With the demise of the TPP, Australia now needs to refocus on an ever-shifting environment of overlapping treaties.
The TPP would have covered 800 million people, encompassed 40% of the world’s GDP, and eliminated 98% of tariffs. Australian farmers, financial institutions and manufacturers would have seen the world’s largest free trade area brought into existence around us and expand outwards as new entrants sign up to its requirements around guarantees of rule of law, labor rights and environmental protections.
The agreement’s rejection by US President Donald Trump means a return to our patchwork of agreements across the Asia Pacific. These are states we can keep trading with, but the hope of a consistent framework and the avoidance of extra compliance costs that entails is substantially reduced.
The executive order signed Monday by President Trump formally withdraws the US from negotiations for the Trans Pacific Partnership (TPP). While this move was largely symbolic, as the TPP was already languishing in Congress where it needed to be ratified, it puts an end to hopes that the President would seek a renegotiation or at least use the TPP as further leverage against China.
With the actual policy priorities of the Trump Administration hidden behind a wall of conflicting statements and obfuscating ideology, we will have to use moments like this to divine what is next for Australian companies doing business in the Asia Pacific.
While American business was counting on the TPP or something similar to reverse the downward trend in US exports to the Asia Pacific, existing trade agreements with major economies in the region means the effect will be a gradual falling behind rather than a step change down for US exports. The impact will therefore not be immediately felt in the fundamentals of regional trade, but how we navigate the changing expectations and business confidence for long term import/export strategies has become crucial.
The US already has bilateral or trilateral trade agreements with many of the would-be TPP members. Australia signed one in 2004. With the end of the TPP, Asian states must return to and expand on these bilateral or smaller multilateral agreements. The expansion of free trade agreements (FTAs) between Asian states had been stagnating after the finalisation of the text of the TPP, as the region saw the agreement as a potential fast-track to greatly expanded markets and investment opportunities. Australian businesses were poised to take advantage of that, but now must move to convince stakeholders of their preparedness for this brave new world.
Although there is talk of the remaining TPP parties such as Australia through Trade Minister Steven Ciobo working to lock in some of the benefits even without the US, this effort is unlikely to have much of the gravity of the original proposal. The presence of US was the chief reason for many of the TPP countries to get involved, and the loss of the world’s largest consumer market is likely to take the significance out of any remaining treaty. Already, senior Government ministers are starting to talk up the merits of further involvement of China in future agreements.
Now, as we look to signals from the Trump Administration, it will be critical that Australian export/import businesses look closely to the shifting patterns of free trade agreements and areas in Southeast Asia. Free trade agreements with North Asia have been greatly beneficial, and having them with both China and the US is likely to keep our fundamentals solid, but much of Asia remains an untapped market so the environment in which we will be seeking to sign new deals remains important. China has seemingly switched into the US’s rhetorical role, espousing the merits of free trade and warning against the trend towards isolation, seeking to fill the void left by President Trump’s embrace of the latter. Steve Bannon, formerly of Breitbart News and now senior Trump advisor, has highlighted the growing divide. “I think it’d be good if people compare [Chinese Premier] Xi’s speech at Davos and President Trump’s speech in his inaugural… you’ll see two different world views,” he said in an interview with the Washington Post.
We have had forty years of understandings by US Presidents that internationalism is mutually beneficial and that the United States has a central role in promoting mutual cooperation and strengthening trade. That fundamental assumption of the global economy is gone. In the short term, the trade environment in the Asia Pacific will be noticeably more unpredictable, but implications for businesses’ long term planning will take more time to tease out. If Republican majorities in Congress start to take the Trump approach and reject the rules of the game, we may see a longer-lasting shift beyond the direct impact that President Trump can make. If Trump’s impact on the direction of trade policy in the region lasts longer than his Presidency, business leaders will have to begin rethinking assumptions made about import/export over long-term timescales.
For Australia, this means a blow to Prime Minister Turnbull’s trade ambitions as the Coalition Government had stressed the central importance of the TPP to the future of Asia Pacific trade. Particular sectors that had been welcoming the TPP as a deal that would broaden markets for Australian products, like agriculture and finance, will need to complete readjustments begun after Trump’s election. Australian exporting businesses with exposure to regulatory risk in the Asia Pacific will need to take heed in their long-term planning of the probable lack of American leadership in shaping the environment over the short- and medium-term. China’s historically cautious foreign policymaking attitude means it is unlikely to take the US’s role in shaping the global environment, but its steady-handed opportunism means it is likely to make some national advantage of the US withdrawal. In the meantime, Australian business will need to plan for more uncertainty and track the progress of disparate trade deals. Centralizing and harmonizing regulation and trade policy in the Asia Pacific just became decidedly less American.
Sam Perkins is a Policy Analyst at FPL Advisory, writing on political risk and change management in regulatory affairs.