPP economies.

This massive Asian trade bloc holds promise for many countries now that the TPP is on the brink of being binned, but the pact does not come without flaws.

“The RCEP differs from the TPP because it doesn’t involve rules around environment and food safety standards,” said Faraz Syed, an associate economist at Moody’s Analytics.

The work done on the TPP can provide some useful experience for ambitious trade agreements like the RCEP, although some experts note that other trade pacts are a different animal, with different standards.

While ambitious and possibly an alternative to the TPP, the RCEP still needs to be negotiated.

Cause for hope amid TPP setback Despite an uncertain economic outlook, analysts believe the region need not rush into new bilateral trade deals

By HAKY MOON in Hong Kong
For China Daily Asia Weekly

Anumber of bilateral trade agreements may be the outcome of the likely failure of the United States-led Trans-Pacific Partnership, creating a tangle of trade deals that fall well short of what the TPP promised to deliver.

Such a network of deals could also prove too complicated for small and medium-sized enterprises (SMEs) to navigate and profit from.

At the same time, however, there is reason for hope regarding the decisions that emerging markets will make. Instead of haphazardly forming bilateral pacts, countries could wait to see what benefits other regional trade deals will present.

While some analysts argue that the worst of the predictions from the start of 2016 have failed to materialize, it has still been a volatile year for most Asian economies.

China did better than many expected, and emerging markets throughout the region showed signs of stabilizing as the year progressed.

But trade has generally slowed. In fact, global trade is expected to run into strong headwinds now that the TPP looks doomed after US President-elect Donald Trump pledged to kill it on his first day in office.

Asian countries will not be spared from the fallout. As it is, Malaysia, one of the 12 members of the proposed TPP, saw exports fall 3 percent year-on-year in September, while imports dipped 0.1 percent too.

Malaysia’s exports to China fell 1 percent from a year earlier, and those to the European Union declined 8.4 percent. Malaysia has been hurt by dropping oil and commodity prices and high-profile financial scandals.

Neighboring Singapore — the Asian economy most dependent on trade and often viewed as a weather vane for the future of the region — has also seen better days. The region’s strongest advocate for the TPP, and one of the deal’s founding members, saw exports slump 12 percent in October due to weakening global demand.

The drop was worse than expected, adding pain to the previous month’s 5.4 percent fall, according to figures released by International Enterprise Singapore, which tracks trade statistics.

The Monetary Authority of Singapore said in October that the trade-dependent economy weakened over the past six months with all sectors seeing a broad-based downshift. The continued slump in oil prices has also affected the city-state.

On the faltering recovery in trade, Singapore’s Ministry of Trade and Industry (MTI) slashed 2016 growth expectations. MTI said the island nation’s economy is expected to grow 1 to 1.5 percent this year, versus the previous projection of 1 to 2 percent expansion.

This trend toward slowing economic and trade growth is also visible in Vietnam, a fast-growing economy that was widely expected to be one of the TPP’s biggest beneficiaries.

“Vietnam had a lot to gain from the TPP, particularly in its textiles sector. Though losing the TPP could weigh on long-term investment decisions, it’s unlikely to have a short-term impact on growth in Vietnam or Asia,” said Faraz Syed, an associate economist at Moody’s Analytics.

Vietnam’s import-export turnover by Nov 15 was on the threshold of $300 billion, up $100 billion when compared to 2011. Export turnover was more than $151.48 billion, up 7.5 percent year-on-year, while import value rose 3.1 percent to $148.82 billion.

While growth in Vietnam is robust compared to the more developed countries of the Association of Southeast Asian Nations (ASEAN) like Singapore and Malaysia, it is unlikely to meet its targeted 10 percent export growth for this year, according to Tran Tuan Anh, Vietnam’s trade and industry minister.

The virtual certainty of the US withdrawal from the deal is another painful issue for Vietnam.

“Vietnam had developmental strategies around the TPP. They had great expectations on the trade pact, but they now have to change their direction and trade policies, as well as the development strategies,” said Masahito Ambashi, economist at the Economic Research Institute for ASEAN and East Asia.

Japan, one of the TPP’s larger members, has also pretty much seen a decline in trade. After a mini export boom in 2013, the country’s export growth has stagnated. A more expensive currency and lower global growth prospects have crimped exports out of Japan.

Exports have declined for 13 consecutive months in Japan and contracted 10.3 percent year-on-year in October, a further tumble from September’s 6.9 percent slide. Imports retreated even more, dropping 16.5 percent year-on-year in October, from 16.3 percent in September.

Across Asia, total trade declined 7.8 percent year-on-year in October compared with a 3.6 percent decrease in September. Total exports decreased 9.2 percent in October, after a 1.4 percent decline the previous month. Total imports fell 6 percent in October, following a 6.2 percent decline in September.

“Trade in Asia has slowed largely on the back of a decelerating Chinese economy. But lower global growth has also hurt trade prospects across Asian countries less exposed to China,” said Syed at Moody’s Analytics.

China, the largest trading country and not a member of the TPP, has also experienced volatile trade performance. Exports fell 7.3 percent in October, an improvement from September’s 10 percent plunge but still a decline.

China’s imports fell 1.4 percent, following September’s 1.9 percent dip. In October, China recorded a trade surplus of $49.06 billion, compared to September’s $41.99 billion.

Meanwhile, India, also one of the world’s fastest-growing economies, is seeing a slight slowdown. Its performance is contradicting assumptions that a slowing China might not open doors for India.

The question for several of these countries is whether a growing network of bilateral deals could work as an antidote for the virtually defunct TPP. And the answer is, probably not.

Global and regional trade, economic and industry leaders of the Asia-Pacific Economic Cooperation forum have said the numerous free trade agreements forged by countries in Asia Pacific could hinder the full participation of SMEs in trade. The network is too complicated for SMEs to fully grasp.

On the one hand, turning to bilateral trade agreements could be a temporary solution to the TPP’s failure. But, if SMEs fail to leverage those deals, the legs would be cut from under a very important engine of economic growth.

“What I hope not to happen is another huge burst of bilateral trade agreements. It’s a likely outcome in the short run; countries will now try to start negotiating, creating an even more messy tangle. Hopefully, the WTO (World Trade Organization) can step up and avoid that,” said Jayant Menon, lead economist at the Manila-based Asian Development Bank.

Bilateral trade deals will not replicate what the TPP promised member countries, but not for lack of trying.

Menon added that US withdrawal from the TPP is “unlikely to be hyperbole” and President-elect Trump appears more interested in bilateral agreements where he feels that “a better deal can be struck in terms of US interests”.

Even so, some see real hope for the region in the strategic choices emerging markets will make.

“It appears that Vietnam and other Asian economies will likely look inwards in Asia for more trade opportunities in the coming year,” said Syed.

“The Regional Comprehensive Economic Partnership agreement and Free Trade Area of the Asia-Pacific are in their infancy, and there’s still some time before we get clarity on what kind of trade deals could be negotiated.”

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