Brexit, the US, China and the Future of Global Trade

Some years ago, the distinguished economist Richard Baldwin said: “Regional trade liberalisation sweeps the globe like wildfire”. He was right. Preferential trade agreements (PTAs) increased from 20 in 1990 to close to 300 today, and have become a key feature of the international trade policy landscape.

Every country in the world is party to at least one PTA, with Mongolia the last to join the pack when it signed a deal with Japan in 2016. But Brexit, the US withdrawal from the Trans-Pacific Partnership (TPP), and the renegotiation of the North American Free Trade Agreement (NAFTA) have been a major shock for the world trade system.

What will the outcome of this shock be? Are we in for a recess, retreat or revamp of regional trade integration? Much depends on how other key players will respond to this shock.

Though PTAs tend to be a tough political sell, governments pursue them because they increase productivity and benefit consumers; promote economic policy reform; underpin supply chains; and have other positive implications in terms of regional peace and security. Also, though estimates of the trade impact of PTAs vary, economists agree that they boost trade among members and hence, have positive effects on growth.

Back in 2016, negotiations on the TPP, encompassing the US, Japan and 10 other countries in the Americas and the Asia Pacific region, and on the Trade and Investment Trans-Atlantic Partnership (TTIP) between the US and the European Union, dominated the headlines.

Expectations were high, as these agreements would cover a significant part of world trade. There were also concerns. A report from the World Economic Forum Global Agenda Council on Trade & Foreign Direct Investment addressed them early on.

How would these mega-regional agreements shape the global trading system? Would they be game changers or costly distractions? How would they impact non-members and how would they react?

Fast forward to 2018 and the situation is very different. There has been a shock to the system, in the form of the repositioning of the US and the UK. The US has withdrawn from TPP, suspended TTIP negotiations, launched the renegotiation of NAFTA – with threats to withdraw – and initiated the revision of some specific commitments of the Korea-US PTA.

The UK post-Brexit repositioning involves undoing a very deep trade integration scheme with the EU, and agreeing on new rules of engagement for a future economic partnership, while replicating or renegotiating some 40-odd PTAs that came with EU membership – not a small task.

How will other countries reposition their policies to respond to the current shocks? Is the world in for a recess, a risk of retreat, or a revamping of PTAs? These are the questions of today – very different from those of barely a year and a half ago.

Among the challenges, there is some interesting news. The EU is leading a broad expansion and modernisation of its already extensive PTA network with recent agreements with Vietnam, Canada, Japan and maybe soon, Argentina, Brazil, Paraguay and Uruguay (Mercosur), among the most prominent. Under the strategy that the best defence is a good offence, the EU is bringing greater predictability to global trade.

In Asia, countries are also moving forward. Japan has taken the leadership role in what seemed the unlikely resurrection of TPP after the US withdrawal. With just the suspension of a few provisions, the TPP, now renamed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), will be signed next March by all 12 of the original members minus the US, delivering de facto 18 new PTAs between CPTPP members.

At the same time, the EU-Japan PTA – also to be signed in March – is a very significant economic cooperation commitment between these two leaders of world trade. Other negotiations are on the way, including the Regional Cooperation Economic Partnership (RCEP), the Japan-China/Korea PTA, and others.

China’s Belt and Road Initiative (BRI) is beyond and above PTAs. It is the most ambitious initiative to improve regional economic integration and connectivity on a transcontinental scale: involving “hard” infrastructure along six overland corridors, and the 21st Century Maritime Silk Road; “soft” infrastructure, such as the financial system, to enhance efficiency and facilitate economic flows; and policy reforms and institution-building to promote trade and foreign direct investment among the 70 or so BRI countries. There is talk now of expanding it to Latin America or to shipping routes across the Arctic, dubbed the “Polar Silk Road”. RCEP, the Japan-China-Korea PTA and other agreements are also moving forward.

Other regions are also actively engaged. African countries will be signing the Continental Free Trade Agreement (CFTA) next March, building on the regional economic communities to liberalise trade.

Asia continues to upgrade and deepen existing PTAs and engage in new agreements with non-Asian partners; while in Latin America, there is great excitement around the potential Mercosur-EU agreement and the continued strengthening of the Pacific Alliance, encompassing Colombia, Chile, Mexico and Peru, who are now negotiating “associate membership” with Australia, Canada, New Zealand and Singapore.

In light of the above, the world is not in for a full retreat on PTAs. While some negotiations have been suspended, important trade agreements are being undone, and uncertainty underpins US involvement in the negotiation of trade agreements; the EU, Japan, China and others have picked up the baton and are leading the world to greater trade cooperation.

This is a sign of the new times. Their leadership is welcome. It is doing a lot of good in itself, but it is also instrumental in keeping the door open for when others may be ready to come back. In addition, the cost of being left out is greater in a cooperative rather than a divided world, so they are increasing the likelihood that others may be willing to re-engage tomorrow.

Anabel Gonzalez, Member of the World Economic Forum's Future Council on Trade & Investment, former Trade Minister of Costa Rica.

This post first appeared on the World Economic Forum's Agenda blog.

Image credit: Sandra Cohen-Rose and Colin Rose via Flickr (CC BY 2.0)