Photo: Reuters
Photo: Reuters

International trade tensions: a worry for Asia

The uncertainty in the global trade environment does not bode well for Asian economies that are heavily dependent on international trade and investment as a means of sustained growth

Between 2002 and 2017, economic growth in Asia averaged about 6% annually, outpacing the global economy as a whole, which expanded about 4% on an average. Consequently, Asia’s share of global gross domestic product (GDP) rose from 25% in 2002 to about 35% in 2017. While China and India are important contributors to the region’s dynamism, Indonesia and the rest of South-East Asia have also grown rapidly during the 15-year period.

This has, in turn, been driven in no small part by the region having seized opportunities for global trade and investments. In fact, Asia’s share of global exports spiked from about 29% in 2002 to 38% in 2017, while its share of global imports increased from about 22% to 31% during the period.

It is notable that merchandise trade in Asia (in value terms) grew at an average of 17.5% between 2002 and 2008 before the global financial crisis struck. Since 2010, the annual growth in the value of merchandise trade plummeted significantly, with the sharpest contraction (-13%) observed in 2015. The most recent data from International Monetary Fund’s World Economic Outlook (April 2018) suggests that Asia’s merchandise trade continued to shrink in 2016, but somewhat rebounded in 2017, although the growth rate remains well below the pre-crisis average.

The tepid recovery notwithstanding, Asian economies should well be concerned about a gradual erosion of a rule-based multilateral trading system, particularly given the tit-for-tat tariff threats by the US and China.

The Donald Trump administration announced the imposition of tariffs on $60 billion worth of Chinese imports under Section 301 of the Trade Act of 1974, primarily on aeronautical, energy and technology-intensive areas. This was in addition to the more general tariffs imposed on washing machines, solar panels, steel and aluminium imports on China and its other trading partners. China, in turn, has threatened retaliatory tariffs worth $3 billion of goods from the US with 90% in food-related products and the rest in steel tubes and aluminium products.

Trade wars blame game

Both parties have a role to play in the US-China and overall global trade tensions. While China cannot be considered a currency manipulator (based on the US Treasury criteria or in terms of actual currency value), concerns abound about the continued interventionist industrial policies by the country to build national champions with government funding and its mercantilist strategy to secure core technologies and develop indigenous expertise in semiconductors and related areas. This is part of its “Made in China 2025" (inspired by Germany’s “Industry 4.0 plan") which aims to develop world-class dominance in 10 domestic tech-manufacturing industries.

In so doing, critics have argued that China has failed at times to respect the World Trade Organization (WTO) agreements on Trade Related Aspects of Intellectual Property Rights (TRIPs) and Trade Related Aspects of Investment Measures (TRIMs). While it remains far from clear that China’s policies have actually violated the WTO code on TRIPs and TRIMs, political scientist Oh Seung-Youn has at various times referred to China’s use of “convenient compliance". She has argued that although China removes such policies when challenged at the WTO, by that time it usually achieves whatever it wanted to from implementing those industrial policies. In other words, the country not only manages to achieve what it wants, but also creates the reputation of being a “responsible" WTO member.

Others have argued that the WTO itself is ill-equipped to deal with the unique challenges posed by a rising China with its unique economic structure. In fact, writing in 2012, the Indian government’s chief economic adviser Arvind Subramanian had noted that “...the previous bargain struck at the time of China’s WTO accession may no longer be an equilibrium... Hence, a new bargain may need to be struck, which would reflect China’s increased size". Deputy US trade representative Dennis Shea, on his part, has chosen to blame the WTO’s appellate body for the “steadily worsening rupture of trust".

On the other hand, the Trump administration has undertaken aggressive unilateralism due to its “diminished giant syndrome" à la eminent trade scholar Jagdish Bhagwati of Columbia University. As he had once noted, the “protectionist retaliation" from other countries failing to comply with multilateral or bilateral obligations is not as serious an issue as Washington using its clout to arbitrarily and unilaterally declaring established trade practices as unacceptable. Such trade threats make it look as if “America believes in the law of the jungle rather than the rule of law".

Implications for Asia

For now, the global trade environment will be much less buoyant and much more uncertain than it was in the past. This does not bode well for Asian economies, particularly those, which are heavily dependent on international trade and investment as a means of sustained growth. With Trump’s “America First" economic platform, the administration’s preference for bilateral agreements over multilateral ones as a means of promoting “fair trade", as well as its willingness to use unilateral sanctions rather than work through the WTO to manage its trade concerns (“fair, reciprocal trade"), there is a clear vacuum in global trade leadership.

China could potentially take on that mantle, but to be viewed as being a credible champion of a rules-based international economic order, it must eschew some of its own mercantilist and predatory behaviour and begin to better respect intellectual property rights (IPRs). A Trans-Pacific trade war would not be to anyone’s benefit.

For the rest of Asia, it is critical that they reaffirm the importance of an open, transparent and rules-based multilateral trading system, while pushing forward with greater intra-regional trade initiatives that are of mutual benefit.

Ramkishen S. Rajan and Sasidaran Gopalan are, respectively, professor and vice-dean (research) at the Lee Kuan Yew School of Public Policy, National University of Singapore, and an assistant professor at the Graduate School of Public Policy, Nazarbayev University, Kazakhstan.

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