On Trump, free trade, and the end of TPP

On 20 January 2017 Mr Donald J. Trump sworn in as the 45th President of the United States of America, and as part of his “100-day action plan to Make America Great Again” on 23 January 2017 signed the executive order to withdraw the USA from the TPP, the Trans Pacific Partnership free trade agreement between 12 Asia-Pacific countries including four within the ASEAN marketplace (Singapore, Malaysia, Vietnam, and Brunei). It reconfirmed Trump’s position well expressed during his presidential campaign and remarked his intent to withdraw from the TPP “from day one,” calling it “a potential disaster for our country” and continued by adding that instead he would negotiate “fair bilateral trade deals that bring jobs and industry back”.

Indeed this was in line with his “two simple rules” as outlined in his inauguration speech: Buy American and Hire American.

Republican Senator Mr John McCain commented on the announcement, saying that although much anticipated, “The decision is a disappointment to all those who believe in free trade and most of all in the importance of the strategic role of the USA in the APAC marketplace.”

Furthermore he added, “This decision will forfeit the opportunity to promote American exports, reduce trade barriers, open new markets, and protect American invention and innovation” and “it will create an opening for China to rewrite the economic rules of the road at the expense of American workers.”

Japan’s Prime Minister, Mr. Shinzo Abe, a strong supporter of the TPP although overcoming strong opposition from Japan’s influential farming lobby, met with Mr Trump at the Trump Tower in New York in mid-November 2016, in the first meeting between the US President-elect and a foreign leader, and then continued to the APEC Summit in Lima, Peru, where Mr Abe highlighted that “the TPP would be meaningless without the United States” and paved the way to moving towards a new regional trade pact with China by saying, “There’s no doubt that there would be a pivot to the RCEP if the TPP doesn’t go forward.”

For the record, RCEP or Regional Comprehensive Economic Partnership is the extensive FTA programme highly sponsored by the President of the People’s Republic of China, Mr Xi Jinping, and covering the ten ASEAN markets (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six markets with which ASEAN has FTAs already in place (Australia, China, India, Japan, New Zealand, and South Korea), representing 27% of global economy and 30% of global trade.

Singapore’s Prime Minister, Mr. Lee Hsien Loong, who attended the APEC Summit in Lima, Peru, referred to Mr Trump on the topic of the TPP by saying, “He had no sympathy for the TPP at all and I think that’s a disappointment to all of us who worked so hard to negotiate the TPP.”

So with the now defunct TPP, what is next?

Well, the first thing to say is that the TPP was not in force, and therefore as of now there is no moving backwards or negative, real, or significant impact for the ASEAN economies as trade will continue the way it used to take place until new broader FTAs or additional bilateral FTAs will be negotiated in the future.

Singapore was one of the four ASEAN economies expected to join the TPP, along with Malaysia, Vietnam, and Brunei, and the City-State has been the first country in Asia to sign a bilateral FTA with the USA way back in 2004.

The overall value of Singapore exports to the USA stands at US$16.4b whilst overall value for imports from the USA stands at US$30.2b in imports from the USA, and Singapore ranks 17th as trading partner with the USA, whilst Malaysia ranks 19th and Vietnam ranks 29th.

We all know the position of Mr Trump on free trade and his plan to rebuild the American economy by fighting for free trade which includes the already ended TPP, the renegotiation of terms of the NAFTA (the North America Free Trade Agreement between USA, Canada, and Mexico) from which the USA may withdraw if an agreement is not reached, and bringing trade cases against China at WTO level.

Still talking about China and Mr Trump, already in early December 2016, indicated Iowa Governor, Mr Terry Branstad, the longest-serving governor in US history, as the next US Ambassador to the Middle Kingdom in Beijing.

For the record, more than 25% of the American soybean is exported to China, and the state of Iowa is a major producer to the point that China plans to build a model farm totally inspired on one of the farms that Mr Xi Jinping, President of the People’s Republic of China, visited during a trip to the USA back in 2012.

Now Mr Branstad is a long-time friend of Mr Xi Jinping, and posted the following comment on the Iowa Governor’s website on 7 December 2016: “During our 30-year friendship, President Xi Jinping and I have developed a respect and admiration for each other, our people, and our cultures,” and then added, “The President-elect understands my unique relationship to China.”

But notwithstanding this good friendship relation, it’s not going to be an easy task for the new Ambassador to China as Mr Trump pointed out during a rally in Des Moines, Iowa, that “Mr Branstad’s connections with China make him the right person to deliver tough demands in Beijing on rebalancing trade.”

And there’s no doubt that apparently Mr Trump may not seem a good friend not only of China (with whom he’s also questioning the “One-China policy” as Beijing considers Taiwan an inalienable part of China, on top of the dispute on the Spratlys and Paracel islands in the South China Sea considered by the US as international waters and taking Mr Rex Tillerson, confirmed last 23 January 2017, by the US Senate as the new US Secretary of State, to declare that the US should “send China a clear signal that, first, the island-building stops, and second, your access to those islands also is not going to be allowed”) but of Asia in general (on Japan, Mr Trump declared, “We can’t defend Japan, a behemoth, selling us cars by the millions”) as well where most economies totally rely on foreign trade and free trade.

A hypothetical, although prospected by Mr Trump, trade war with China and the imposition of tariffs on China products could only provide a dangerous halt to the growing and developing Asian economies as Asia is today the driver of global economic growth, but in the end China may well emerge as the winner in this battle.

During the 23 January 2017 meeting in Washington, DC, with a group of CEOs from Fortune 500 companies, Mr Trump put it simple: “Move your manufacturing operations overseas and you’ll face a substantial border tax,” warning the imposition of a steep border tax if US companies manufacturing products abroad then sell them back in the US market.

Mr Trump is convinced that this border tax would be fair because it’s meant to protect US jobs from leaving the country and to boost domestic productivity following the “Buy American, Hire American” rule, which in principle is correct but it clashes with the concept of globalisation and provides great concern for US companies that already have outsourced abroad their production capability because manufacturing costs in the USA are much higher than in developing countries (just think about Vietnam or Malaysia to remain within the ASEAN countries once part of the TPP) resulting in a much higher cost of the new Made-in-the-USA consumer product which will reflect into a much higher retail price for the US consumer.

Indeed this may well offer China, and on a silver tray, the opportunity of benefitting from globalisation.

With free trade as the major driver of globalisation, China’s focus is to replace the USA in any trade deal – as it may well happen with China’s RCEP program including forging stronger economic bonds between ASEAN and China on top of the already effective ASEAN-China free trade agreement (see my column “Bye bye, TPP”) – and be a major influencer all across the world benefitting from the “One Belt, One Road,” the 21st century version of the Silk Road conceived by People’s Republic of China’s President Mr Xi Jinping to provide economic and trade connectivity across almost 60 countries stretching from China to selected European markets like the Netherlands, Italy, Germany, and across South Asia, ASEAN, and selected markets in Africa.

In the meantime a glimpse on the future shape of the global business and trade may come out after the 27 January 2017 meeting at the White House between Mr Trump and UK Prime Minister Mrs Theresa May, the first foreign leader to meet with the new US President since taking office, where a potential USA-UK free trade deal may be on top of the meeting agenda.