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What Smaller Countries Can Teach the World About Trade Deals

It should have been the year of the Trans-Pacific Partnership. This was to be the first of three mega-regional trade deals, designed to join the U.S. and NAFTA partners with key Asian economies, Australasia, and emerging nations in South America. President Donald Trump stopped the process cold by withdrawing at the beginning of 2017.

Mr. Trump’s decision leaves in the lurch those trading partners who don’t have current bilateral preferential trade agreements with the U.S. That includes larger countries, including Japan, but is more worrying for smaller countries such as New Zealand and Brunei. They will now be unable to gain preferential access to the U.S. market, even if the other TPP members can establish a TPP minus the U.S.

For smaller states, access to the world’s top markets is crucial. They face difficulties getting in the goods and services they need for economic development and innovation. And because they’re small, producers and providers seeking scale need to look beyond their borders for new customers.

World Bank data from 2016 shows that on average, trade as a percentage of GDP is particularly high in small states: 103 percent compared to 84 percent for the eurozone. For these countries, domestic demand can’t act as a backstop as it does for the U.S., EU or China.

Staying Open

That has prompted a group of smaller states in the Asia-Pacific to take trade openness to heart. Since the 1980s and 1990s, they have developed active policies of unilateral reduction of trade barriers and pursuit of preferential trade agreement networks. Chile, Singapore and New Zealand stand out.

Singapore has benefited from its location at the heart of the Southeast Asian growth economies and manufacturing hubs. It has established itself as an access point for the region with its port, service industries, membership of the Association of South East Asian Nations, and preferential trade agreements covering 32 partners.

Chile positioned itself as a “gateway to Latin America” for European, North American and—later—Asian business, by developing an extensive network of PTAs. Chile’s PTAs cover 61 countries. Both Chile and Singapore have negotiated PTAs with the U.S., EU and China. New Zealand, meanwhile, has PTAs with 16 partners, including China, and will soon embark on negotiations with the EU.

Their success in creating PTA networks lies in a flexible approach and adaptation to their partners’ needs. For instance, Chile initially negotiated a trade in goods agreement with China—and only negotiated an agreement on services once China had decided that trade in services deals could be beneficial. Their PTAs are, therefore, diverse in terms of coverage and scope. This contrasts with the use of templates by the U.S. and the EU’s insistence on a number of areas that must be included in PTAs.

For smaller states, access to the world’s top markets is crucial.

Their small size has aided them in pioneering PTAs with new partners. They are not seen as a threat. This makes larger and more protected markets willing to negotiate with them. Less than 1 percent of Singapore’s land is given over to farming, and it contributes the same percentage to its GDP. That means sensitive agricultural issues are eliminated from negotiations with the U.S., EU and China. Even New Zealand, a highly successful exporter of dairy and agricultural goods, is viewed in a relatively benign light. It was able to sign a free trade agreement with China in 2008—seven years before Australia—as, even with somewhat improved agricultural market access, it would be unable to severely damage Chinese agriculture.

This enables these states to offer something of unique value to negotiation partners: a safe environment in which to learn about PTAs and practice and test new approaches. New Zealand actively courted this agreement by becoming the first developed state to negotiate a PTA and grant China market economy status and, now, the first to engage in upgrading negotiations with China.

Brexit Blueprint?

TPP itself emerged from the vision of small states to overcome their market limitations and enhance their attractiveness as PTA partners. Limited progress on trade liberalization within the Asia Pacific Economic Cooperation organization led Singapore, Chile and New Zealand (and later Brunei) to negotiate the Trans-Pacific Strategic Economic Partnership agreement (also known as P4) of 2005. The intention here was that others may join. When, in 2008, the U.S. announced it would do just that, TPP negotiations began. When the initial agreement was signed in 2016, it looked like their gambit had succeeded.

Although the U.S. will not participate in TPP for now, the project has reinvigorated interest in trade negotiations in the region. It has also enhanced the attractiveness of smaller trade partners—look to the EU negotiations with Asian and Australasian states as proof of that.

Moreover, decades of East and Southeast Asian initiatives for regional agreements coalesced in 2012 against the TPP backdrop in the negotiations for the Regional Comprehensive Economic Partnership between ASEAN and its PTA partners: China, Japan, Korea, India, Australia and New Zealand.

It remains unclear whether RCEP will conclude this year, but it has become the last remaining of the major mega-regional initiatives after the stalemates in TPP and the Transatlantic Trade Investment Partnership. Asia-Pacific states whose governments have committed to trade openness are keen to join this initiative in the absence of TPP.

Shifts in policies in the major economies will continue to affect smaller economies. However, smaller Asia-Pacific economies have shown they can exercise agency in their trade strategies, and retain and expand their attractiveness as trade partners.

The UK will shortly find itself thrust into a new world of free trade agreements and PTAs as it imagines life outside the EU. It might just be able to copy the blueprint of a flexible approach and a unique proposition to potential partners. But crucially, whether it can present itself as a non-threatening economic force is another matter entirely.

This piece first appeared on the World Economic Forum Agenda.

Maria Garcia

Senior Lecturer in International Relations at University of Bath

Prior to joining Bath in 2014, Maria was a Marie Curie International fellow at the NCRE, University of Canterbury (New Zealand) and the University of Nottingham. Her current projects include a book on the divergent free trade agreement strategies of large (China, U.S., EU) and small economies (Singapore, Chile, New Zealand) in Asia-Pacific and their effects on the development of future economic governance in the region.

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