Asia Needs TPP to Spur Reforms; With Asia in a rut, forcing state-owned enterprises to compete would drive growth

Asia Needs TPP to Spur Reforms

With Asia in a rut, forcing state-owned enterprises to compete would drive growth.

FREDERIC NEUMANN AND IZUMI DEVALIER

Dec. 12, 2013 12:21 p.m. ET

Another round of talks for the Trans-Pacific Partnership, another failure to reach a deal. Negotiators meeting in Singapore this week emerged having missed a year-end deadline to conclude a high-quality multilateral trade agreement. What exactly held things up is not entirely clear since the discussions are held in secret. But with each passing month it becomes more important to conclude TPP.The TPP is billed as a trade agreement for the 21st century, reaching well beyond tariffs and addressing issues such as intellectual property protection, government procurement, and cross-border investment rules. The 12 participants produce 40% of world GDP and conduct 30% of global trade; easing the flow of goods and investment capital between them is bound to boost prosperity.

But the real value of TPP lies in strengthening the hand of reformers in Asia. The agreement will expose sheltered domestic markets to greater competition, weaning signatories such as Japan, Vietnam and Malaysia off debt-fueled growth and spurring badly needed advances in productivity. The reforms these economies need often flounder on the opposition of vested interests when governments attempt them in isolation. But if leaders can present difficult reforms as part of a broader, pro-growth strategy—and point to an international agreement as a reason why failure to reform is not an option—they stand a better chance.

The strategy has worked before. Reforms required for China’s World Trade Organization accession in 2001 ultimately laid the groundwork for soaring growth over the subsequent decade. At the time, Chinese Premier Zhu Rongji pursued a liberalizing agenda, using the negotiations to force through necessary changes, such as a restructuring of bloated state-owned industries.

With Asia stuck in a reform rut, TPP offers similar benefits. Take state-owned enterprises, which often enjoy subsidies, cheap financing, trade protection and preferential government procurement. SOEs are a drag on growth. In Vietnam, they account for 40% of output and have an even greater hold over key industries such as transportation and telecommunications. Public firms in Vietnam need more than three times the amount of capital than private companies to generate revenue. In Malaysia, by some estimates, government-linked companies account for half of the country’s stock market capitalization.

TPP could address this problem. Although the deal won’t outright require privatization of SOEs, it appears negotiators want to set certain rules for the funding and regulation of state firms, aiming to create a more level playing field for private companies both foreign and domestic in ways that would eventually require SOE reform. This would yield a big growth boost, since the Asian Development Bank has estimated that private investment suffers when state firms are dominant, restraining overall productivity growth.

One of TPP’s biggest benefits would be to stimulate productivity gains in services. The ADB calculates that in most Asian countries, labor productivity in service industries is less than one-fifth the level of developed OECD economies. This is largely because services protectionism spares Asian firms from competition. Average tariff rates run at five times the level of the European Union and U.S. in the case of Malaysia. They are similarly high in Australia, Japan and potential signatory South Korea.

TPP would cut tariffs and include ambitious rules on market access for services and investment. This would at last force changes. Already in Japan, productivity at foreign firms is about 10% higher than at their domestic counterparts. TPP would bring more such gains to all the participants.

Although TPP is a game changer for Asia, there are still some caveats. Two elephants—China and India—are absent from the arrangement. Korea and Taiwan are on the fence. Indonesia, Thailand and the Philippines are watching with curiosity from the sidelines. And there is a danger that, as ambitious as TPP already is, some participants may overreach in ways that could kill a deal. Some politicians in the U.S. have advocated including a provision against currency manipulation that would be a poison pill, as well as unenforceable if it were implemented.

Still, in addition to its own benefits, TPP is stimulating other efforts to boost trade. Seized by the worry that its influence is being eroded by growing regionalism, the WTO last week struck its first deal in years, to reduce customs red tape. The successful implementation of TPP could spur further arrangements and help expedite the ultimate prize—a vast Asia-Pacific free trade zone that includes China.

The proposal, once mere pie in the sky, may not be that far off. China’s stance toward the TPP has recently thawed. The country faces its own need for reforms. Many of the disciplines covered by TPP—pruning the role of SOEs in the economy, liberalizing services, enforcing stricter safety standards, supporting small firms and environmental protection—align with the interests of China’s new leaders.

Negotiators will return to the table in the new year, and with luck they will at last reach a deal. TPP is too important—for everyone involved—for delays to drag on any longer.

Mr. Neumann is co-head of Asian economics research at HSBC, where Ms. Devalier is Japan economist.