The US retreat from East Asia is costly

Peter A. Petri (PIIE) and Michael G. Plummer (Johns Hopkins University and East-West Center)

June 11, 2020 3:30 PM
Image credit: 
REUTERS/Athit Perawongmetha

When President Donald Trump said in his inaugural address that trade “protection would lead to great prosperity and strength” and withdrew from the Trans-Pacific Partnership (TPP) agreement, many East Asians were unfazed. Trump was a businessman. He might bargain for better trade deals but would not abandon America’s lucrative partnerships with the world’s most dynamic region. Three years on, with a US-China trade war in full swing and the World Trade Organization under siege, these hopes have faded.

Meanwhile, East Asian countries are surging ahead on trade cooperation without the United States. The TPP countries concluded the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), essentially TPP minus the United States, and 15 East Asian countries have agreed to sign the Regional Comprehensive Economic Partnership (RCEP), a huge accord that includes China, by the end of 2020.[1] These pacts will lower the costs of East Asia’s regional trade relative to its trade with the United States. For various reasons, the COVID-19 crisis is also accelerating the fissure across the Pacific.

According to our calculations, the US-China trade war will generate global losses rising to $301 billion annually by 2030 compared with “business as before” the Trump administration. Adding the CPTPP and RCEP agreements will offset these global losses, if not the full losses of China and the United States. By strengthening East Asia’s regional economy, the RCEP agreement would especially benefit the region in the context of the trade war.

This analysis is contained in our PIIE working paper, which uses long-term simulations with a computable general equilibrium model to examine economic distancing between East Asia and the United States. The trade war and the new trade agreements are represented in the model in their effects on trade barriers among countries. While this model does not account for all potential effects of COVID-19, it does address one important implication of the pandemic for trade: It has deepened US-China conflict and makes it likely that current US-China trade barriers will be sustained through the 2030 horizon of our study.

The results suggest that China, Japan, and Korea will be the major beneficiaries of the new regional agreements, partly offsetting the damage of the US-China trade war. These three countries had built close trade ties in recent years but have been unable, until RCEP, to conclude a joint trade agreement. RCEP will increase trade among its members by $428 billion, while reducing trade among nonmembers by $48 billion. Trade created among China, Japan, and Korea will focus on complex production chains in advanced manufactures, as well as European-style trade connections in differentiated products.

Understandably, China strongly supports the RCEP15 and has also expressed interest in joining the CPTPP, including recently in Premier Li Keqiang’s press conference following the May 2020 National People’s Congress. China can be also expected to double down on its multi-trillion-dollar Belt and Road Initiative, building infrastructure to connect much of Asia and Europe. These projects have slowed with the COVID-19 pandemic, but the political case for revitalizing them has strengthened. These efforts dwarf America’s engagement in the region[2] and are spurring integration between China and its neighbors, potentially enhancing its role in East Asia and beyond.

The results of our study also point to wider effects: A sustained US-China trade war will have repercussions that depress world trade by about $1 trillion by 2030. The trade war will shift about one-third of US imports from China to US imports from third-country exporters, and half of US exports to third countries will shift to Chinese exports to those countries. Thus, although China will sell less to the United States directly, some of its lost production will be replaced by new trade. The trade war will deliver one Trump goal: It will reduce US-China bilateral imbalances by slashing bilateral trade but will also increase US deficits with other countries.

From economic as well as political perspectives, the US retreat from East Asia appears increasingly costly. America’s isolation will limit its political influence in the region and globally. To US partners, the TPP was not just about economics (few if any trade agreements are) but also about keeping the United States engaged in an era of rising Chinese ambitions. In fact, the policy innovations of the TPP, many of which have since been adopted elsewhere, represented concessions to the United States in areas such as intellectual property protection, digital commerce, state-owned enterprises, labor rights, and the environment. Countries accepted these behind-the border measures because they wanted the United States to balance China’s economic clout. The new US vision for a free and open Indo-Pacific is not a meaningful substitute unless it somehow acquires an economic backbone.

East Asia has been a critical US partner for good economic and political reasons. A recipe for continued US engagement is also not hard to see: invest in American workers to make them more competitive; protect US business interests with fair, rules-based markets; and keep China from wielding disproportionate influence. Judging by the recent plea from Prime Minister Lee Hsien Loong of Singapore, most of East Asia shares this vision.[3] The CPTPP, RCEP, and a reenergized World Trade Organization are logical pillars for making trade an engine of the global recovery; the United States should support them vigorously.

Notes

1. The members of RCEP are Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam.

2. US secretary of state Mike Pompeo announced a $113 million US investment plan on July 30, 2018, as a key part of his new Indo-Pacific economic vision.

3. Lee Hsien Loong, “The Endangered Asian Century,” Foreign Affairs, June 4, 2020.

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