Except for a few countries such as India, most Asian economies depend significantly on global trade. The trend towards protectionism in recent years has been a drag on their economic prospects.
Two important developments, however, provide a potential uplift to regional trade prospects. One is mainland China’s new development strategy under its forthcoming five-year plan; the other is that efforts to preserve the momentum of trade opening for Asia are beginning to produce results.
China’s leaders have approved the broad outlines of the 14th Five-Year Plan. It is founded on a new concept, the ‘dual-circulation’ economy, which emphasises both a defensive element of developing indigenous technological strength alongside the maintenance of a highly open economy, which will remain integrated with the rest of the world.
Open for business
China will certainly be developing its own supply chains in sensitive areas such as semiconductors, but that does not mean that it is turning inward or abandoning engagement with the rest of the world. In fact, China’s leaders from President Xi Jinping down have been at pains to reiterate that China will remain open for business, while doing what it can to boost globalisation.
Indeed, the new development plan seeks to open the economy further to the outside world, as seen in recent approvals for foreign financial firms to do more business within China and to even own 100% of some companies.
As China’s economy matures further, it will specialise more deeply in areas of comparative strength while trading more with its partners, especially its neighbours, in the many niches that are more profitably left to others. This is seen in the trend for Chinese companies to move low-value operations to countries such as Vietnam while focusing on higher-value activities.
China’s new plan also includes a continued commitment to its Belt and Road Initiative, which involves putting in place the physical infrastructure as well as supporting agreements that will integrate its economy more closely with its neighbours.
As a result, trade between China and its closest partners has soared and will become more pronounced in coming years. Engagement with the outside world, especially East and South-East Asia, will grow, not lessen.
As China’s economy matures further, it will specialise more deeply in areas of comparative strength while trading more with its partners, especially its neighbours, in the many niches that are more profitably left to others
Asia opens up
When President Donald Trump pulled the US out of the Trans-Pacific Partnership, an economic partnership agreement that brought free trading nations in Asia Pacific together with those in the Americas, many thought it signalled the end of trade liberalisation in the region.
Instead, Japan got together with like-minded countries such as Australia and Singapore to create the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement, which has now been ratified by enough of its 11 members to take full effect.
The CPTPP’s ambitious provisions will boost flows of trade and investment in the Pacific region, straddling East Asia, Canada, Mexico and a few other Latin American economies.
In November, the 10 ASEAN member countries came together with China, Japan, South Korea, Australia and New Zealand to sign the Regional Comprehensive Economic Partnership (RCEP) agreement. This is a highly consequential trade agreement which encompasses around a third of the world’s population and close to 30% of global economic output.
While its provisions are not as wide-ranging as the CPTPP, the RCEP will bring sizeable economic benefits to its members worth around US$186bn, according to one estimate. It should be stressed that the RCEP marks a beginning not an end; it will be a process that, over time, will produce follow-up agreements that will expand its provisions, as well as bringing more countries into its fold.
Preserving synergies
There are certainly headwinds to global trade in the form of growing protectionism and a tendency for more countries to contemplate inward-looking policies, so the downside risks to global trade should not be underestimated.
However, the recent developments discussed here remind us that there are also countervailing forces that can offset these challenges to trade. Yes, multilateral trade liberalisation embracing the whole world of the sort that the World Trade Organisation attempted will be difficult to pull off. But smaller-scaled and less ambitious economic partnerships within Asia Pacific will help preserve enough of the synergies from trade opening to help retain economic dynamism in the region.
