June 19, 2018 By Dr. Nihal Pitigala
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Dr. Nihal Pitigala*
Global trade is undergoing turbulent times. The United States’ retreat from multilateral trade integration and the ensuing fear of a US-China trade war has put the global trading system under significant stress. At the same time, the ongoing evolution of mega-regional trade blocs, if realised, is likely to substantially reshape the global trading system. Within the Asia-Pacific region, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP),1 even without the US, is poised to create a US$356 billion trade area,2 with a combined Gross Domestic Product (GDP) representing 13.5% of the global economy,3 while the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) encompasses 39% of the global economy and 29% of global trade.4
Many developing countries, including Sri Lanka—for whom trade continues to be an economic lifeline—are forced to consider their options; either to join one or more of the mega-regional agreements or face the potential costs of staying outside the newly-emerging global trade architecture.
After the US withdrawal from the original Trans-Pacific Partnership (TPP) in 2017, the eleven remaining countries, led by Japan, recently signed the revived CPTPP.5 Compared to the original agreement, the CPTPP is a slimmed down version. The remaining members agreed to freeze 20 articles, and to negotiate two articles bilaterally6 with the parties outside the CPTPP framework, while other provisions have been revised.
Most of the intellectual property rights articles included in the original TPP agreement at the insistence of the US—such as data protection periods for biomedicines and copyright duration issues—were suspended,7 and technology protections have been narrowed. One of the more contentious chapters, on ‘Investor-State Dispute Settlement,’ has been curtailed by suspending provisions8 that permitted arbitration claims for breaches of “investment agreements” and “investment authorisations,” which are usually associated with natural resource-related concession agreements.
All other country commitments, including market access schedules for goods, services, investment, government procurement, state-owned enterprises, and business mobility are unchanged from the original TPP agreement. The CPTPP is structured as a ‘living agreement’ with an accession clause9 designed to enable the US to return to the table and allow for others to join.
The case for Sri Lanka’s potential membership of CPTPP may be considered from several perspectives.
First, the geographic scope of the agreement will create the world’s third-largest economic bloc.10 Given the CPTPP market size, the potential gains are estimated to reach US$147 billion by 2030.11 Though smaller than the projected US$286 billion worth of gains under RCEP,12 the potential return of the US would boost the gains from CPTPP to a much larger US$492 billion.13
Even without the US, several countries in the Asia Pacific—Indonesia, South Korea, Taiwan, Thailand, and the Philippines—have already signalled their interest14 in joining the agreement. It is estimated that their accession would triple the welfare benefits of CPTPP,15 creating an equivalent impact of the US rejoining. The CPTPP’s more diverse membership, which includes industrially advanced countries, also makes it a more favourable integration option for Sri Lanka.
Second, CPTPP offers a deeper and more comprehensive framework compared to RCEP’s more flexible, but shallower, approach—in terms of timing and depth of reductions in tariff and non-tariff barriers. The CPTPP is, therefore, likely to provide Sri Lanka with both greater market access and efficiency-boosting effects, through market and industry size, as well as diversity and technological sophistication. This will likely outweigh any trade diversionary impacts and domestic adjustment costs.
Moreover, by generating productivity-induced growth that more than offsets the cost of implementation, the quality-increasing regulations in CPTPP16 (for example, product safety standards, labour and environment standards) are likely to be income-boosting. Outsiders to the CPTPP, particularly those that compete directly with members for market share, will eventually be compelled to converge toward a similar level of standards in order to compete in a market with higher quality standards, without enjoying the benefits of preferential market access. For Sri Lanka, membership in the CPTPP would also lock in domestic reforms and provide a more rapid and beneficial path to upgrading to modern standards.
Third, and related to the above, the dynamic effects of the CPTPP will be achieved through the foreign direct investment (FDI)17 incentivised by the size and diversity of this market. This may push the composition of trade towards intermediate goods and services, consistent with a deepening of value chain activity within the CPTPP bloc. In particular, it is likely to encourage further investments in upstream and downstream industries in member countries that are already deeply entrenched in global supply chains (e.g. Japan, Malaysia and Vietnam), at the expense of non-members.
Sri Lanka, like other developing countries outside East Asia has, by and large, missed out on growth-enhancing segments of manufacturing value chains due to deficits in technology, skill and government policy.18 The CPTPP is a potential springboard for Sri Lanka to take advantage of evolving regional supply chains, to diversify away from textiles and apparel into other industrial and service sector activities, including manufacturing enablers like logistics services, IT and financial services.
The likely expansion of CPTPP appears imminent. The US, by remaining outside, is foregoing US$131 billion in potential gains in favour of a US$2.0 billion loss.19 Equally as important, the US has retreated from an opportunity to reset the rules for global trade. Indeed, the current US administration, which withdrew from the TPP, may be rethinking its position20 in light of recent tensions with China over trade and investment. Many expect the return of the US to be a matter of ‘when’ and not ‘if’. Given the very real potential for CPTPP to expand, with the US or other Asian countries, the potential gains from joining such a large and diverse economic bloc cannot be overlooked.
As new members join, the costs to non-members will grow higher. These costs not only include the loss of market share due to preference erosion and diversion of FDI away from non-members, but also the absence of an impetus for further market liberalisation. Joining the CPTPP could provide the necessary carrot for domestic reforms in the absence of robust progression under World Trade Organization; more so than could be incentivised by bilateral arrangements. It is important for non-members like Sri Lanka to take stock of these costs and benefits as they weigh their future trade integration options.
1Ministry of Foreign Affairs and Trade of New Zealand. ‘Comprehensive and Progressive Agreement for Trans-Pacific Partnership.’ New Zealand. Available at: https://www.mfat.govt.nz/assets/CPTPP/Comprehensive-and-Progressive-Agreement-for-Trans-Pacific-Partnership-CPTPP-English.pdf.
2U-Wen, L. (2017). ‘Fate of Trans-Pacific Partnership deal, minus the US, remains up in the air.’ The Straits Times. Available at: https://www.straitstimes.com/world/fate-of-trans-pacific-partnership-deal-minus-the-us-remains-up-in-the-air.
3Department for Foreign Affairs and Trade. (2018). ‘TPP-11 outcomes and background documents.’ Australian Government. Available at: http://dfat.gov.au/trade/agreements/not-yet-in-force/tpp-11/outcomes-documents/Pages/outcomes-documents.aspx.
4Wignaraja, G. (2017).“Sri Lanka’s Absence from Asia’s Big FTA Game.”The Lakshman Kadirgamar Institute of International Relations and Strategic Studies. Available at: http://www.lki.lk/publication/sri-lankas-absence-asias-big-fta-game/.
5Londoño, E., Rich, M. (2018). ‘US Allies Sign Sweeping Trade Deal in Challenge to Trump.’ The New York Times. Available at: https://www.nytimes.com/2018/03/08/world/asia/us-trump-tpp-signed.html.
6Government of Canada. (2017). ‘Annex II – List of Suspended Provisions’. Available at: http://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/annex2-annexe2.aspx?lang=eng.
7Asian Trade Centre Policy Brief no. 17-11. (2017). ‘TPP11: Unpacking the Suspended Provisions’, PDF pg= 1. Available at: https://static1.squarespace.com/static/5393d501e4b0643446abd228/t/5a0a27b1f9619a1bb0564c62/1510614967962/Policy+Brief+17-11+TPP11+Suspensions.pdf.
8Asian Trade Centre Policy Brief no. 17-11. (2017). ‘TPP11: Unpacking the Suspended Provisions’, PDF pg= 3. Available at: https://static1.squarespace.com/static/5393d501e4b0643446abd228/t/5a0a27b1f9619a1bb0564c62/1510614967962/Policy+Brief+17-11+TPP11+Suspensions.pdf#page=3.
9New Zealand Foreign Affairs and Trade. (2018). ‘Comprehensive and Progressive Agreement for Trans-Pacific Partnership: National Interest Analysis’, pg. 197. Available at: https://www.mfat.govt.nz/assets/CPTPP/Comprehensive-and-Progressive-Agreement-for-Trans-Pacific-Partnership-CPTPP-National-Interest-Analysis.pdf#page=203.
10Ota, Y., Maruyama, S. (2018). ‘TPP 11: How Asia took the lead in free trade’. Nikkei Asian Review. Available at: https://asia.nikkei.com/Features/Cover-story/TPP-11-How-Asia-took-the-lead-in-free-trade.
11Petri, P., Plummer, M., Urata, S., and Zhai, F. (2017). ‘17-10 Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States’ in Peterson Institute for Economics, PDF pg= 15. Available at: https://piie.com/system/files/documents/wp17-10.pdf#page=15.
12Petri, P., Plummer, M., Urata, S., and Zhai, F. (2017). ‘17-10 Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States’ in Peterson Institute for Economics, PDF pg= 8. Available at: https://piie.com/system/files/documents/wp17-10.pdf#page=8.
13Petri, P., Plummer, M., Urata, S., and Zhai, F. (2017). ‘17-10 Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States’ in Peterson Institute for Economics, PDF pg= 15. Available at: https://piie.com/system/files/documents/wp17-10.pdf#page=15.
14Donnan, S., Harding, R., Leahy, J. and White E. (2018). ‘Pacific countries seek new members for regional trade deal.’ Financial Times. Available at: https://www.ft.com/content/423b4908-2225-11e8-add1-0e8958b189ea
15Petri, P., Plummer, M., Urata, S., and Zhai, F. (2017). ‘17-10 Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States’ in Peterson Institute for Economics, PDF pg= 9. Available at: https://piie.com/system/files/documents/wp17-10.pdf#page=9.
16Organisation for Economic Co-operation and Development (OECD). (2018). ‘OECD welcomes CPTPP agreement’. Available at: http://www.oecd.org/trade/oecd-welcomes-cptpp-agreement.htm.
17Mai, N. (2018). ‘The CPTPP is not just TPP version 2.0’. Vietnam Investment Review. Available at: http://www.vir.com.vn/the-cptpp-is-not-just-tpp-version-20-57064.html.
18Samarajiva, R. (2017). ‘Opportunities & challenges in global value chains’. Lirneasia. Available at: http://lirneasia.net/wp-content/uploads/2017/09/Samarajiva_Marketing-Alumni-Assn_Sep2017.pdf.
19Petri, P., Plummer, M., Urata, S., and Zhai, F. (2017). ‘17-10 Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States’ in Peterson Institute for Economics, PDF pg= 8. Available at: https://piie.com/system/files/documents/wp17-10.pdf#page=8.
20Global-is-Asian. (2018). ‘Trump’s TPP Reversal: Part of Washington’s China Strategy?’. Available at: http://global-is-asian.nus.edu.sg/index.php/trumps-tpp-reversal-part-washingtons-china-strategy/.
*Dr. Nihal Pitigala is a Consultant at the World Bank and a Senior Trade Economist specializing in regional and multilateral integration, trade competitiveness, global value chains and trade policy reforms. The opinions expressed in this article are the author’s own and not the institutional views of LKI, and do not necessarily reflect the position of any other institution or individual with which the author is affiliated.