The participation and engagement of Latin American countries in multiple economic integration efforts within the Asia-Pacific means that they will become key partners and stakeholders in the development of a regional trade infrastructure that has the potential to create more open, resilient and inclusive trade outcomes in a post-Covid environment. However, increased political uncertainty and structural obstacles will determine the depth and impact of that role.
Part of the problem is that the entire policy landscape for managing sustainable trade with a focus on climate or environment remains at an early stage. Climate has been managed by officials through the UN Framework Convention on Climate Change (UNFCCC). Trade officials, agencies or ministries may participate, but are not driving the agenda. Many of the ideas circulating to address climate and trade are quite new as well. It isn’t entirely clear, as an example, what sort of trade implications will come from the growing use of carbon border adjustment taxes. The trade consequences of green subsidies are likely to be significant, but uncertain. There are some elements of a trade and climate agenda with more consensus, including the potential inclusion of clauses on pollution or managing endangered species. Some trade agreements include commitments to sign on and implement a variety of climate-related international treaties and conventions. The critical importance of the “climate and trade” agenda is clearly crying out for a suitable response. Yet existing mechanisms for delivering results seem limited. Adding climate to trade agreements, as noted above, tends to be unsatisfactory. Asking global or regional institutions to manage any possible trade-related fallout from climate actions taken by the UNFCCC or others is also problematic. One solution that seems achievable is to create a new style of trade agreement, the CTA. It could pull out the most useful and innovative element of a digital counterpart, the DEPA.
Firms of all sizes are currently experiencing unprecedented pressures as a result of COVID-19, the ongoing US-China trade war, and even climate change. Such quickly changing market signals have put enormous pressure on margins, leaving companies with sub-optimal networks and trading partners, and making firms more vulnerable to further disruptions and market fluctuations. In such an environment, building a more transparent and robust supply chain risk management program that monitors and responds proactively to potential disruptions has become a C-suite agenda item. Firms need to re-examine their existing supply chains and ensure that they are fit for purpose in a new, widely disrupted, trade environment. Companies that did not see the point in engaging in potentially complex reengineering of their footprint may be forced to look more closely. Areas of the chain that were previously unimportant may become a top-line challenge while other markets that have traditionally sustained business may no longer do so. To help lower risks, one key, typically underutilized, tool for companies is effective use of free trade agreements (FTAs). These agreements can limit the scope for sudden shifts in government regulations, policies, tariff levels and services and investment restrictions. Proper use of FTA rules can generate thousands or even millions of dollars in annual savings, providing consistently lower tariffs, plus rules between partners that bring greater certainty and lower risks for regional supply chains.
That said, agreements signed for non-trade reasons tend to exclude key sectors or items of interest, even in market access in goods chapters. They might provide 100 percent coverage of snow equipment—snow boots, skis, jackets, snowplows and snowmobiles—but carve out, or exclude, tropical fruits. If the agreement involves two equatorial members, a boast of “full coverage” for snow suits is unlikely to be met by enthusiastic manufacturers or traders, particularly if fruits that are actually exchanged are getting nothing new. Officials will often talk of the extent of coverage by bragging about the inclusion of tariff lines, ie, “this agreement includes 65% of tariffs from the first day of the agreement, rising to 90% coverage when fully implemented.” Given the high concentration of trade in a handful of tariff lines, firms might be extremely disappointed to discover that even 90% coverage may not provide any new tariff benefits for key products of interest. Better trade deals include more things.
It is a struggle to stay on top of important information. The deluge of news never stops and bigger networks often just mean more sources for materials. In the triage and sorting phase, some items get dropped off the list entirely, and analysis of the impact for some news is not done.
One solution that companies often pursue to cut through the clutter is to focus on the immediate and surrounding area. Distant places are left off the radar screen entirely. News from elsewhere is either assumed to be handled by some other division or department or is simply not picked up and followed at all.
Hence, in Singapore, firms are often keenly aware of policy changes in Indonesia. They may be tracking, for example, an upcoming law that will require potentially complicated new handling and labeling for all imported products to indicate halal and non-halal compliance. (More on this law likely in a later blog post.)
There is a lot of awareness and activity by firms across the region over Indonesia’s new regulatory structures for mobile phones. Given the importance of the sector and the impact of some of the regulations that require extensive domestic content in manufacturing, firms are paying attention.
Some news from further away also commands notice. The slowdown in economic activity from China, of course, also occupies the minds of many company staff in Southeast Asia. Many ASEAN-based firms buy and sell to China and have supply chains that are deeply integrated across China.
The corporate structures of firms in ASEAN may, however, make it difficult for companies in this region to fully appreciate the impact of changing circumstances in China on ASEAN production, sales, workplans and so forth. This is because many companies put China into a different division or department from ASEAN or the rest of Asia Pacific.
However, getting internal alignment within Asia looks a doodle compared with trying to get staff based in the region to pay attention to events outside of Asia.
Case in point—the impending referendum in Britain on the EU. At first glance, this may appear to have nothing whatsoever to do with a company’s sales or production in Southeast Asia. After all, whether the British vote to stay or leave the European Union is a purely internal matter to be decided on June 23.
But perhaps not quite so fast. The EU is the largest investor in Southeast Asia. ASEAN is Europe’s third largest trading partner (outside of Europe), behind the U.S. and China, and Europe is also ASEAN’s third largest partner.
Most of this trade runs through Singapore where a good chunk of this investment is British, including a substantial amount of British financial services. Services, overall, are critically important for Britain.
If Britain opts out of the EU, the trade and investment implications could be important. It is not just that the stock markets in Europe (and elsewhere) would gyrate. It is quite unclear what would happen to trade policies in both the EU and in Britain.
The EU has been very supportive of trade agreement and trade liberalization. Not all of this, of course, has been at the request of the British. But certainly Britain’s centuries of promoting freer trade has pushed the continent to engage more on a liberalizing agenda than might have, perhaps, otherwise been the case. Without British persuasion, how likely will it be that the EU will continue to press for freer trade in the future?
Will an EU without Britain continue to advocate for robust, liberalizing trade agreements in this region with Malaysia? Philippines? Indonesia? India?
One of the important arguments, for example, for believing that Vietnam will implement commitments in the Trans-Pacific Partnership (TPP) is that the TPP rules are also backed up by many similar pledges made in the EU-Vietnam trade agreement. Vietnam’s government therefore is taking on difficult domestic level reforms in various areas like customs not just because the TPP requires new changes, but because EU-Vietnam also will. The TPP and EU agreements are, in this sense, mutually reinforcing.
Britain and the EU will have to sort out their own trade arrangements between them. While many of the Brits voting to leave the EU may want to continue to enjoy the benefits of the EU market without change, this is a highly unlikely outcome. The two sides will apparently have just two short years to negotiate a mutually satisfactory bilateral trade deal that covers goods, services, investment and all the other types of deep integration issues that Britain covets and the EU is probably going to be less enthusiastic about signing with a country that has voted to leave.
At the same time, a departing Britain will not have access to the same global trade deals the EU has received. Instead, the British will have to renegotiate trade agreements on their own (with substantially less leverage and power than it had when it was part of the EU). This includes multilateral, regional and bilateral deals.
The British would, therefore, have to conclude new trade agreements with countries like Singapore and Vietnam. These deals might (or might not) repeat the EU commitments in the recently completed agreements.
In short, the British vote on a possible Brexit June 23 is the sort of news that should be followed (at least a little) in Asia, even by individuals with extremely cluttered inboxes and short attention spans. In a globally connected world, what happens in Britain may not stay in Britain.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***
