What’s Going on in Asia?

Monday, February 17, 2020
 • 
Episode: 
9

What’s Going on in Asia?

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host jill o'donnell Jill O'Donnell
guest Michael Plummer
Michael Plummer

Dr. Michael Plummer, Eni professor of international economics at the Johns Hopkins School of Advanced International Studies (SAIS) and director of SAIS Europe, discusses all things Asia, emphasizing the three things he thinks are “the big news” from the region: the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP); the China-led Regional Comprehensive Economic Partnership (RCEP); and economic integration in the Association of Southeast Asian Nations (ASEAN). He explains why political and strategic implications surrounding trade negotiations are often more important than the economic ones, using his own research on India’s withdrawal from RCEP to demonstrate the point. He also tells us why we should be paying more attention to ASEAN.

Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or the University of Nebraska-Lincoln.

Show Notes

Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States, by Peter A. Petri, Michael G. Plummer, Shujiro Urata, and Fan Zhai

The Truth About Trade by Douglas A. Irwin

Transcript

Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the audio before quoting in print and write yeutterinstitute@unl.edu to report any errors. Transcripts will be posted within one week of the show.

Jill O'Donnell: Welcome to Trade Matters, a podcast of the Clayton Yeutter Institute of International Trade and Finance at the University of Nebraska–Lincoln. I am Jill O'Donnell. Our guest today is Dr. Michael Plummer, the Eni professor of International Economics at the Johns Hopkins School of Advanced International Studies and the director of SAIS Europe, the school's European campus in Bologna, Italy. Dr. Michael Plummer, thank you so much for joining us today on Trade Matters. We really appreciate that.

Michael Plummer: It's wonderful to participate.

Jill O'Donnell: I have to start by just giving a shout out to Bologna, Italy. You're joining us from Italy where you're the director of SAIS Europe and I am someone who was fortunate enough to spend about 10 months of my life there as a graduate student at SAIS. So thank you for joining us from across the pond today.

Michael Plummer: Sure, my pleasure.

Jill O'Donnell: You focus a lot on Asia in your research, and I just want to start by asking you to tell us a little bit more about the kinds of questions that you are currently investigating when it comes to Asia and trade and economics. Give us a sense of your research.

Michael Plummer: Well, mostly my recent research has been related to estimating the effects of mega-regional trade arrangements in the region. By mega-regional, we mean plurilateral arrangements that have a significant impact on international trade. So this is included the Trans-Pacific Partnership, the TPP, its successor the Comprehensive and Progressive Agreement on Trans-Pacific Partnership, a real tongue twister, the CPTPP, which is the TPP without the United States, as well as the Regional Comprehensive Economic Partnership, RCEP. So we've done a good deal of work on that as well as things related to say U.S.-China relations. I've done a good deal of work over the last 30 years on the Association of Southeast Asian Nations and the economic effects of closer regional integration in Southeast Asia.

Jill O'Donnell: Great. Okay. Well, let's start by talking about the Regional Comprehensive Economic Partnership, RCEP. Just to give our listeners a little background, it's a proposed trade agreement between 15 Asian countries, including China. It was 16 until India pulled out recently. It's been in the works for a number of years, six or seven years or more. Reportedly they are essentially concluding negotiations and it's possible this could be signed in February or March this year. If it goes forward, my understanding is it would be the largest trade agreement in the world by population and GDP, but my understanding is also that the RCEP is not as high quality of an agreement as others like the TPP for example, or CPTPP are. It doesn't labor, environmental chapters. Many ag products remain highly protected. It doesn't address state-owned enterprises. Can you just tell us a little bit more about the quality and status of the RCEP?

Michael Plummer: Well, you're 100% right that it certainly doesn't meet the standards of the Trans-Pacific Partnership or the CPTPP. But remember that those agreements were led... the TPP was led by the United States, and the United States wanted to have a 21st century agreement that would update rules, global rules, on international trade and investment in the modern 21st century economy. The World Trade Organization had, when it was created in the mid-1990s, has been useful I think in providing a legal framework for international trade dispute, settlement mechanism, et cetera. But it hasn't been very effective in creating new rules. In fact, the last major agreement there was in the mid-90s when the economy was very different. There wasn't any digital economy for example. So you haven't had a major updating of these rules.

With the TPP, the United States wanted to do that and create a number of measures and disciplines that would be effective in guiding international trade. The TPP countries had enough diversity so as to create a very interesting framework. It's got a chapter on state owned enterprises, for example, which is... we had to deal with Vietnam and Singapore intensively because of the large state-owned sectors in those countries. But that would have been sort of a chapter that could be actually used in any agreement with China. It included deeper arrangements and intellectual property, very deep cuts in tariffs, up to 98% across the board. So the interesting thing about the TPP is that it wasn't just policies at the border, it was also policies behind the border and that's really what's most important for the 21st century digital economy and trade and services.

The RCEP agreement, however, is really made up of developing countries. When it was launched in November, 2012, it was said to be an ASEAN-centric agreement. So the 10 countries in that association, Southeast Asian nations really had a key role in pushing that forward. Includes both least developed countries like Laos and Cambodia and Myanmar as well as middle income countries. And they were going to be setting the standards together with China and India. So it obviously wasn't going to be as detailed and as comprehensive as the TPP. Self-likely that the RCEP agreement will lead to reduction in 89% of products to zero, whereas, as I mentioned, it would be about 98% in the CPTPP. As you mentioned, there's not going to be any liberalization. Cultural products and those sensitive areas, including services, is going to be much more minimal.

You couldn't expect countries like Cambodia or even India to really be able to implement the kind of rigors that are necessary in the CPTPP. So in effect, if you go back to APEC in November, 2010 and what was called the Yokohama Vision, the idea that APEC had is, look, what we'll do is we'll have two different tracks. We'll have a transpacific partnership track and we'll have an Asian track, and they will both lead to negotiations in 2020 to try to create a free trade area in the Asia Pacific, which would include all of APEC countries and perhaps others. That was supposed to start this year. Obviously, it's not going to happen. But that continues to be the goal. And so, you could think of it this way, that the RCEP arrangement, even though it's weaker in many ways, it's a way of trying to bring up the least developed countries to a framework or to a position where they could actually form an agreement with the developed countries. This, what's called the Yokohama Vision, is sort of a pathway to try to bring the region up together. The RCEP agreement is certainly not as deep as the CPTPP but that's understandable. And if I might mention in the modeling we've done, even though ASEAN for example has pre-trade arrangements with all of the other countries in the RCEP region... In fact, it was a requirement to join RCEP as a negotiating partner that the country have a free trade area in place with ASEAN. Even though you've got that, our numbers are actually fairly significant in the potential benefit to the ASEAN country. So it is adding a layer of depth that did not exist before.

Jill O'Donnell: Okay. So a number of things I want to follow up on there. Thank you for that. One is this idea of two tracks in the Yokohama vision that you mentioned. Some of the countries in RCEP are also in CPTPP, which is now enforced for about seven countries that have ratified that agreement. So how do you assess those dynamics? I saw an article in Vox, you and your colleague at Brandeis, Peter Petri, wrote an article there last year that Canada, Japan, Vietnam, and other countries are already using CPTPP rules to motivate reforms that are politically difficult. So you can kind of unpack that for us. One, what kind of reform is CPTPP helping induce in these countries and then how does that relate to their participation in RCEP?

Michael Plummer: I think the CPTPP is sort of aspirational for these countries and it's a good guideline as to how to be best practices and how to be cutting-edge. So that Prime Minister Abe of Japan, when he launched his three arrows for economic reform, one would be monetary policy, one was fiscal policy, and the other would be structural reforms, and literally within there the TPP as a way of helping guide them towards structural reforms. The same was true of Vietnam and even Canada about using these cutting-edge policies as a way of moving the country forward and to be at the level of best practices that would be essential for competition. So CPTPP does a good job of doing that and actually some of its provisions are even being already imported outside of the region. I think if you look at the new USMCA agreement, or some of us call NAFTA 0.8, it does have some CPTPP provisions in it and everyone is looking at this as sort of... for standards in the international economy.

So the CPTPP has developed these very interesting global standards. What I find amazing is that, first of all, it's very strange that the CPTPP emerged in the first place because without the United States it's a much smaller agreement. When the US pulled out, Abe, for example, said that the TPP without the United States was meaningless. So it wasn't clear at all that this would go forward, or if it went forward, what it would look like because the US was such so instrumental in developing the TPP. But in the end, the countries agreed that they would almost change nothing. With a 6,000 page document, they only suspended 22 measures. And these measures were all us priorities, including an intellectual property, express service delivery, as well as labor and the environment. But they kept it in because they really do hope that the United States will come back to the agreement. So it went forward. In a way, I think that that gave an impetus for the RCEP to continue to move forward and to try to open up markets in the region. In a way, some people would say really the RCEP really began as a way of... China's way of competing with United States in the TPP. It felt as though maybe the United States was trying to contain China and so it tried to negotiate this agreement. I think that's probably a bit exaggerated. But certainly, China has tried to try to demonstrate that it is interested in bringing forward regional cooperation in Asia, both from a policy point of view, which is RCEP, as well as in terms of hard infrastructure, which is the Belt and Road Initiative. So this role of China as a leader is very important. In terms of the overlapping membership, I think that's always been the best guarantee that you wouldn't have contradictory measures in the TPP and in RCEP. Because it wouldn't make any sense if you've got Japan in both agreements and Malaysia and Vietnam, et cetera, Brunei, Singapore. They would always ensure that there wouldn't be contradictory policies. So I really do think that you can start to fold RCEP into a CPTPP and eventually merging RCEP into the CPTPP under free trade or the Asia Pacific would be much easier to do.

Jill O'Donnell: So that's an interesting idea, folding RCEP into a CPTPP eventually. I want to pick up on the point as well about China's leadership role, because certainly China has at times tried to claim this global leadership role in international trade and on the global stage. I want to cite an interview with the South China Morning Post that you did not too long ago where you said if RCEP goes forward, then China will have created a template for how to have a trade agreement between countries that are extremely diverse, from the richest to the poorest. So what's the opportunity cost for the United States on that front if RCEP gets folded into CPTPP and China is kind of an engine behind creating this template for a pretty diverse region that's really growing?

Michael Plummer: When the United States left the TPP, the region was very nervous that the United States was withdrawing from the region. The Trump administration was warned that this would be the case. In all the economic modeling that we've done on the TPP and estimated the economic effects on the United States, we always would mention that this is... the economic effects would be far less important than the strategic implications of the United States being perceived as leaving the region whether or not it is. But certainly, it has the idea that there's going to be this imbalance of China within the region without, if you will, the United States to balance it, has made many of these countries very nervous. In the RCEP for example, India has said that it's going to withdraw from the region. I mean, the RCEP countries rather have it stay in part because of the fact that... for example Japan would love to have India balance China. So interestingly, the focus now isn't on the United States anymore, it's really internal to the region. So I think the big risk here is that the United States is losing influence in the region because it has withdrawn from this economic cooperation that it had been so instrumental in leading. The regional economies, they want to see closer economic integration. East Asia in particular has counted on trade and investment in order to grow, so really they want to move in that direction and they're no longer finding this leadership from the United States and so they're getting closer to China. That's a real challenge I think for us policy.

Jill O'Donnell: This is a question I've been really looking forward to asking you. That segues very nicely from what you said into this question. You talked about the big risks being the US losing influence in the region and the strategic implications. How do you as an economist quantify the importance of American leadership in the global economy? I mean, there are applications that go beyond economics, so we know that, but how do you think about that? Can you quantify that? A leadership seems like a hard thing to actually quantify, but how does an economist think about the implications of the U.S. stepping back from a leadership role in the Asia Pacific region?

Michael Plummer: Unfortunately, we usually don't talk about those things. It's very inconvenient to think about the real world, it's really messy. But I think that it's really important and we have to understand that we're only looking at a very small part of what is in the country's interest when it's looking at regional integration. I look around the world and I see hundreds of preferential trading arrangements, free trade areas, et cetera, and I can point out many of them that make no sense from an economic point of view, but make sense for a political point of view so they go forward. I can't think of any that makes sense from an economic point of view, but not from a political point of view. The politics dominate in those considerations. In fact, if you look at what's happening, ASEAN has created an economic community which is sort of loosely modeled on the European single market. It technically went into effect December of 2018, even though it still has a long way to go in order to reach that. The reason why ASEAN really began is because it was nervous that some of its members were negotiating more advanced with non-regional members than they had within ASEAN. The Singapore-U.S. Agreement for example, at the time when it was created in 2001, 2002 was one of the most advanced free trade areas in the world, much more advanced than the ASEAN free trade area. So the ASEAN leaders were afraid that this was going to have a negative political effect on the region, a centrifugal effect that could be problematic to its diplomatic and its political means. So what it ended up doing is deepening economic integration. So how do you quantify that? I don't know, but I know that the economics are important, but the politics and the strategic areas tend to dominate what policymakers are thinking. So I think that's important to keep into consideration when we're ever evaluating these things. So if I'm able to come up with numbers on the effects of say the TPP on the United States, I think our original numbers came to $131 billion permanently, so every year, which was less than... it's about one half of 1% of U.S. GDP. I'd argue that is not insignificant because it's on a permanent basis, but that is much less significant than the United States having this problem of... to disengage from the region. I don't know how to quantify it, but I know it's really important.

Jill O'Donnell: So it sounds like you're saying, and this is something I often tell students too, is that free trade agreement negotiations are always about more than just trade, more than just the market access that's kind of on the negotiating table.

Michael Plummer: Yeah. No, it's absolutely right. If I might mention with some new numbers that we have produced in looking at RCEP agreement without India that should be out next week or so, just to give you a preliminary view. Interestingly, with India out of the agreement, in economic terms, Japan is worse off and China is better off. What is really interesting to me is it's Japan that really wants India in. So obviously, the politics of it is much more important than the economics of it from Japan's point of view. China definitely wants to move forward even without India and even though it'd be better if India were in the agreement. So it's quite interesting I think.

Jill O'Donnell: I'm going to switch to slightly different tack here and a question about the impact of our RCEP if it goes into force on the U.S. As we know, RCEP includes major us trading partners like Japan as well as competitors for agricultural products like Australia. For example, in Nebraska where I'm sitting right now is first in the nation on things like cattle and feed, red meat production, dry edible beans. Also a leader in corn for green and soybeans. Many Nebraskans whom I talk with look to Asia for the future and look to Asian countries including many in RCEP as important destinations for future agriculture exports. So what would an RCEP enforce mean for the U.S. Especially for us agriculture and especially given that we're not part of the CPTPP?

Michael Plummer: I would look at, from an economic point of view, two aspects of that, two different implications of RCEP for the U.S. Number one, one could expect that there would be... it will contribute to economic efficiency of the region at the margin, and so the region will be slightly better off and they will therefore would import more from the United States. In our estimates, the United States however does slightly lose from RCEP. Very, very small, but it's still there and in part because of this trade diversion that you're mentioning. But most of that is not agriculture because as you mentioned earlier, agriculture is not dealt with very much in the RCEP agreement because it's such a sensitive area. One of the reasons why India pulled out no doubt had to do with the fact that it did not want to compete with New Zealand dairy for example. So there is some of that, but it is very much regulated trade. It's not like you're going to see major drops in tariffs for agriculture imports in RCEP and therefore putting the US at a major disadvantage to pretend to trade these markets. There may be a few areas, but already, meat and dairy products are highly regulated in the region. I mean, look at Japan, the meat market in Japan, that was supposed to be a big part of the U.S.-Japan agreement and everything. That is a very much regulated market. I don't think it'll have a major effect on agriculture and that in the longer term RCEP will be good for growth in region and that should lead to some additional imports, but I don't think it's going to be a major factor.

Jill O'Donnell: Okay. You mentioned Japan there. As you know, two kind of partial deals between the US and Japan went into effect January 1st, one in agriculture, one on digital products. How would you contrast those two partial US-Japan deals with how the U.S.-Japan trading relationship would have looked through the TPP if we had stayed in that and that had gone into effect?

Michael Plummer: To begin, I'm not convinced at all that the US-Japan agreement is consistent with WTO rules. Clearly, it says in article 24 of the GATT WTO that any sort of preferential arrangements have to meet certain criteria, including it has to be comprehensive. In other words, substantially all goods. The tariffs have to go to zero and you can't raise tariffs on other products. Just having agriculture and digital products does not meet that criteria at all. So that's a problem, I think, in terms of WTO rules. But certainly, the United States did not get the kind of deal that it would have gotten with the TPP, because with the TPP in that agreement there was on the table some access to the U.S. market. It wouldn't have happened until like 2030, but U.S. automobiles access to that market would have come into effect at a certain point. So Japan was much more willing to open up into certain markets in the TPP.nSo when we did our modeling of U.S.-Japan free trade area and some earlier work we did in 2016, we found that the effects were much, much smaller than they would have been with the TPP because the template would have been much more restrictive and there would have been much less in terms of market access.

Jill O'Donnell: Okay. Zooming out to a bigger question. What else is going on in Asia in terms of regional economic integration that you think maybe we're not hearing enough about, at least not here in the United States? Or what else would you think we should be paying more attention to?

Michael Plummer: Well, I think that we should be paying much more attention to ASEAN and what's going on in the ASEAN region. It is a region that often gets ignored. I mean, I've been to DC and people have thought that I've been mispronouncing the word Asian when I say ASEAN. I mean, it's not a very well-known term even though it includes 630 million people and it has a long process of economic integration that has... Okay, it's not the European union, but it has made some strives. The ASEAN free trade area is in effect and it does lead to free trade across these countries. It's a good place for regional production networks and these sorts of things because of the fact that you've got these reduce barriers to trade. So if you think of the region, the ASEAN region includes a country like Singapore, which has a per capita income that's higher than the United States. But as I mentioned earlier, it's got least developed countries and it's got middle income countries that have been high performing like Malaysia and Thailand at least in the past, Vietnam which is now a middle income country growing very rapidly. There's a lot of exciting things happening in ASEAN. And with this restructuring outside of China, with the US-China trade war for example, it is just speeding up a process that had already begun of the supply chains moving out of China into Vietnam and elsewhere where you have lower cost of doing business. So I think that that's something to watch out for, that trade. By the way, if you look at a dairy exports of the United States, for example, Southeast Asia, I believe, was the second most important last year. So it is an important source of agricultural exports for the US. So it's a region that's very interesting.

You've got negotiations for a China, Korea, Japan free trade area, trilateral free trade area that has gone through a number of rounds. That agreement is supposed to have some value added onto RCEP. For political reasons, it's very difficult to see that coming to fruition, even though it could happen within the context of RCEP. But RCEP is much better than the current China-Korea arrangement, which is very superficial. So RCEP is building on the China-Korea arrangement, and that trilateral between China, Japan, and South Korea may someday add depth to Northeast Asia. But when you look at the numbers of the effects of RCEP, a lot of the big numbers come from Northeast Asia because you do have a free trade area between a lot of the other countries and you don't have it there in the second and third largest economies in the world. And Korea, of course, is a member of the OECD. There's a lot going on, I think, in the region, but the big news would be CPTPP, RCEP and the ASEAN economic community, from a policy point of view anyway. This is different from the Belt and Road Initiative and these sorts of things.

Jill O'Donnell: Right. Okay. Last question, and I ask this of every guest on this podcast, and that's just something that you've read lately. What have you read lately about trade, a book, article, report that is particularly striking to you?

Michael Plummer: That's a great question. In my current role as director of SAIS Europe, I don't have as much time to read as I would like to, but I think I've been reading some more general pieces on trade. I read a very interesting article by Doug Irwin at Dartmouth University called the Truth About Trade. It's in Foreign Affairs Magazine, so it's written for nontechnical audiences. But I think that gives a very strong argument in favor of trade, looking at trade from an economist point of view, because I think a real threat out there is that there's a lot of misunderstanding about trade. I believe that there's a lot of people out there that are using these false narratives on trade for political purposes that actually are problematic, not just for the United States, but for other countries. What I really like about this Doug Irwin's piece, he's an excellent economist. He's able to bring down to really a grassroots level. For example, in the United States there were 157,000 or so workers in the textile and clothing industry and yet there were at the time 40 million people living under the poverty line in the United States. So you've got 40 million people that are struggling every month just to make ends meet. So therefore, does it make sense to increase significantly the price of textile and clothing in United States to these people in order to save a few jobs in the textile and clothing industry, as well as increasing price by the way to the rest of us. The one thing I would add to that discussion too is the effects that these things have on foreign countries, that when we protect textiles and clothing or other sorts of labor intensive goods, it means we're not importing it from the some of the poorest countries in the world. If they're able to export, that allows them to reduce poverty, absolute poverty significantly at least. Anyway, that's an interesting piece I read recently.

Jill O'Donnell: Thank you, yeah, for mentioning that. I've seen Doug Irwin's work and I'm working my way through his large tome, Clashing Over Commerce, which is a very accessible history of trade, yeah, in the United States. So thanks for mentioning that. We'll put that article that you mentioned in our show notes. Dr. Michael Plummer, thank you so much for giving us a lot of insight into Asia today and more. We really appreciate it.

Michael Plummer: Thank you. It was very interesting.

Jill O'Donnell: That's it for this episode of Trade Matters. Thanks for listening and a big thank you to Rebel Sjeklocha and Brianne Wolf for helping produce this podcast. Please subscribe to Trade Matters on iTunes, Spotify, Stitcher, or wherever you get your podcasts. If you have ideas or topics you would like to hear about on Trade Matters, we'd love to hear from you. Send us an email at yeutterinstitute@unl.edu, or follow us on Twitter @YeutterUNL [corrected.] Opinions expressed on Trade Matters are solely those of the guest or host and not the Yeutter Institute or the University of Nebraska-Lincoln.