Nepal, SAsia could benefit from protectionist US policies: WB

April 19, 2017

The Kathmandu Post, 19th April 2017, Post Report, Kathmandu

US President Donald Trump has often become a target of ire for his controversial policy statements. But South Asia, including Nepal, may find a reason to cheer if he sticks to his campaign promise of withdrawing the US from two major free-trade pacts--referred to as TPP and TTIP--and imposing high tariff on goods imported from China and Mexico.

This is because stalling negotiations of TPP and TTIP, and higher US protection against China and Mexico would be favourable for South Asia, including Nepal, says the latest edition of the twice-a-year South Asia Economic Focus published recently by the World Bank (WB).

The TPP, or Trans-Pacific Partnership, is a free-trade agreement covering 12 countries--Japan, the US, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The TTIP, or Trans-Atlantic Trade and Investment Partnership, on the other hand, is a trade and investment agreement between the US and the European Union (EU).

The TPP aims to create a free-trade zone across 12 countries in the Pacific Rim with common labour and environmental standards. It also aims to protect data and intellectual property of large companies. The TTIP, meanwhile, is aimed at lowering trade tariffs and removing various trade barriers. Trump has openly expressed his dislike for both the deals, citing they would hit American workers and pose threat to US companies.

The TPP and the TTIP have basically been designed to provide tariff-free access to member countries of the two groupings. This would create an uneven playing field for South Asian countries that are not parties to these agreements and thus reduce their competitiveness.

“From TPP alone, exports of textiles and clothing from Vietnam--a major competitor for South Asian countries--would have increased by about 40 percent, mostly due to the implied zero-tariff access to the US market,” says the World Bank report titled ‘Globalisation Backlash’. This would cause “large losses to exports of textiles and clothing from Nepal and Bangladesh”, adds the report. “But if TPP and TTIP do not go through, the predicted negative impacts on South Asia would not materialise.”

The US is key export market for many South Asian countries, including Nepal. For instance, the top export destination for Bangladesh, India, Pakistan and Sri Lanka is the US. For Nepal, the US is the second most important export destination after India. The dependence of South Asian countries on the US, in terms of exports, means these nations would gain if the world’s largest economy raises tariffs on goods imported from China and Mexico. Trump, during election campaigns, had promised to slap tariffs of up to 45pc on Chinese imports, and introduce similar provisions to make Mexican exports to the US expensive, citing cheap goods flooding into the country were  not only eroding competitiveness of American firms but compelling US companies to relocate their production bases to foreign countries.

Against this backdrop, if the US raises tariffs for imports from China and Mexico by 10 percentage points, exports of these two countries to the US would reduce by 35 percent and 25 percent, respectively, says the World Bank report, adding, “South Asian countries would be able to scale up their exports to the US as a result.” Ironically, higher US protection across the board would also have small effect on South Asia.

The scenario considered by the World Bank here is an increase of US tariffs on imports from all countries in the world by 5 percentage points.

In this trade destruction scenario, exports from China and Mexico to the US would decline more sharply than exports from South Asia, says the report.

This means, both the sides would suffer, but “by how much depends again on how elastic or inelastic domestic supply is”. “In the worst case, exports from South Asian countries to the US would decline by 4 to 5 percent. But even in the worst case, total exports would fall by less than 1 percent,” adds the report.

These numerical simulations suggest that South Asia would not have much to lose from a rise in protectionism.

“Countries in South Asia would also stand to gain in a trade diversion [a larger hike in tariffs against China and Mexico only] scenario, and would not lose much in a trade destruction [a relatively small hike in US tariffs across the board] scenario, provided that the rise in trade barriers is not too steep.