TPP Requiem: What May Supply Chain Managers Expect Next?

Leaders of the Asia-Pacific Economic Cooperation (APEC) gathered in Lima, Peru, just after Donald Trump's stunning victory in the U.S. presidential election in November to regroup—and perhaps rethink—free trade alternatives for the coming year.

Now that it appears likely that the Trans-Pacific Partnership (TPP) will not move forward with American participation, China's President Xi Jinping is championing the Beijing-backed Regional Comprehensive Economic Partnership (RCEP), which excludes the Americas. Furthermore, the Obama administration has warned that the RCEP may not include proper protections for labor, the environment or intellectual property.

But the 21 members of APEC are hedging their bets for the time being, having just completed a study for a regional free-trade area that was designed to examine lessons learned from both the TPP and RCEP discussions. No future considerations, however, will be made until they convene at their next annual summit in Vietnam.

When that happens, we may expect the current theme of “quality growth and human development” to prevail in APEC discussions, as they continue to work on the support of free and open trade and investment, sustainable economic growth and shared prosperity in the Asia-Pacific region.

Throughout 2016, APEC focused its efforts on the following thematic priorities: regional economic integration and quality growth; enhancing the regional food market; working towards the modernization of micro, small and medium-sized enterprises (MSMEs) in the Asia-Pacific; and developing human capital.

Smart money at the time was on TPP narrowly winning Congressional approval. Since then, several prominent U.S. trade experts were quick to condemn the lost opportunity and issued some fairly dire forecasts in late November.

“For hundreds of companies whose manufacturing and assembly is in China, this promises trouble,” says Kevin O'Marah, chief content officer for the consultancy SCM World. “Finished goods and parts could be stranded suddenly. Longer term, the cost of such sourcing will rise substantially. At the same time, sales to Pacific Rim countries will slow or stop as trade negotiators jockey for position. Production assets could be inaccessible or even seized.”

Elsewhere in the world, says O'Marah, protectionism should be expected in response. Network design going forward, he says, must account for high risks in globally sourced bills of materials. Global product platforms could help, however, as R&D spending can be shared among a larger number of smaller plants closer to end markets.

Dr. Schreiber, CEO and founder of the logistics portal Freightos, was harsher in his criticism, saying free trade agreements and shifting labor costs continue to move manufacturing and exports from China to Southeast Asian countries like Vietnam.

“Southeast Asia-U.S. trade has been helped by cost-effective labor and low-cost transparent freight and the now shattered promise of free trade,” says Schreiber. “Instead of improving global trade, cancelling TPP will hinder shifting manufacturing patterns, bolster China's export industry, and suppress the continuation of the rapid growth of Vietnam's economy with GDP multiplying five times since 2000.”

According to Schreiber, Vietnam and other countries that export to the United States were not destined to be the TPP's only benefactor. In fact, U.S. exports have continued to grow, with exports to Vietnam exploding by 473% in the last decade.

“Transparent trade, from sourcing to duties to freight shipping, are the cornerstone of the global economy,” says Schreiber. “With over $1.2 trillion dollars of goods imported to the U.S. from the 10 non-North American signatories in the past five years, the ultimate price for canceling the TPP will be paid by U.S. consumers who will face higher prices.”

Marie Sherylyn Aquia, the APEC Committee Chair on trade and investment, notes that sluggish trade growth and rising scrutiny of globalization have cast these forces into uncertainty. “Most of the APEC economies are prolific negotiators of free trade agreements,” she says. “Right now, we're looking into probably more than a hundred proposed deals. It has also made us realize that we are creating a ‘noodle bowl' of trade agreements.”

Meanwhile, APEC may soon be concentrating on one free trade agreement that will supercede all prior discussions: the Free Trade Area of the Asia-Pacific or FTAAP.

There's a note of irony in this development, says C. Fred Bergsten, director of the Peterson Institute for International Economics, who recalls that the Obama Administration rejected the FTAAP several years ago for the geopolitical TPP which would have imposed an “Iron Curtain scenario” on the Asia Pacific.

“In contrast, the FTAAP would better serve as a foundation for regional talks,” says Bergsten. “Indeed, the failure of the exclusive TPP may pave the way to truly inclusive free trade in the Asia Pacific.”

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