Global trade has officially slumped into recession, including in Asia. For a debt-ridden and troubled world economy, the long awaited Trans-Pacific Partnership (TPP) deal may have come just in the nick of time, but there are plenty of risks still ahead.
After narrowly failing to reach agreement in August, the 12 TPP nations finally sealed a deal on October 5 after five days of round-the-clock talks, creating the world’s biggest free trade zone. Comprising Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, the grouping encompasses 40 percent of world gross domestic product (GDP) with economic output of nearly $30 trillion, representing the biggest multilateral trade pact in two decades.
“After five years of intensive negotiations, we have come to an agreement that will create jobs, drive sustainable growth, foster inclusive development, and promote innovation across the Asia-Pacific region,” U.S. Trade Representative Michael Froman said.
Highlighting the deal’s strategic significance, U.S. President Barack Obama said the agreement “strengthens our strategic relationships with our partners and allies in a region that will be vital to the 21st century.”
“When more than 95 percent of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy. We should write those rules, opening new markets to American products while setting high standards for protecting workers and preserving our environment,” he said in a statement.
International Monetary Fund (IMF) managing director Christine Lagarde hailed the TPP pact as a “very positive development.”
“I have called for a policy upgrade to avoid a new mediocre in the global economy, and rekindling trade is an essential component of this agenda. The agreement is not only important because of the size, as the signatories countries account for about 40 percent of global GDP; it also pushes the frontier of trade and investment in goods and services to new areas where gains can be significant,” Lagarde said.
The IMF boss also urged countries to “renew their efforts to complete ongoing negotiations and the broader international community to reignite multilateral trade initiatives to ensure a cohesive global trading system.”
However, the TPP still faces the political hurdle of ratification in each member nation before it can take effect. Obama in particular is expected to face a tough fight to win passage in the U.S. Congress, with criticism of the pact from both Republican and Democrat lawmakers, including Democratic presidential frontrunner Hilary Clinton.
Asia’s Winners and Losers
Assessing Asia’s winners and losers from the deal, Bloomberg News pointed to Japan’s auto industry as gaining from increased access to the U.S. market, while its farmers face increased competition due to reduced barriers on beef, pork and rice imports. Overall though, the deal affects an estimated 28 percent of Japanese trade, with Tokyo seeing the pact as an important tailwind for “Abenomics.”
Australia and New Zealand are seen as big winners in agricultural exports, while the Oceania neighbors also persuaded Washington to reduce intellectual property protections for new drugs from 12 years to five. According to Canberra, the TPP will remove import taxes on A$9 billion ($6.6 billion) of Australian trade, while New Zealand has estimated annual savings of around NZ$259 million ($173 million).
Vietnam has been described by the Eurasia Group as one of the biggest winners, with a potential 11 percent boost to GDP by 2025 on the back of an estimated 28 percent jump in exports. Malaysia is also seen gaining from reduced trade barriers on its exports of electronics, chemicals, palm oil and rubber, while Singapore hailed the pact as creating “greater prosperity and more jobs.”
Singapore Business Federation chief executive Ho Meng Kit also noted that the TPP “is not an exclusive agreement, but has provisions to allow other trading nations in Asia to join later. As such, it serves as a pathway toward a free trade area for the Asia-Pacific.”
However, China’s failure to join the TPP in favor of its own Regional Comprehensive Economic Partnership (RCEP) pact for Asia could prove costly. According to Bloomberg economist Fielding Chen, the world’s second-biggest economy could lose market share to the United States and Japan in developing economies such as Vietnam, while the Obama administration has gained momentum in its much-touted “pivot” to Asia.
The TPP could boost world income by as much as $295 billion a year over the next decade, a gift that keeps on giving for the global economy, according to estimates by the Peterson Institute for International Economics.
Yet for Asia and the world, the pact has added significance in the face of a deepening trade recession that threatens to send a sluggish global economy back into crisis.
Gavekal Research has highlighted that world trade has slumped into recession, in the biggest downturn in export volumes since 2010. As previously noted by Pacific Money, Asia has also been hit by a “trade recession” amid an “unusually depressed period of global trade.”
According to the IMF’s Lagarde, 2015 could mark “the fourth consecutive year of below-average trade growth,” with the continued failure of the Doha Round of global trade negotiations adding to the pressure on a successful TPP.
In its latest “World Economic Outlook” report, the Washington-based lender cut its global growth forecast for 2015 to 3.1 percent from its July estimate of 3.3 percent, rising to 3.6 percent in 2016 compared to its earlier prediction of 3.8 percent.
“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” the IMF’s Maurice Obstfeld said in a statement.
Obstfeld pointed to increasing “downside risks” due to slower growth in China, falling commodity prices and the impending uptick in U.S. interest rates, with emerging and developing economies expected to post their fifth straight year of weaker growth.
Adding to the pressure is the recent global debt binge fueled by quantitative easing, with emerging market companies estimated to have racked up $3 trillion in over-borrowings. According to the IMF, corporate debt in such economies has quadrupled over the past decade, with over-borrowing accounting for an average 15 percent of their GDP and as much as 25 percent in China.
“Corporate and bank balance sheets are currently stretched,” the IMF warned. “Immediate prudential attention is needed.”
With the risks for the global economy escalating, the pressure is now on TPP lawmakers to speed the pact’s implementation and prevent an even deeper slump in world trade.