American Votes on Trade

The U.S. Presidential election gets underway in earnest in less than a week with the first votes in the Iowa caucuses on February 1.  Unlike many past electoral battles, both the Republican and Democratic primaries feature serious contests between multiple candidates. 

A bumper crop of candidates are jockeying to be the last person standing in their party and to reach the general election on November 8.   

In addition to electing a new president to replace outgoing Barack Obama, Americans will be voting on all 435 members of the House of Representatives for new two year terms and one third of the Senate (34 of 100 seats). 

An American election can have all sorts of consequences, of course, but of particular interest to readers of Talking Trade may be the implications of a contested election on a crowded 2016/2017 trade agenda. 

In trade, Congress has a number of important issues to consider.  Most critically, the Trans-Pacific Partnership (TPP) continues to move ahead.  The official legal texts were just released and will be signed on February 4 in New Zealand. 

Next up, the ITC has to issue a report on the expected consequences of the TPP.  This report is due in May and will likely be used (or misused) as fodder for both sides.  At any time after this report is finished, the President could ask Congress to begin the ratification procedures. 

Of similar economic importance to the TPP, the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with the European Union is supposed to wrap up this year. 

Also in the pipeline, the Trade in Services (TiSA) officials just pledged to conclude negotiations in 2016.  While it is unlikely that this services talk will be ready to present to Congress this year, it nevertheless represents the kind of deal that a new Congress and President may have to address in early 2017.

These three agreements alone present a complex set of challenges for current and potential Presidential and Congressional candidates. 

To make getting trade deals done more difficult, the current crop of candidates from both parties running for the highest office have views of trade that range from lukewarm to decidedly unhelpful. 

What is very unusual, in this upside down electoral cycle, is which candidates and parties are most strongly anti-trade.  In the past, Democrats were less enthusiastic about trade agreements, fearing the effects on workers, jobs and the environment. 

In large part to head off their potential objections, American negotiators included chapters on labor and environment in the TPP over often-strong opposition from other TPP member governments.

Candidate Hillary Clinton has not been enthusiastic about the TPP, despite having promoted the benefits to the United States from the agreement when she served as Obama’s Secretary of State.  Her position, once in office, could shift.  Her Democratic challenger, Bernie Sanders, is strongly in opposition to the TPP citing traditional concerns about labor and environment. 

What is new for 2016 is that Republicans are also not wildly excited about trade this cycle.  In the past, the party was generally willing to vote for trade deals.  For example, while contentious, voting just seven months ago produced support for the Trade Promotion Authority (TPA) to allow the conclusion of the TPP negotiations (and other trade deals). 

The vote count was 60-37 in the Senate, with the support of 13 Democrats and the opposition of 5 Republicans (including 2 running for President).  In the House, the vote count was 218-208 (28 Democrats voting yes while 50 Republicans opposed). 

Since then, positions have hardened.  Even supporters of the TPA vote and the TPP in the past, including Republican Speaker of the House Paul Ryan, have suggested potential problems voting in favor the TPP if it comes before Congress now. 

In part, this is because Republican candidates for President appear to have gotten strong public support for an anti-trade message.  The current front-runner, Donald Trump, has consistently argued against greater trade, at one point threatening to slap Chinese imports with 45% tariffs, for instance. 

Ted Cruz, who voted for TPA in the Senate, is now a vocal opponent.  He has suggested that he remains in favor of free trade, but not “corrupt” back-room deals that harm immigration. 

This puts the trade agenda—and TPP approval—into an interesting spot.  In the past, many Democrats who likely supported trade policies did not need to go out in front of voters having cast controversial votes in favor of trade because they could count on Republican colleagues to push trade over the line. 

Many Republicans, and most of what are now called “establishment Republicans,” have supported a trade agenda for years or decades.  Much of the ongoing trade agenda in the United States, such as lowering trade barriers overseas to American exports, pushing for standards regulations that are consistent with American regulations, expanding access for American services providers and investments, fit squarely in the traditional agenda of the Republican party. 

These objectives have lead to substantial benefits for many in the party, particularly for the traditional donor base. 

However, this election cycle has seen increasing tensions in the Republican party.  A rise of protectionism appears to have led many candidates to push back against free-trade and free-market ideas.  Perceptions matter and many potential voters on the campaign trail seem convinced that global trade has caused them to suffer significant economic harm with limited benefits.

Marco Rubio and Jeb Bush did defend free trade in the Republican debate held earlier this month and have supported the TPP.  But neither candidate is currently polling very well. 

For candidates running for the House or the Senate, the message seems clear—many primary voters seem to be responding better to messages about closing off America from foreigners than to traditional language about the benefits of greater engagement with the outside world.

This puts TPP approval, especially, into a very peculiar place.  Many are arguing that the agreement is most likely to be approved in the lame duck session (after the general election is finished on November 8 but before the new President and Congress are seated in January 2017).

However, if protectionist enthusiasm continues to build, it could be increasingly difficult to mobilize a winning coalition around getting the TPP ratified. 

Interesting times indeed.  Time to pay greater attention than ever, perhaps, to early electoral states like Super Tuesday on March 1 when a dozen states vote or March 15 when some key swing states select their preferred primary candidates to see which types of arguments actually carry the day in the voting booth.  Do Americans that are urging protectionism or freer markets show up to vote?  Are politicians swayed by perceptions too?

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Trade Outlook for 2016

Last year was quite extraordinary for anyone interested in trade policy.  Things were happening at the global, regional, and bilateral levels and involved most of the countries in Asia.  What will 2016 look like for trade?

The year ahead promises to be quite exciting.  The global or regional economy might be less robust, but there are ample opportunities for companies to use new trade arrangements or to promote specific policy outcomes that can affect their bottom lines.  Many of the trade changes that are coming into effect across Asia will provide new avenues for companies to generate growth and to explore new market opportunities. 

As always, come see us at the Asian Trade Centre for more details on how your firm can use trade agreements and trade arrangements to your advantage and how we might work together to influence trade policy outcomes for the future.

Implementation of the ASEAN Economic Community (AEC):  The AEC came into force at the start of the year.  During 2016, firms should spend time figuring out how to take advantage of existing commitments made by various ASEAN members.[i] 

Government officials have promised to implement the entire set of AEC pledges during 2016.  Many domestic level regulations, laws and procedures have not yet been brought into compliance with ASEAN commitments.  The gaps are particularly large in services and investment and often at the local or provincial levels.

In the diverse context of ASEAN, some members have more enthusiastically embraced the AEC and have made on-the-ground changes as required.  The level of commitment varies across the region, across local provinces, and across sectors or types of commitments.  (As prior Talking Trade posts have noted, please ignore optimistic assessments of levels of implementation drawn from ASEAN’s Scorecard exercise.)

The best use of the AEC, however, may be that companies can use AEC commitments as a platform for engagement with local officials.  If an ASEAN member state has already made a specific commitment, companies can encourage compliance with these existing pledges. 

ASEAN Blueprint 2025:  ASEAN has already started turning its attention to a new set of requirements for the next ten years.  The Blueprint practically promises everything to everyone.  Hence, it also provides an opportunity for savvy firms to help define specific areas where change would be most helpful.

For example, ASEAN could usefully discuss a range of non-tariff barriers.  Up until now, negotiations over various types of barriers like incompatible or inconsistent standards or regulations over things large and small have proceeded slowly.  Firms could help ASEAN focus on the critically important non-tariff obstacles that are hampering trade in a time of economic slowdown in the region.

Clearly, ASEAN will need to do more work to open up services markets and, especially, to think hard about licensing requirements that make it difficult or impossible for companies to provide services across the region.  Given that ASEAN’s own stated objective is to create a market with a free flow of services, these types of barriers to an increasingly important aspect of trade are deeply problematic. 

But ASEAN government officials are often uncertain about their own services markets and have an unclear understanding of the kinds of barriers to trade in services that firms actually face.  Hence, in 2016, it would be extremely helpful for firms to provide specific input to ASEAN about which obstacles should be addressed first in the road to Blueprint 2025.

Regional Comprehensive Economic Partnership (RCEP):  Officials in the 16 member countries[ii] involved in the RCEP negotiations have suggested that the trade negotiations will conclude in 2016. 

For now, there are three rounds scheduled.  The first will take place in Brunei next month.  The Asian Trade Centre has been working to get stakeholder outreach sessions in place for the April meetings in Perth, Australia, and New Zealand in mid-year.  Companies should think about what sort of outcomes would be most helpful in this trade arrangement that brings together all the economies in Asia into one agreement. 

RCEP will, likely, not be terribly ambitious which means that the most highly sensitive goods will not be opened with new, deep tariff cuts (or perhaps tariff cuts at all).

But this does not mean that RCEP will not bring benefits to many firms, even for agricultural trade, textiles, and manufactured goods.  Any agreement that links together 16 of the most important markets in the world can provide benefits for companies. 

Even if the tariff cuts and coverage for goods are relatively thin (and this may not ultimately be the case if officials seize opportunities to bold in 2016), RCEP also includes a range of other issues that also matter, including services, investments, e-commerce, intellectual property rights, and so forth.  The final commitments in some of these areas may ultimately be much more ambitious than market liberalization for goods. 

More important for firms—officials basically have one shot at this agreement.  It is quite rare for governments to sit down in the future and engage in a wholesale revision of an existing agreement.  Whatever comes out of the RCEP process is likely to be the trade agreement across Asia for at least the next decade.  Hence, company engagement with governments at the level of individual members and the group is critical to crafting the best possible deal for the future.

Trans-Pacific Partnership (TPP):  The Talking Trade blog posts have covered the TPP negotiations quite extensively.  Negotiations in this ambitious, sweeping agreement that links together 12 countries[iii] across the Pacific finished in October.  The year ahead will be largely focused on the domestic level ratification procedures needed to bring the agreement into force.

For most firms active in or across TPP member markets, this agreement should bring substantial benefits.  For non-members, the TPP can also have strong impact. 

Firms should spend time in 2016 evaluating the consequences of TPP entry into force, since much of the TPP commitments also start on the date of entry into force.  This includes not just the dropping of tariffs on roughly 90 percent of all goods to zero on that date, but also most of the changes in services, and investment.  Many of the commitments in areas like intellectual property rights or government procurement procedures will also take effect immediately.

Companies need to know what is in the agreement and think hard about what these new commitments may mean for their own firm, for their suppliers, customers and even for their competitors.  Some firms will need to start changing their supply chains in anticipation of new benefits and consider (or reconsider) investment decisions ahead of TPP entry into force.

Bilateral agreements:  While most Asian governments have been focused on regional trade negotiations and commitments, some have continued to sign and will be implementing bilateral trade agreements in 2016.  The most important may be China/South Korea and South Korea/Vietnam.  If the European Union solves an issue domestically with the investment provisions of FTAs, trade agreements with Singapore and Vietnam are finished and more are being negotiated with ASEAN members like Philippines. 

Multilateral or global trade:  Just before the end of the year, the World Trade Organization (WTO) managed to quietly kill off more than a decade of mostly fruitless negotiations in the Doha Development Agenda.  But it did so without consensus from 160+ member states on what, exactly, ought to be done instead.  Hence, 2016 should be a year of intense discussions and dialogue on the multilateral trade front as officials scramble to create a new agenda for global trade.

In short, 2016 promises to be an extremely active year again on the trade front.  There are many opportunities for companies to shape the agenda on the local, regional and even global level and to address many of the specific roadblocks and barriers that impede trade.  We are looking forward to it!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

[i] ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

[ii] RCEP: Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand, and Vietnam.

[iii] TPP:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. 

Witnessing the Birth of the ASEAN Economic Community (AEC)

The ASEAN Economic Community (AEC) became official on January 1, 2016.  The launch of the AEC represents a high water mark on ASEAN’s decades-long quest to create a stable, more integrated region.

Many ASEAN members are enthusiastically promoting the region and AEC benefits by noting that the market size of the 10 member states collectively add up to US$2.6 trillion with over 622 million people.  As a region, the Secretariat has noted that ASEAN is the third largest economy in Asia and the seventh largest in the world.

While there are multiple elements to the AEC, most firms are interested in promises to create a “free market for goods, services, investment, skilled labor and freer movement of capital.” 

In general, in ASEAN, soaring rhetoric often obscures a rather less glamorous reality on the ground.  Veteran watchers in the region will shrug knowingly and say, “Well, it’s the ASEAN Way—eventually they will get round to doing things properly and certainly, the potential is there.” 

The language of the AEC suggests strong parallels with the European Union, but this was never the intention.  ASEAN is not a common market, does not intend to pool sovereignty, and has a microscopically small institutional structure and matching budget to manage a complicated structure and many commitments.

So what has ASEAN accomplished and where does it go from here?

The primary benefit of ASEAN has been the elimination of tariffs on goods.  This was largely finished in 2010, but note that there are still some gaps in coverage.

Tariffs cannot be viewed in isolation in a trade agreement without simultaneously considering rules of origin (ROOs).   This is because it is possible to open a market completely at zero tariffs (duty free), but create such difficult or onerous rules of origin that hardly any products actually qualify for zero duties. 

ROOs are necessary in a free trade agreement like the AEC because countries want to make sure that only ASEAN businesses benefit from lower tariffs and not firms from non-ASEAN countries. 

Originally, ASEAN used a simple ROO, 40% regional value content (RVC).  This meant that as long as 40% of the content of the item being shipped across an ASEAN border into another ASEAN country come from within ASEAN, it would qualify for ASEAN preferential tariff rates.  However, this simple rule is not always easy for firms to use and, over time, ASEAN included new options as well, including change in tariff classification (CTC) and process rules.  (Note that many of the ASEAN+One free trade agreements use different variations of ROOs.)

With the fall in tariffs, a much more serious problem in ASEAN has been the proliferation of non-tariff barriers (NTBs).  NTBs can include a wide variety of mechanisms, not all of which are designed explicitly to keep out foreign products. 

For example, rules on the labeling of products can be legitimately about providing consumers appropriate information about the content of a good, but can also be done in such a way to place an unfair burden only on imported products.  Other NTBs include other health and safety regulations, as well as import quotas and other quantitative restrictions.

Although ASEAN members promised to eliminate NTBs by 2012 for the original ASEAN 6 members and by 2015 for the CLMV countries, progress has been very slow. 

Opening markets for goods only works if products can transit borders, so ASEAN added trade facilitation to the agenda very early.  The most visible element of ASEAN’s facilitation agenda is the commitment to the ASEAN Single Window (ASW).  This is a very ambitious project aimed at seamless transfer of goods across customs’ authorities in all 10 members. 

The original deadline called for national single windows to be implemented in all 10 members by 2012 in order for the ASW to be ready for the AEC prior to 2015.  However, with the launch of the AEC, not all 10 ASEAN members had national windows in place, and plans to integrate customs across the region are delayed.

The AEC promised to deliver free flow of trade in services.  A fascinating, hard-hitting paper out from the World Bank and ASEAN Secretariat shows how far away the region has been from meeting this goal.  The report notes that ASEAN’s last four years of negotiations in services failed to deliver liberalization. 

Overall, ASEAN shows levels of restrictions in services that are more than 60% above global averages and worse than any region but the Gulf States.  Discretionary licensing regimes create the largest obstacles to the free movement of services and without a renewed focus on regulatory barriers, the situation may not improve in the future. 

Investment liberalization has also proceeded slowly, with limited commitments from many member states.  Many of the current pledges are not likely to be seen as commercially meaningful.

While skilled labor is meant to move freely as well through the use of mutual recognition agreements (MRAs), these arrangements are in place for just eight industries (like architecture, accounting and nursing).  Within these industries, few people have actually moved using an ASEAN MRA, since individuals must clear all domestic immigration and visa hurdles as well as any necessary licensing or regulatory barriers that apply.

In short, the AEC launch does not signify the creation of true common market in Southeast Asia.  It does not meet its own stated objectives for free movement of goods, services, investment, skilled labor and freer movement of capital (where the deadline remains 2020). 

However, while simultaneously trying to finish up commitments in the AEC and handle negotiations with its Dialogue Partners in the Regional Comprehensive Economic Partnership (RCEP), ASEAN officials were boldly crafting a new vision for the future.  The new ASEAN Blueprint 2025 promises to continue the path towards ever-greater economic integration in the future.

The first objective of Blueprint 2025 is to complete all unfinished business from the AEC by the end of this year.  Then, officials will turn their attention to a wide range of deeper integration objectives, including fostering greater resilience; supporting equitable and inclusive growth; furthering poverty reduction; facilitating productivity enhancement; improving prospects for good governance; continuing with connectivity expansion; encouraging sustainability; and spreading green technology.  Stay tuned!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***