Trump’s Tariff Tantrum May Give RCEP A Boost

For many nations, a highly profitable trade relationship with the United States is now no longer a given. With President Trump’s tariff agenda looming over the world, how is Asia planning for a future where the U.S. may not be so open for business?

The barrage of tariffs unleashed by the United States under President Donald Trump ushered in the rise of a new global economic order that can upset free trade. It would trigger different responses with long-term implications.

First, unpredictability will push affected countries to reduce overreliance on the U.S. and diversify markets and sources of investments. It may revive suspended or stalled trade deals, such as the China-Japan-Korea Free Trade Agreement and the China-European Union Comprehensive Agreement on Investment. It may also accelerate the implementation of recently concluded ones, including the Regional Comprehensive Economic Partnership (RCEP). The World Trade Organization will be further eroded, and its trade dispute settlement mechanism will be marginalized as the tit-for-tat tariff war escalates. Bilateral and regional FTAs may be seen as alternatives, and countries may show more eagerness to join them.

For instance, more ASEAN countries may sign up with the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The United Kingdom was the first European country to join CPTPP last year. Others may follow. UK Trade Minister Jonathan Reynolds will reportedly visit China later this year. All ASEAN members are already parties to RCEP. Hong Kong, Chile, and Sri Lanka expressed interest in joining RCEP. As such, these FTAs are expanding their geographic remit to include countries from beyond the region. Hence, while Trump’s tariffs put severe downward pressure on globalization, they also push other countries to rally behind free trade. We have seen this before and will see it again. While CPTPP members still hoped to see U.S. re-entry, they did not wait and went on. We may see a repeat of such behavior by countries navigating Trump 2.0.

Second, negotiating with the U.S. does not necessarily mean submitting or accepting this new form of global trade order featuring strong-arm intimidation, if not coercion. One should distinguish between understandable short-term response and long-term adjustments. Trump is applying pressure to secure leverage and force negotiation. The goal is to extract concessions. The U.S. may demand that tariffs on its goods or constraints to its investments be removed or further reduced. In the short term, due to the importance, if not heavy reliance, on the U.S. market or capital for some affected countries, they may have no option but to sit down with Washington to seek some reprieve. However, in the medium to long run, Trump’s tariff tantrum will push ASEAN and other countries to commit to economic diversification, including deepening ties with other partners like China, Japan, Korea, and the EU.

Third, U.S. tariff impositions may be part of Trump’s strategy to compete with China. In its dealings with other countries, Washington may try to isolate Beijing by cutting it off export markets or sources of raw materials. Long-arm pressure may be used to persuade other countries to restrict the flow of critical technologies that China needs or convince other countries to limit the intake of Chinese inputs in their manufacturing. Washington may apply more stringent rules of origin and refuse to admit goods with high Chinese input content. However, restrictions may only drive Beijing to double down on domestic innovation and risk engendering global technology fragmentation with disjointed supply chains and the rise of disparate systems and standards.

Fourth, as the biggest target of Trump’s tariffs, China may offer valuable lessons in diversifying partners and providing safety nets or mitigating measures to seriously affected sectors. There will be pains that must be endured and turbulence that must be weathered. Affected countries should compare notes.

Fifth, Trump’s tariff barrage may compel major target countries to not only diversify but even alter their investment and trade patterns. For instance, China may re-orient trade and investment towards developing and emerging economies in the Global South, including ASEAN and BRICS Plus. ASEAN and China have become both sides’ largest trade partners in recent years. This may give rise to some problems, like concerns about overcapacity and dumping. In response, some countries may roll out protectionist measures for vulnerable sectors or pursue dialogue to address trade spats. ASEAN countries may ask Chinese firms to produce in ASEAN to sell in ASEAN and beyond. This presents opportunities. Such capital and technology infusion may improve manufacturing and drive industrial upgrading in ASEAN countries.

For affected ASEAN countries, the China market may not substitute for the U.S., but it may soften the blow to exporters should Trump erratically impose further tariff or non-tariff barriers. China’s unilateral opening to ASEAN countries is a boon to ASEAN. For instance, planters from the region may step up to alleviate Chinese reliance on U.S. agricultural imports. ASEAN and China may fast-track the conclusion of the ASEAN-China Free Trade Agreement (ACFTA) third upgrade, which can boost digital and green economy trade and supply chain connectivity.

Despite reservations, the momentum for deeper economic integration in the region may get more traction. Regional FTAs like RCEP may bring Northeast and Southeast Asia closer together. The North American automobile sector is a highly integrated production, supply chain, and market. Trump’s blanket unilateral tariffs may produce something of that sort in East Asia and even go well beyond cars.

Lastly, RCEP needs serious discussion on how to make free trade more fair and beneficial for all parties. This can deny politicians the chance to opportunistically use some job losses, the demise of some inefficient and rent-seeking enterprises, and other unintended downsides to upend free trade deals, which were achieved after years of protracted negotiations. RCEP should not stagnate and should continue to evolve to meet the needs and expectations of member economies and their people. Free trade results in some losses, which should be recognized and mitigated. But overall, it is a net gain. Governments and leaders should communicate this to their public to defend free trade now under siege.