BILATERALTRADE DEALS ARE KEY TO UNLOCKING ASIA: HSBC CHIEF TRADE ECONOMIST

Douglas Lippoldt says global trade is slowing, but Asia is bucking the trend with several regional trade pacts that will drive global economic growth; but Sri Lanka isn’t party to any of these

Global trade growth is forecast to decline to 3.9% by 2019 from 5.2% in 2017 owing to weaker consumption in developed markets particularly in Europe and the US; but Asia, with relatively younger populations and fast-growing markets, is forging multilateral arrangements to boost trade and investment within the region. Sri Lanka is not party to any of these deals, but can gain access to the growth prospects via bilateral trade agreements, says HSBC Chief Trade Economist Douglas Lippoldt.

Global trade growth is forecast to decline to 3.9% by 2019 from 5.2% in 2017 owing to weaker consumption in developed markets particularly in Europe and the US; but Asia, with relatively younger populations and fast-growing markets, is forging multilateral arrangements to boost trade and investment within the region. Sri Lanka is not party to any of these deals, but can gain access to the growth prospects via bilateral trade agreements, says HSBC Chief Trade Economist Douglas Lippoldt.

“This is why I am pleased that the country concluded the recent bilateral trade accord with Singapore and is considering upgrading its existing trade deals and potentially negotiating others,” Lippoldt says.

Pursuing bilateral free trade agreements is a critical step not just to liberalise trade and improve access to services, but also because it reduces uncertainty for businesses, promotes development more broadly and presents citizens
with better opportunities.

Excerpts from the interview are as follows:

What were the drivers of global trade in 2017?
Lippoldt: International trade had a good year in 2017 after underperforming over the previous two years where trade growth wasn’t even keeping pace with the change in global GDP. Over 2015-2016, China’s economy was undergoing a restructuring phase, shifting from investment- and export-led growth to consumption. This was one factor that weighed down global trade and contributed to commodity price weakness. Consumers in Europe and North America contributed to sustaining global trade, but it was not enough to offset the broader weakening of trade during the downturn. In 2017, China made a strong comeback and, with consumption holding up in Europe and North America, global trade saw an upturn.

IT IS IN THE INTEREST OF DEVELOPED ECONOMIES TO DO MORE TO ENGAGE THESE MARKETS AND AVOID PROTECTIONIST TRADE POLICIES

Going forward, we at HSBC are bullish on the broader Asia-Pacific economy. Globally, by 2050, we estimate that there could be 2.6 billion new members joining the middle class across 17 emerging markets. In Asia, countries like China, India, Malaysia, Indonesia, Thailand and the Philippines will likely experience a significant expansion of this income group. This matters for international commerce, as the middle class tends to have relatively trade-intensive patterns of consumption.

Technology transfers and innovation will see output per employee reach levels we now see in advanced economies. Given the younger population profiles of emerging economies and abundant resources, we believe emerging markets will make a tremendous contribution to global economic growth. We can already see this shift taking place.

According to forecasts for 2018, Western Europe will grow at around 2.1% and Japan may only reach 1.1%. Yet, these large economies can find opportunities in emerging markets. We expect Asia Pacific to grow some 4.3% in 2018. Given this type of performance, it is in the interest of developed economies to do more to engage these markets and avoid protectionist trade policies. Emerging markets are hungry for the capital goods, technology and services they need to build their economies. Also, consumers moving out of poverty and into the middle class will boost their discretionary spending on non-essential goods and services like entertainment and education. Developed economies have the capacity to meet many of these growing demands. In addition, we anticipate increased dynamism in intra-regional trade in the Asia-Pacific region.

Where does Sri Lanka fit in all this?
Lippoldt: There are opportunities for both advanced and emerging economies, but realising these can be challenging. It requires further trade liberalisation: not only tariff reductions, but also efforts to address non-tariff barriers and regulatory impediments to trade. Asia has a lot to do in these areas. For example, according to the World Bank, Sri Lanka scores in the mid-range for trade facilitation and customs burdens. But, some of its neighbours aren’t doing so well. I’m encouraged that Sri Lanka is in the process of implementing the recent bilateral trade agreement with Singapore and is open to negotiating bilateral trade agreements with other countries in the ASEAN region. Increased market openness can promote growth in Sri Lanka and its trade partners.

More broadly, we need to recognise that trade liberalisation in other parts of Asia Pacific is advancing as well. The Trans Pacific Partnership Agreement and ASEAN trade initiatives will give advantages to Sri Lanka’s competitors like Vietnam. Establishing bilateral trade deals will help Sri Lanka maintain and expand access across this dynamic region.

Sri Lanka’s export basket is dominated by a few key products such as clothing and tea, as well as tourism. Europe and the US account for more than half of Sri Lanka’s annual exports. Clearly, there is room for diversification both in terms of products and destinations. This could help to insulate Sri Lanka from future downturns in Europe and the US by tapping into fast-growing markets in Asia. This is why Sri Lanka’s engagement with ASEAN countries is encouraging to see. Even among countries with similar production profiles, trade enables consumers to benefit from increased choice among different varieties.

What’s your forecast for global trade going forward?
Lippoldt: In 2017, global trade in goods was around $18 trillion and $5 trillion in services. Global exports of goods and services grew 5.2%. We expect global export growth to slow a bit to 4.6% in 2018 and 3.9% the following year. While some of the strength in 2017 was fuelled by a recovery off a low base over 2015-16, there are now other factors weighing down demand. Globally, protectionism and trade policy uncertainty are having an effect. We also see some slowing in the US on rising interest rates and, longer-term, some fading of the stimulus from the recent US tax reduction. Uncertainty across Europe, especially in relation to the UK with Brexit, will weigh on demand. In some cases, investment will slow down until businesses have a clearer idea about the new policies and trade rules post-Brexit.

The picture is generally more optimistic in Asia Pacific.

THE REGION IS BUCKING THE TREND AND CONSUMPTION IS PICKING UP. COUNTRIES ONCE FOCUSED ON GLOBAL SUPPLY CHAINS ARE ESTABLISHING STRONGER INTRA-REGIONAL LINKS WITHIN ASIA PACIFIC

The region is bucking the trend and consumption is picking up. Countries once focused on global supply chains are establishing stronger intra-regional links within Asia Pacific. Trade policy is supportive of this. Having removed most tariffs on intra-ASEAN trade, ASEAN members are advancing in the reduction of customs burdens and plan to tackle services liberalisation. The 10 ASEAN members and 6 free trade agreement partners in the region – including Australia, China, India, Japan, South Korea and New Zealand – are working to conclude the Regional Comprehensive Economic Partnership. This will cover an area with a GDP of $22 trillion and 48% percent of the global population. If successful, the negotiations could remove most tariffs and reduce other impediments to trade in goods and services among these nations.

China’s Belt and Road Initiative will complement such trade liberalisation by reducing infrastructure bottlenecks and boosting the capacity to trade across borders in the region.

We’re positive about some reforms underway in India, such as the implementation of the GST. Given India’s scale with more than 1.3 billion population, its position and resources, the country has tremendous trade potential. On the policy front, India has had a number of impediments to global trade including relatively high average tariffs. But future trade liberalisation, for example via its participation in the Regional Comprehensive Economic Partnership Agreement, could help to promote improved market access for imports and exports.

Sri Lanka is rightly thinking about gaining improved access to such dynamic markets across Asia. This is why I am pleased that the country concluded the recent bilateral trade accord with Singapore and is considering upgrading its existing trade deals and potentially negotiating others.

The US has pulled out of the Trans Pacific Partnership, and where do you see NAFTA heading? How will the outcomes impact global trade?
Lippoldt: The Trans Pacific Partnership goes far beyond a typical trade agreement to virtually remove all duties for most goods across the region comprising 11 countries with a combined GDP of $10 trillion. It’s tackling non-tariff barriers and will improve cross-border trade facilitation, establishing streamlined customs procedures. The TPP will liberalise services in an ambitious way: negotiations began with member countries agreeing in principle to open most services with relatively few exceptions. In many cases, businesses will be granted national treatment across all TPP member countries, for example with respect to regulatory requirements. That’s very exciting and some observers believe it will boost trade within the region by about 10% and add up to one percent to GDP. This may not seem like much, but it’s a change in the base – a boost that will compound over time. In other words, a gift that will potentially keep on giving.

The TPP is the new standard for regional trade, in part because it tries to answer some of the critics of globalisation. The TPP includes standards on environmental protection, labour, cross-border data sharing, privacy protection and cyber security. The TPP will better enable the digital economy to thrive.

Sri Lanka already has a foothold in ASEAN. Some of your corporates have factories in the region and you’ve concluded a trade agreement with Singapore. Sri Lanka may not enjoy direct access to the TPP, but indirectly, some Sri Lankan businesses will benefit. The TPP will promote growth in important destination markets, and encourage trade and investment in the region.

As for the North American Free Trade Agreement, it needs updating. For instance, it doesn’t provide for permanent duty-free treatment for digital products like the TPP does. In NAFTA, coverage of data and e-commerce issues could be improved. Some areas of agriculture could also benefit from liberalisation. If the US, Canada and Mexico can agree to update the agreement, all three countries should benefit. This may also benefit other trade partners, helping to boost demand. The alternative to NAFTA going forward is difficult to predict. We don’t know. Businesses, however, prefer regional trade agreements over many bilateral ones, as regional accords are better suited to the operation of value chain production.

There is always a cost when you open up to the rest of the world for mutual benefit; this makes liberalisation challenging. There are ways of dealing with these adjustment costs by having clear policies around labour, social safety nets and a business-friendly environment, as well as access to quality education and lifelong learning. At the end of the day, it’s about adjustment, and moving into more productive areas that will create better wages for people and support economic development.

According to a World Bank study (2008) covering a 48 year period, countries that liberalised trade in a deep and sustained manner saw their GDP expand at an average annual rate that is 1.5 percentage points greater compared to relatively closed economies. And that makes a big difference because it compounds over time. This is one of the reasons that I remain supportive of open markets and further trade liberalisation.

THE COST TO TRADE BETWEEN ASEAN AND SRI LANKA IS RELATIVELY HIGH, SO THERE IS ROOM FOR LIBERALIZATION TO FACILITATE GROWTH AND TRADE

What will China’s Belt and Road Initiative do for global trade?
Lippoldt: According to some estimates, the Belt and Road Initiative will mobilise $1.4 trillion or more in new investments across Asia in infrastructure like roads, rail, ports, pipelines, business centres and power generation. There is an infrastructure gap across the region, and the BRI is helping to close this. A study published in the Journal of Asian Economics (2018) found that by removing logistical and energy bottlenecks, the BRI could boost global trade by perhaps 5% annually. That is significant.

What should Sri Lanka prioritise to gain access to growing markets in Asia?
Lippoldt: The cost to trade between ASEAN and Sri Lanka is relatively high, so there is room for liberalization to facilitate growth and trade.

According to published research (UNESCAP, 2018), the cost of trade between South Asia and ASEAN is over 120% of the value of goods. Sri Lanka does better than average in South Asia, but still has room to improve. If Sri Lanka can reduce the cost of trade in a meaningful way through improved logistics and streamlined and paperless customs procedures, then it will be better able to benefit from the proximity it has to ASEAN and other dynamic Asian economies. UNESCAP estimates that the use of streamlined, digitised procedures could cut the cost to trade in Asia by about 25%.

From what I have heard during my visit, I think Sri Lanka’s policy orientation towards additional trade liberalisation appears healthy. Pursuing bilateral free trade agreements is a critical step because they not only liberalise trade and improve access to services, but reduce uncertainty for businesses. Uncertainty is costly. And, Sri Lanka is also working towards improving its World Bank “Ease of Doing Business” ranking, which matters to both domestic and foreign investors seeking to establish and grow businesses. Such market-oriented approaches can promote development more broadly and enable people in Sri Lanka to avail themselves of better economic opportunities through trade.