By: Ryan Nichols
In January of this year, President Trump informed the world that the United States would be abandoning the Trans-Pacific Partnership (“TPP”). The TPP, negotiated over the course of five years by former President Barack Obama, was a proposed free trade agreement that allied the United States with eleven Pacific Rim economies. These countries included Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. In total, these twelve countries represent around forty percent of the world’s economic output. The rationale for this agreement was to bolster trade among these countries to generate economic growth, increase relations by lowering tariffs, and stimulate job creation through competition. Additionally, the countries hoped to foster better economic policies and regulation by forming closer relationships amongst themselves. In order for this to happen, all twelve countries needed to ratify the agreement. Much to the dismay of the other countries, President Trump made it clear the United States would not be ratifying, thereby negating any chances of ratification for the other countries. Casting aside the pros and cons for the United States’ departure, a question remained for the other eleven countries: what do they do now? During this fallout, Japan and China seized the initiative to provide solutions by proposing two different partnerships for the region: the Comprehensive Pacific Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Because of their differing responses to the United States’ departure of the TPP, both countries are poised to assert their dominance in the region from the expected increase in trade relations and economic growth.
How Has Japan Benefitted From the United States Leaving the TPP?
Japan, and the now ten other countries, have agreed to continue the partnership, which will be called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”). The deal, which is set to be the largest trade agreement in history, carries much of the same substance of the original TPP. While it still needs to be ratified by every country, no major issues have arisen so far to prevent the deal from moving forward. This deal could close early next year. Moreover, the other ten countries, with Japan’s lead, are showing the United States that the world can move on without it, despite the aggregate drop in economic output of countries in the agreement from forty percent with the United States to now thirteen percent without the United States. Important for Japan, this could improve trade relations and stimulate economic growth.
Japan will use its economic superiority of being the biggest economy among any countries in the CPTPP to improve its trade relations with the other CPTPP countries. Some countries in the CPTPP, specifically Canada and Mexico, are huge trade allies to the United States. Japan now has a competitive advantage against the United States to trade between these countries from the CPTPP, which “aims to eliminate tariffs on industrial and farm products across the [eleven nation[s.]” The CPTPP emphasizes open markets and economic advances between these countries, and Japan only stands to strengthen its trading relations from these priorities.
In addition to improving trade relations among different nations, the CPTPP will boost Japan’s struggling economy by allowing Japan’s exports to reach these smaller markets, such as Canada and Mexico, with little to no trade barriers. Japan has experienced decade’s worth of deflation, which has stifled trade, investment, and growth. Fortunately, the CPTPP will help Japan combat these issues, and could provide the stimulation Japan’s economy needs. The CPTT enables Japan to increase its exports among the eleven countries at lower costs because of the elimination of tariffs. Further, the CPTPP will create more market opportunities among the countries for Japan’s businesses. This not only has the effect of promoting competition, which can lower costs and encourage specialization, but it can also lead to economic growth, investment, and job growth.
How Has China Benefitted From the United States Leaving the TPP?
The TPP was set to establish a dominant American leadership in Asia, much to the chagrin of China, which was not invited to participate in the agreement. Fortunately for China, the American dominance never came to fruition because of the United States’ departure from the TPP. With the United States’ departure, China is primed to step in the United States’ place and assert its dominance in this region. China has done this with the Regional Comprehensive Economic Partnership (“RCEP”). Negotiations for the RCEP began in 2012, and it is comprised of the Association of Southeast Asia Nations (“ASEAN”) countries (Australia, China, India, Japan, South Korea, and New Zealand) and Laos, Myanmar, Indonesia, Philippines, Thailand, Cambodia, Brunei, Malaysia, Singapore, and Vietnam. China has re-energized the RCEP’s importance during the fallout of the TPP and is encouraging the ratification of the RCEP to be completed by the end of 2017. The RCEP is set to have a combined economic output of $17 trillion, and the countries involved includes around half of the world’s population. This equals around forty percent of global trade and would match the original TPP’s trade percentage. By forwarding a trade proposal across the region that emphasizes China’s leadership, China’s goal is to provide strong partnerships to help increase economic growth and trade.
China is the world’s second largest economy, currently behind the United States, and therefore will be the largest economy in the RCEP. China is primed to experience economic growth and increased trade from the RCEP, because of the increased trading opportunities and decreased trade barriers. Notwithstanding China’s restrictions on imports, which sees several industries closed to foreign investors, China can experience substantial economic growth from exporting and by alleviating some of their import restrictions. China is already a substantial exporter for most of Asia, and the RCEP emphasizes reducing tariff barriers and market access, which will increase China’s export dominance in the region. Further, the improved market access provides incentives for China to take advantage of exporting its products to increase its trading opportunities. Thus, the RCEP will help China maximize its economic opportunities across the region. Under the RCEP, it is estimated that the “income of ASEAN countries would increase by about [three percent] in total by 2025 . . . [and] could boost the real GDP of almost all ASEAN countries more than any other free trade agreement.”
In addition to experiencing increased economic growth and trade from the improved trading opportunities, the RCEP allows China to take advantage of reduced trade barriers. One of the goals of the RCEP is to reduce trade barriers on a myriad of products in order to increase economic growth. Specifically, the RCEP is planning to remove trade barriers on “92 percent of [the RCEP nations’] product lines over five to ten years.” Moreover, China is promoting its efforts of globalization and free trade by alleviating some of its import restrictions to reach different markets. It is capitalizing on the United States’ departure from the TPP to attract investment and trade opportunities with Asian and Latin American countries who would normally trade with the United States.
Despite the initial uncertainty in the future of global trading caused from the United States’ departure from the TPP, Japan and China have taken advantage to try and improve their trade relations and increase economic growth. Japan and China have done this with their respective trade agreements: the CPTPP and the RCEP. Because of the increased trading opportunities and reduced trade barriers, Japan can use the CPTPP to jumpstart its economy, which has stifled over the last decade. China can use the RCEP to further expand its exporting prowess, regionally and globally. These agreements will indubitably have a profound effect on most of the trading world, as both agreements represent a substantial amount of the world’s economic output. With both agreements set to be ratified, by the beginning of 2018 and the end of 2017 respectively, Japan and China are primed to assert their dominance in the region and across the globe.
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