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TPP-EU alliance makes good sense in fight against protectionism

Huge free trade zone can serve as warning and example to US-China squabbles

A new trade bloc comprised of the Asia-Pacific region and EU would account for 35% of global GDP, eclipsing both the U.S. and China.

TOKYO -- Simmering U.S.-China trade tensions and rising protectionism are threatening the global economy, with efforts to persuade the two countries to resolve their differences being largely ignored.

To counter these developments, the European Union and 11 members of the Trans-Pacific Partnership, or TPP-11, could band together to create a vast free trade zone.

The idea has already been floated by a number of academics, among them professors Zaki Laidi at Institut d'Etudes Politiques de Paris and Shunpei Takemori at Keio University in Tokyo. Both are known for their extensive writings on government policy, with the latter a member of the Japanese government's Council on Economic and Fiscal Policy.

But the time for talk is over. Rather, rolling out a grand plan makes increasing sense, taking care to avoid as much as possible the wrath of U.S. President Donald Trump, who may see any such partnership as a challenge to American leadership.

One of the first moves Trump made after taking office was to withdraw the U.S. from the initial 12-member TPP. Ever since, Trump has repeated his stance that multilateral trade agreements harm America, his point being that they dilute U.S. influence in the pacts, while bilateral accords give Americans more power over weaker negotiating partners.

Given Trump's views, free trade agreements are now harder to forge.

According to the Japan External Trade Organization, there were 309 free trade agreements in effect as of the end of 2018. But in 2018, only five new FTAs were implemented, compared with 10 that came into force in 2017. These figures clearly reflect a slowdown in FTAs: from 79 in the five years between 2005 and 2009, to 67 in the subsequent five years to 2014.

A grand alliance between the TPP-11 and EU would reverse this trend.

Japan worked with other members of the TPP-11 to see it finally come into force in December 2018, then launched its own economic agreement with the EU in February. Now, the time is ripe for building a comprehensive bridge linking the Asian-Pacific region with Europe.

This would create a trade bloc of unprecedented size, fusing the TPP-11 and its 13% of the world's gross domestic product with the EU and its 22%. Their combined share of GDP at 35% would dwarf America's 24% and China's 15%.

The partnership would not only be a bold economic move, but also send a stern political message that the signatories were committed to the principles of free trade and multilateralism. Moreover, advocates of the agreement believe it would shield signatories from fallout caused by the U.S.-China crisis over trade and technology.

The alliance could also prod Washington and Beijing to quickly resolve their differences instead of creating more grief for themselves and the global economy. Both the TPP-11 and EU want to build a lasting framework that eliminates tariffs and protects intellectual property.

Advocates of the alliance want the TPP-11 and EU to modify rules on government subsidies for industry, limit the roles of state-owned enterprises, and offer better protection for intellectual property. The new bloc would also ensure safe direct foreign investment and market access, as well as transparent and reciprocal public procurement.

All of the above would send a not-so-subtle signal to China to open its markets more and ramp up structural reform. The goals also align with Washington's demands in its current bilateral trade talks with Beijing, opening the door to future cooperation with the U.S.

Importantly, a tie-up between the TPP-11 and EU could bolster the World Trade Organization at time when its dispute-resolution mechanisms are under attack.

The WTO's seven-member Appellate Body has the final say on trade disputes. The panel now has only three judges -- the minimum for it to function -- because Washington has blocked reappointments for judges whose terms have expired. As the terms for two of the remaining judges are set to end in December, the panel may become entirely dysfunctional by 2020.

To ward off the looming crisis, a partnership between the TPP-11 and EU would call for countries to respect rulings of the WTO's first-instance panels rather than wait for a final verdict by the Appellate Body. The alliance would also look to strengthen the WTO's role as arbitrator during trade disputes, in addition to its current role as judge.

Proponents of the alliance want to start fleshing out plans after the annual Group of Seven in August and finish the framework by the end of 2020.

Any new trade alliance that excludes the U.S. would likely incur the wrath of the Trump administration, but the results may be worth the risks.   © AP

Needless to say, this could generate backlash from the Trump administration, which is not on the best of terms with the EU. In bilateral trade talks that began in April, both sides have been looking to cut tariffs on industrial goods and remove regulatory barriers.

But talks have stalled and the October deadline for reaching an agreement is in jeopardy. The Trump administration seems more interested on solving trade problems with China, while the EU is facing a sharply divided electorate, the manifestations of which could be seen in the 2019 European parliament election. In addition, Trump has become impatient with EU complaints over U.S. trade policy.

Meanwhile, Japanese Prime Minister Shinzo Abe will have to fast-track trade negotiations with the U.S. after upper house elections on July 21. The Americans are looking for a deal that includes greater Japanese imports of U.S. farm products. When Abe and Trump met in Tokyo in May, the president seemed to think a deal could be reached as early as August. Abe himself seems keen to settle trade issues as soon as possible, even though it may be hard to meet the August date.

Given the current dynamic, it would be unwise for Abe to let on that Japan is pushing too hard for creation of a new trade bloc comprising Asia and the EU at the exclusion of America.

Still, as the world economy slows and business activity shrinks, it is imperative that multilateralism in trade be strengthened in the face of protectionist tendencies. The idea of a grand partnership between the TPP-11 and EU might be the right vehicle to accomplish this, and Japan could well be the driving force behind it.

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