AIIB miles ahead of TPP in promoting integration

Author: Andrew Elek, ANU

The Asian Infrastructure Investment Bank (AIIB) is a far more economically efficient option than the Trans-Pacific Partnership (TPP) for integrating Asian economies to each other and to the rest of the world. While the United States is attempting to thwart China’s AIIB by completing the TPP, it is likely to result in net costs to countries other than the US.

In 2015, very few products face significant transparent barriers — such as tariffs — when they cross international borders. The most important constraints to the flow of products along modern supply chains are due to weaknesses in transport and communications infrastructure. A 2013 study by the World Economic Forum found that supply chain barriers to international trade are far more significant impediments to trade than tariffs. Reducing supply chain barriers could increase world GDP over six times more than removing all tariffs.

This study confirms the experience of business people. For more than a decade they have urged governments to stop obsessing about traditional trade barriers that only affect some agricultural commodities and low-tech manufactures. Those managing ever-expanding supply chains want governments to shift attention to the widening gaps in Asia’s transport and communications infrastructure.

China’s AIIB initiative responds to these realities. It aims squarely at the real obstacles to economic integration. The new multilateral development bank will mobilise finance from international capital markets to reduce the vast gaps in economic infrastructure. It is a timely move to take advantage of the current low borrowing costs to invest in projects with potentially high economic returns.

With its vast current financial strength, China could have chosen to go it alone. Instead, it sought to draw in as many shareholders as possible to ensure that it is able to expand urgently needed investment as fast as possible. Drawing in other governments will also help the AIIB to draw on the expertise of existing multilateral development banks to acquire and sustain its own AAA rating.

The proposed TPP has a very different agenda. It comes from the United States Trade Representative, which responds to the wishes of its domestic business interests. The most widely publicised objective is to eliminate all remaining traditional trade barriers. Even such an impossibly ambitious trade deal would only add 0.5 per cent of income to the nations involved. Paul Krugman believes even that is an overestimate. And any actual TPP outcome will fall far short of fully eliminating all trade barriers.

There is a more important reason for the US push for the TPP. The US is seeking to impose rules that suit its economy on those that are very different. Much-leaked drafts for the TPP reveal many chapters defining new rules for issues such as intellectual property rights, labour and environmental standards, management of state-owned enterprises and many other matters.

But even if United States views were appropriate for 21st century commerce, they would not create any new trade. If accepted, they would impose costs on emerging economies, weakening their capacity to compete. In practice, if the TPP is signed, United States producers will be able to challenge and disrupt imports that they claim to contravene any of its rules. ANU economist Philippa Dee has argued that the TPP may lead to net costs, rather than benefits, for participants other than the United States.

The TPP is likely to be a multiplicity of bilateral preferential trade deals, adding new layers to rules of origin. It hopes to route supply chains around — rather than through — China, the largest trading partner of Asia Pacific economies. By contrast, the AIIB will finance infrastructure to facilitate the creation of essential new production networks. This is necessary as China’s labour costs will continue to rise and labour-intensive production will shift into other countries.

When the AIIB becomes operational in 2016 it will certainly boost much-needed economic infrastructure and integration in the region. The TPP is far less certain. Even if it is ever agreed upon, the deal will need ratification by the US Congress and many other legislatures and will not make a significant contribution to the market-driven integration of the region.

Andrew Elek is Research Associate at the Crawford School of Public Policy, Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.

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