trade agreements

The Year Ahead: 2023 for Asian Trade

The Year Ahead: 2023 for Asian Trade

It’s that time of year again—ready to gaze into a crystal ball and guess the 2023 future of trade in Asia?  The overall picture looks mixed, with continuing disruptions which may be offset by new opportunities. 

Continuing Covid impact: while much of the world (and probably all Talking Trade readers) seem eager to put the Covid-19 pandemic in the rear-view mirror, the virus is likely to continue to affect trade in Asia for much of 2023.  Disruptions will be caused by individuals that are continuing to get sick and are unable to report for work.  Fluctuating staffing levels can make it difficult for companies to deliver goods and services on time as intended.  These delays will continue to reverberate across the region and create continuing headaches for supply chain managers, particularly in the first half of the year.  As with the earlier waves of Covid, government reactions and responses to potentially rising infection levels are also important.  While complete border shutdowns may be a thing of the past, governments have shown a new willingness to make rapid adjustments to policies that can catch firms by surprise.  

Inflation and recession worries:  The jury remains out on whether inflationary pressures are going to sharply or modestly moderate in the near term, but there is a growing consensus that several major economies are still poised for recession.  Given the importance of key markets in the US and Europe to most Asian economies, even a mild recession in either can be quite damaging.  Inflation and rising interest rates are also posing new challenges to domestic firms and consumers. 

Uncertain supply and demand:  Firms in Asia are also grappling with continuing uncertainty about the supply and demand for goods and services in the near term.  Many of the economic patterns developed during covid, such as working from home or extensive shopping online, will change in 2023.  But the “new normal” is also unlikely to snap back to pre-covid times.  This leaves firms and supply chain managers facing a set of forecasts that are probably obsolete and few clear answers on what sorts of supply and demand pressures might be most relevant now.  High levels of uncertainty make it all too easy for firms to over or undershoot expectations, leading to mountains of unsold inventory, staffing levels which are not right sized, or an inability to deliver at volumes.

Bright Spots for Trade in Asia

Bright Spots for Trade in Asia

Two other important groupings have important milestones in August. The members of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) are meeting on August 5. The CPTPP, which still has no Secretariat to manage this sprawling and complex trade agreement, is instead driven by a series of meetings across the year by government officials working on various aspects of the deal. The primary mechanism for oversight is the CPTPP Commission, which will be held virtually under Mexico’s chairmanship this year. The Commission meeting should be notable for a few reasons. First, it is an opportunity to celebrate the achievements of the agreement after more than 18 months in operation. While trade flows remain depressed under the pandemic, governments like Vietnam have taken advantage of the opportunity to expand knowledge. Vietnam held 577 seminars and workshops in 2019 alone to encourage the proper utilization of the CPTPP by firms of all sizes across the country. Second, the Commission will review any issues that have emerged in implementation. An agreement that runs to nearly 600 pages with thousands of country-specific commitments is bound to have a few issues. As a simple example, a typo in one of the letters mentioned yams instead of yarn.

Shifting Supply Chains in Disruption

Shifting Supply Chains in Disruption

The extreme level of disruption appears to have caused firms to finally think seriously about their existing supply chain footprints. Companies in multiple sectors have now vowed to develop more resilient chains. In many cases, firms have supply chains that have evolved organically, with little coherent planning. Staff, to pick one example, often run disparate parts of global firms from locations that may not make sense if viewed from the perspective of today. Companies might have an office in one location that was originally set up because a key staff member liked the area, only to watch it evolve into a much larger operation than ever anticipated at the outset. Companies typically do not design supply chains from scratch, but bolt on different parts over time, as the firm grows or acquires new companies or moves into new sectors. The net result is often supply chain footprints that actually make little rational sense. Warehouses might be located in places that no longer have the transport links originally intended. Traffic, as an example, could be so heavy that goods are stuck in transit much longer than planned. With so many staff locked down in houses or slowly venturing back to offices, it makes sense to seize the opportunity to re-examine supply chains and determine whether and how the existing footprint can be adjusted to cope with new stresses.

Guest Post: Unraveling the Complexities of Modern Trade

Guest Post: Unraveling the Complexities of Modern Trade

More recently still, trade has branched out into non-core areas such as sustainability. The evolution of trade deals is attempting to future-proof FTAs to better accommodate the complexities of digital transformation, the ever-increasing importance of services trade, and handle similar modern-day developments. There is also the need to agree on specific features such as rules of origin, and the streamlining and/or standardisation of non-tariff measures (as well as removal of non-tariff barriers). All of which are imperative to maintain, nourish and grow supply chains. But with such ambition comes complexity, and with complexity comes delay and disagreement. The current trade policy mix is a challenging one: essentially a struggle between protectionism and free trade, and a battle between nation state and the multilateral trade environment, but also a chance to use FTAs as mechanisms to structure sustainable targets and agree broader policy direction between partners. How these trade-offs untangle and become conducive to an ever flatter, more connected world is uncertain. There is also uncertainty regarding what a new or revised set of multilateral and regional agreements and bodies may look like, and how quickly these can be agreed upon.

TPP Collapse? Plan B for Everybody Else

Few firms buy and sell goods or services in just one market—even if that one market is huge.  In the long run, larger, more comprehensive agreements are much better for firms than smaller, more limited agreements.  This is what makes the TPP such an important agreement for business.  But, if the deal never makes it out of Capitol Hill in Washington, the remaining TPP countries have many options that can be pursued in the near term.  As Plan B strategies go, these are certainly better than nothing.