Regional integration and multilateral agreements among emerging economies is boosting trade

 

Global trade faces protectionist headwinds that are dampening the outlook for growth in the coming years. In a projection issued even before Covid-19 began to seriously disrupt the global economy in early 2020, the World Trade Organisation expected growth in trade volumes to ease to 2.6% in 2019 before rebounding to 3% in 2020. This would be the first time since the 2007-08 global financial crisis that growth fell below a 3% average, as business confidence was affected by significant uncertainty driven by US-China trade tensions, Brexit and wariness surrounding the US' departure from several multilateral trade agreements. Trade flows in 2020 are all but guaranteed to be starker still.

Although fears of pandemic-induced supply chain disruptions currently dominate global headlines, this does not erase the important progress on trade cooperation that has been made in recent years – notably in Latin America, Asia Pacific and Africa. This is creating exciting multilateral trade areas that can be tapped as global commerce normalises. Equally encouragingly, several major bilateral trade agreements have been ratified or are in the pipeline that could further facilitate trade.

US Protectnism

Since his election, President Trump has taken an unconventional policy direction on trade, engaging in tit-for-tat tariff wars and withdrawing from major multilateral agreements like the Trans-Pacific Partnership (TPP). In trying to encourage US consumers to purchase local goods, and by imposing tariffs on imports from major partners like China, the EU, Canada and Mexico, his administration is challenging and overhauling the free trade policies that have governed US economic policy for decades. However, the Trump administration claims that the global trade system is unfair and prejudicial to US companies, arguing that its trading partners impose excessive tariffs on the US and steal its intellectual property.

In June 2019 Christine Lagarde, then-managing director of the IMF, forecast that the US-China trade war would cut global GDP by 0.5%, or around $455bn, by 2020. A tariff war between the US and China escalated during the second half of 2018 and most of 2019. By August 2019 the US had imposed a 25% tariff on $250bn worth of Chinese imports, with plans to introduce a 10% levy on an additional $300bn in Chinese goods the following month. China responded with tariffs on $110bn worth of US exports, including aircraft and coffee. Neither side was seemingly willing to de-escalate the situation. While China does not have the ability to match US tariffs one-for-one – it imports $130bn of US goods, compared to around $500bn in exports destined for the US – it has other policy tools at its disposal. It can respond by disrupting US businesses in the country and changing the value of the yuan, the latter of which it did in August 2019. While the two countries agreed in January 2020 to sign the so-called phase one trade deal – effectively implementing a temporary tariff truce, among other measures – the global disruption brought about by the escalating rivalry underscores the fragility of key trade relationships, and their susceptibility to changing policy prerogatives.

Trade relations between Mexico, Canada and the US similarly came under strain due to trade tariffs imposed during the North American Free Trade Agreement (NAFTA) renegotiations. Immediately after assuming office, President Trump threatened to exit NAFTA unless more favourable trade terms could be reached. To apply pressure, his administration imposed levies on metal imports from North American trade partners, applying a 25% tariff on steel and a 10% tariff on aluminium in May 2018. EU exports faced the same tariffs, and the bloc, along with Mexico and Canada, responded with countermeasures, targeting US food, steel and alcohol. Renegotiation of NAFTA, which commenced in May 2017, centred on quotas, labour and procurement laws, and rules of origin. With midterm elections in the US and a new president in Mexico in late 2018, negotiators from the three countries signed a last-minute deal on November 30, 2018 to overhaul the agreement.

NAFTA 2.0

In May 2019 the US agreed to lift steel and aluminium tariffs on Canada and Mexico, removing a significant hurdle to ratifying NAFTA 2.0. The revised pact, named the US-Mexico-Canada Agreement, was ratified by Mexico and the US over the course of the rest of 2019, and then by Canada in March 2020, marking something of a political victory for President Trump. It is also likely to soothe economic volatility in Mexico, where President Andrés Manuel López Obrador has publicly stated that he will not attempt to modify the deal.

Brexit Troubles

Across the Atlantic, Brexit negotiations between the UK and the EU have progressed, albeit in fits and spurts. After multiple delays, the UK formally left the economic and political bloc on January 31, 2020. With Prime Minister Boris Johnson and his Conservative Party winning a parliamentary majority in general elections held in mid-December 2019, the UK was able to confirm its decision to leave the EU, though how the new relations will be structured is still being felt out. In 2018 the UK exported £291bn worth of goods and services to the EU, representing 45% of all exports. Imports from the EU stood at £357bn, equal to 53% of all imports. The UK’s 2018 trade deficit with the EU was therefore £66bn; a surplus of £28bn in services trade was outweighed by a deficit of £94bn for goods.

Opening New Doors

Following President Trump’s 2017 decision to withdraw from the TPP, parties to the original agreement created a new deal. In March 2018, 11 countries accounting for 13.5% of global GDP signed a new trade agreement, the Comprehensive and Progressive Agreement for TPP (CPTPP). The deal constitutes the world’s second-largest free trade bloc after NAFTA. The CPTPP is an umbrella agreement encompassing 18 separate free trade agreements among the member countries. Participating nations' economies are projected to expand by 1.7% more than they otherwise would have by 2030, according to the Peterson Institute for International Economics. The biggest winners are in Asia, with the economies of Malaysia, Singapore, Brunei Darussalam and Vietnam expected to grow by an extra 2-3% by 2030, compared to 1% or less for New Zealand, Japan, Australia, Canada, Mexico and Chile.

The conditions for activation of the CPTPP were agreed to come into effect 60 days after at least 50% of signatories ratify the agreement. The pact came into force for six initial countries – New Zealand, Mexico, Japan, Singapore, Canada and Australia – on December 30, 2018 and for Vietnam on January 14, 2019. As of February 2020 the four remaining nations – Brunei Darussalam, Chile, Malaysia and Peru – had yet to ratify. The signatories have left the door open to other countries interested in joining the pact, with the UK, for example, already expressing interest.

China's Own Course

The US and China are noteworthy absentees from the CPTPP, as the latter preferred to forge its own multilateral trade pacts. China has not shown any interest in joining the CPTPP and has instead focused on another major Asia-Pacific trade partnership, the Regional Comprehensive Economic Partnership (RCEP). The RCEP is a free trade agreement involving the 10 members of the Association of South-East Asian Nations (ASEAN), plus its six dialogue partners (Australia, China, India, Japan, South Korea and New Zealand), which collectively account for 4bn people and $49.5trn in GDP. According to a study by US think tank Brookings Institution, the deal could increase global real income by $285bn per year if put into place before 2030 – twice the absolute gains expected from the CPTPP. Technically an attempt to harmonise existing free trade agreements among member countries rather than create a new pact, formal RCEP negotiations began in 2012 and were expected to conclude in November 2018. However, disagreements among negotiators, particularly between India and China, pushed back this timeline. India was wary of opening its economy to an influx of Chinese goods and called for limited implementation of tariff concessions, a demand China appeared willing to accept in order to save the pact. Although India ultimately withdrew in November 2019, as of late that year officials in the remaining nations were hopeful the deal could be finalised in early 2020; Covid-19 may of course slow this timetable down.

Decades in the Making

Negotiations between the EU and the Mercosur group of Argentina, Uruguay, Brazil and Paraguay – the world's fourth-largest trade bloc – had been ongoing for almost 20 years, but in June 2019 an agreement in principle was reached. Bilateral trade between the two blocs totalled €87.6bn in 2018, according to the European Commission. The EU is Mercosur’s largest trade partner, accounting for 20.1% of the bloc's trade that year. Mercosur primarily exports food products to the EU, while the EU largely sends machinery and equipment to the South American bloc.

Africa's Trade Potential

Undermined by red tape, intra-African trade stands at less than 20% of total trade, compared to 60% for Europe and 30% for ASEAN countries. Recognising the billions of dollars of trade potential not being actualised, 44 African heads of state signed the African Continental Free Trade Area (AfCFTA) agreement in March 2018. The AfCFTA’s goal is to create a single market for goods and services for the 55 African Union (AU) member countries, which have a combined GDP of $2.3trn and 1.2bn people. The AU hopes that freer trade will boost industrial capacity and investment, allowing African economies to move away from their traditional commodity export dependence. More developed industrial economies such as Egypt are hoping the AfCFTA will be a boon for local exporters in industries such as garments and other textiles. Mervat Soltan, chairperson of the Export Development Bank of Egypt, told OBG that the AfCFTA “greatly expands the opportunities for Egyptian exporters” even though they “will be under considerable pressure to meet the demand for lower prices” amid increased competition. AfCFTA entered into force in May 2019 after 24 member states ratified the agreement. The dismantling of trade tariffs is expected to start in July 2020. The International Centre for Trade and Sustainable Development expected intra-African trade to increase by over 50% by 2022. While Covid-19-related trade disruptions in early 2020 could slow this progress, the underlying fundamentals point to a positive long-term trend.

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