Early readouts on trade developments under the CPTPP and the EU-Japan EPA are promising, writes Douglas Lippoldt, Chief Trade Economist, HSBC Global Research.
With heightened US-China trade tensions and other trade disputes featuring in recent news headlines, the entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Japan Economic Partnership Agreement (EPA) provides a welcome, positive contrast. The members of these two accords represent a large swathe of the global economy, having a combined GDP of nearly US$28tnn. And, these deals are big and deep enough in their trade liberalisation that they promise to deliver a positive material impact for their respective members. In direct economic terms, the benefits will roll out via the implementation of the provisions of the deals. But, indirectly, they are also having an effect on the political economy of trade globally, introducing a healthy dynamic and a counterpoint to rising economic nationalism elsewhere.
Who and what?
These two deals are high-standards agreements removing most duties upfront and tackling non-tariff barriers like regulatory impediments and customs administration. CPTPP has been in effect for six members since 30 December 2018 (Australia, Canada, Japan, Mexico, New Zealand and Singapore) and for Vietnam since 14 January 2019. Ratification is pending for the remaining four members: Brunei, Chile, Malaysia and Peru. The EU-Japan EPA entered into force on 1 February 2019. Japan, as the common denominator in both deals, is set to be a particular beneficiary.
Setting the agenda
While the CPTPP and EU-Japan EPA were front-loaded in terms of implementation of planned trade liberalisation, a number of reforms will take roughly a decade to roll out, particularly with respect to agriculture. Even longer roll-outs are included for a few provisions. For example, under the EU-Japan EPA, full tariff liberalisation for live swine imports will take 14 years. Such implementation schedules have set an agenda for ongoing liberalisation. They help establish expectations that trade distortions will be reduced over time among the members of each accord.
Delivering the goods
Early readouts on trade developments under both deals are promising. For example, Vietnamese exports of textiles and garments to Canada increased 23% over the first quarter of 2019 compared to Q1 2018, while its footwear exports to Canada grew 33% (Vietnam, Ministry of Finance). Japanese beef imports from the EU also rose significantly after the EPA took effect: import volumes grew from 17 tonnes in February-March 2018 to 183 tonnes in the same months of 2019 (Japan, Ministry of Finance). And, similar gains are appearing for other sectors among various partners in each accord.
Japan is party to both of these deals and therefore stands to benefit considerably from the new agreements. Economic modelling by Peter Petri et al (PIIE, 2017) finds that the CPTPP could generate income gains of US$46bn for Japan by 2030 and an increase in exports of US$97bn. Estimates by the Japanese Ministry of Foreign Affairs (2019) anticipate that the EU-Japan EPA could boost Japanese GDP by around 1% (¥5tn) and create around 290,000 new jobs in Japan in the long term. This positioning as a nexus of trade deals could reinforce Japan’s international economic and political stature.
What about the US and China?
The US and China are notably missing from the mix. Both have redoubled their efforts to conclude new accords and rebalance the situation. For the US, new bilateral trade deals with the EU and Japan would address some of the directly competitive effects of the preferential access now enjoyed by parties to the CPTPP and the EU-Japan EPA. And, a possible US trade deal with China might provide a counter-narrative to the EU-Japan and CPTPP approach. For China, progress in the Regional Comprehensive Economic Partnership (RCEP) talks – a pan-Asian accord among the 10 ASEAN nations and six other partners including Australia, China, India, Japan, Korea and New Zealand – might help the Chinese regain the initiative in shaping Asian trade governance.
And others in the Asia-Pacific region?
The CPTPP and EU-Japan EPA have also motivated other nations in the Asia-Pacific region to redouble their own liberalisation and reform efforts. Some, such as Thailand or Colombia, have expressed an interest in joining the CPTPP. Indeed, the CPTPP was designed with a view to accommodating new members, provided they meet the agreement’s high standards including its provisions for protection of intellectual property, labour and the environment. The completion of the CPTPP has motivated RCEP negotiators to push forward more expeditiously with the conclusion of that pan-Asian deal, aiming to include countries such as India in the wave of regional trade liberalisation. Likewise, the CPTPP has motivated the EU to advance its agenda of bilateral trade deals with ASEAN members (eg, deals pending with Singapore and Vietnam).
For global governance of trade
Both the CPTPP and EU-Japan EPA reflect approaches supportive of a liberal, rules-based, market-oriented framework for the governance of international trade, approaches that are compatible with the underlying principles of the World Trade Organization. They also embody policy innovations that may be amenable to generalisation (eg, with respect to data protection) for use in other regions or globally. This is important in that the emergence of hundreds of bilateral and regional free trade agreements is greatly increasing the complexity of trade and reducing policy transparency. In due course, a consolidation of these accords with alignment based on liberal, least discriminatory, high-standards principles would be the best way to deliver economically optimal outcomes for trade.