international analysis and commentary

Why TPP will be welcomed in Southeast Asia

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The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are game changing initiatives. By this time next year, TPP will probably be ratified, forming a 12-nation free trade zone of Pacific Rim economies comprising 40% of global GDP. While an important step toward economic integration, the deal also heralds progress in political comity. Farther out on the horizon, TTIP offers the possibility of a free trade zone between the US and the European Union advancing closer cooperation with the bulk of the world’s most advanced economies in North America and Europe.

While reducing trade and non-trade barriers facilitates positive-sum global commerce, paths to progress have had mixed results. At the global level, the presumptive leader in trade deals, the World Trade Organization, has found the Doha negotiations stymied and management challenged by the growing assertiveness of the BRICs (Brazil, Russia, India and China) objecting to deals negotiated on developed-country terms. Similarly, the appeal of bilateral deals has waned as countries have struggled to find tradeoffs that could secure domestic support whilst still gaining meaningful commercial ground. 

Between these global and the more narrow bilateral agreements, regional compacts (think NAFTA or the EU) have provided major gains in trade liberalization. TPP and TTIP are designed to replicate this success and may well do so.

Southeast Asian nations recognize the benefits of globalization and trade. With the most complex and prosperous economy, Singapore has been built on a combination of free trade in financial services and export-oriented manufacturing. At the other end of ASEAN’s development spectrum, mainland Southeast Asian countries Vietnam, Cambodia and increasingly Myanmar are all jostling to become the next factory floor of Asia. As noted in a recent survey by the American Chamber of Commerce in Beijing, the rise of wages has become a primary barrier to new investment in China, driving manufacturers to other countries with relatively good infrastructure and a young, trainable, inexpensive labor force. In short, ASEAN nations have every reason to be optimistic about global trade integration.

With so much economic opportunity reliant on trade, the four prospective TPP members in ASEAN – Brunei, Malaysia, Singapore and Vietnam – are likely to support a deal and unlikely to present any obstacle to negotiations.  Moreover, these countries are similar in having strong central governments that can manage opponents to the deal who favor protectionism. That said it is worth taking a closer look at how domestic politics will take shape around TPP in the two ASEAN countries for which it will have the biggest impact on baseline GDP – Vietnam and Malaysia.

Vietnam stands to gain the most in relative terms from a passage of TPP. With ratification, its 2025 GDP is likely to be 10.5% higher than without the trade pact—a projected increase that dwarfs the gains made by any other country. Export gains are expected to be large, projected to increase by around 28% over the same period. According to the IMF, Vietnam’s $1,900 reflects the lowest GDP per capita among TPP member states (with its closest rival, Peru, at $6,800). Consequently, Vietnam is clearly positioned as a preferred destination for industries requiring low-wage labor to remain competitive. The end result will be a boom in Vietnam’s footwear and apparel sectors predicated on market access to the big consumption economies like the US and Japan.

Initially, there was concern that TPP would not be universally popular within Vietnam’s elite. Faced with efficiencies and competition they could not handle, investors and advocates of state-owned enterprises were considered likely opponents of trade liberalization. While politically connected SOE executives will fight hard to protect their interests, geopolitical pressures have curbed their current influence. In the last year General Party Secretary Nguyen Phu Trong’s conservative allies and Prime Minister Nguyen Tang Dung’s business-aligned faction appear to have arrived at the same place. In a visit to Washington, Trong recently reaffirmed Vietnam’s commitment to TPP, making it clear in discussions with President Obama that the Vietnamese government and party – and factions of conservative ideologues and pro-business capitalists – are united in support for the deal.

Behind this emerging consensus is a calculated long-term view based on two considerations. First, party cadre and government leaders share the Chinese view that low unemployment and industrialization are the best protectors of domestic political stability and long-term party survival. TPP means industrial growth in Vietnam, a reality that even conservative forces in government appreciate. The lure of rapid expansion with an increase in the number of urban factory jobs and higher incomes has special appeal for addressing the concerns of displaced and poor agricultural workers.   

The second factor influencing Hanoi’s calculations is the combination of its trade deficit and relations with China. Hovering around 15% of GDP, the deficit is primarily driven by machinery and equipment imports essential to growth and industrialization. Engineering, procurement and construction firms investing in power generation rely the most heavily on these imports. Flare-ups in the South China Sea, moreover, cause Hanoi concern about China’s reliability as a trading and investment partner. Just as Moscow has extorted political concessions by controlling gas exports to Europe, Hanoi fears Beijing will suspend or terminate funding in vital infrastructure projects including power plants and large public works, all critical to supporting manufacturing and growth.  

Turning to Malaysia, TPP presents a substantial opportunity for Prime Minister Najib Razak’s National Front party to bolster exports and growth. With TPP, Malaysia’s GDP would likely be 5.6% higher and its exports 11.9% higher in 2025. The country’s textile and apparel sectors will experience the biggest boost in growth, but other sectors such as electrical equipment and machinery will also see large gains.

The success of TPP in Malaysia is tied to Najib’s leadership. Najib remains a powerful figure and very much likely to remain in control of government until the next party elections in 2018, giving him ample time to see this deal through. Najib sees Malaysia’s inclusion as a strong driver of growth that would propel it into the ranks of developed countries. Adopting TPP is seen as a way to open new export markets and thereby wean Malaysia’s economy away from China, currently the country’s largest partner.

Initially, opposition parties as well as conservatives in Najib’s own party were vocal in their objections to TPP. However, rules requiring governments to reduce state-ownership in business have been diluted, and the US is pulling back on demands to reform the “bumiputera” policy of race-based preferences for ethnic Malay businesses, pacifying domestic opposition to TPP. 

The biggest risk to ratification currently arises from allegations of financial misappropriation against Najib himself. While there is little indication at the moment that the Prime Minister will be removed from power, the negative publicity will make him cautious about pursuing politically unpopular measures such as TPP while he remains under scrutiny and pressure. Assuming these scandals and attacks are not politically threatening, Najib is likely to regain his focus on getting the deal through. Only in the very unlikely case that Najib is ousted and he is replaced by his Deputy Prime Minister Muhyiddin Yassin, could TPP negotiations be derailed. Muhyiddin is more skeptical about international trade deals and he would pander heavily to anti-trade nationalist groups.

The prospective TPP members in Southeast Asia – Brunei, Malaysia, Singapore and Vietnam – have strong hard and soft incentives to join the deal, and will ratify its passage in the coming year. Economically, the trade pact would make major contributions to individual members’ GDP, reinforcing the strength of the ruling parties in all four countries. Diplomatically, moreover, all four can benefit from closer ties with the US amid a period of growing Chinese territorial and trade assertiveness in the South China Sea. These structural factors are far more important, ultimately than the media noise in each country about potential holdouts and deal breakdowns that will rise in the final stage of negotiations.