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Mega pacts and the fight for Asia's trade future

Dec 18. 2014
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By Fiona Chan
The Straits Times

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China and the US battle for influence while political tensions between East Asian giants add more obstacles to future prosperity
As Christmas approaches, Southeast Asia’s trade negotiators look set to end another year without the top item on their wish-list: a resolution to the Trans-Pacific Partnership (TPP).
The ambitious free trade agreement (FTA), which seeks to break new ground in removing trade barriers among 12 Asia-Pacific nations, has already missed several deadlines starting from last year.
Each delay is rooted in the same reasons. The United States and Japan, the two biggest economies in the deal, are still quibbling over opening up their industries to more foreign competition.
Other sticking points in the TPP talks, which began in March 2010, include how to deal with 21st-century trade issues such as intellectual property protection and state-owned firms.
But, this time, the stakes for the TPP’s completion are higher.
Other mega Asia-Pacific trade pacts have started to gain momentum in recent months, propelled by major economic players that are not part of the US-led TPP – notably China.
One such parallel deal is the Regional Comprehensive Economic Partnership (RCEP), which covers all 10 Asean nations plus the bloc’s six FTA partners of China, India, Japan, South Korea, Australia and New Zealand.
When RCEP talks are completed by the end of next year – a commitment the 16 countries reiterated in August – it will be the world’s largest FTA, although not nearly as in-depth as the TPP.
Then there is the Free Trade Area of the Asia-Pacific (FTAAP), a mammoth arrangement that was first mooted in 2004, but that China finally lifted out of limbo during last month’s Asia-Pacific Economic Cooperation (Apec) summit in Beijing.
Making the FTAAP the centrepiece of its summit agenda, Beijing persuaded the 21 Apec leaders to commission a “strategic study” into the trade deal – a move China’s president Xi Jinping said symbolised the “official launch of the process towards the FTAAP”.
Rivals for the prize
Depending on which agreement prevails, trade in fast-growing Asia could flow in different directions, bringing with it the power to shape economic agendas in the region.
The US is well aware of the stakes. It has recently been supplanted by China as the main trading partner of many Asian countries – last year, the US bought only 14.2 per cent of Asia’s merchandise exports, down from 23.7 per cent in 2000, according to Asian Development Bank data.
That may be why Washington is trying to quash Beijing’s attempts at kick-starting the FTAAP and to refocus attention on the TPP, the economic cornerstone of its rebalance towards Asia.
The US reportedly pushed back on China’s original draft of the Apec communique that called for a “feasibility study” into the FTAAP – which would have implied the start of negotiations.
It also managed to prevent Beijing from setting a 2025 deadline for the FTAAP. The final communique states only a meek timeframe of 2016 for the completion of the strategic study.
On its part, Beijing is pushing hard for the FTAAP, in what some say is an effort to extend its influence in the Pacific Rim and counterbalance the bigger role the US is likely to play in the region once the TPP is a done deal.
To a smaller extent, China is also seen as one of the lead drivers of the RCEP, alongside Asean.
While all three trade pacts will enlarge the region’s economy, they involve different countries and represent varying benefits to each, which is likely to translate into different levels of motivation for them to conclude each deal.
China, Indonesia and South Korea are among those in the RCEP and FTAAP but not the TPP. The United States and Canada are in the TPP and FTAAP but not the RCEP. India is in the RCEP but not the other two.
Only seven countries are included in all three agreements: Singapore, Australia, Brunei, Japan, Malaysia, New Zealand and Vietnam.
Even then, countries like Japan and Vietnam are more likely to see immediate gains from the TPP than the RCEP, since they do not have an existing FTA with the US.
The US also stands to reap the most benefits from the TPP, since its intellectual property provisions offer the greatest perks for US companies, says Jayant Menon from the Asian Development Bank Institute.
“But the region as a whole will gain the most from an agreement that includes all of the key players, such as the FTAAP.”
Experts see it as unlikely that the TPP and RCEP will ever merge, given that the former holds all countries to the same ambitious standards while the latter allows special treatment for developing country members.
“The TPP can be broader and deeper in part because it’s a voluntary agreement – members choose to join,” says Deborah Elms, executive director of the Singapore-based Asian Trade Centre.
“The RCEP countries got ‘drafted’ by virtue of existing agreements. They therefore have differing levels of enthusiasm for the whole exercise.”
Assembling the puzzle
An alternative version of events, however, frames the spaghetti bowl of Asia-Pacific trade deals as a jigsaw puzzle, with the different trade deals eventually expanding or being combined to encompass the whole region.
In this scenario of a region-wide FTA, there are two possibilities. The first is that the TPP and the RCEP develop in parallel towards an overarching FTAAP.
If successful, the FTAAP would be by far the largest FTA in the Asia-Pacific region, covering all TPP members and the world’s three largest economies of China, the US and Japan.
One oft-cited study published in May by the East-West Centre, a US-based institution promoting diplomacy in the Asia-Pacific region, has estimated that the economic gains from a concluded FTAAP could reach nearly US$2 trillion, adding 2 per cent to the global economy.
This would be more than eight times the $223-million boost from the TPP, and about three times the RCEP’s $644-million estimated gain.
But even if the FTAAP fails to materialise, a second region-wide FTA is possible. This would entail expanding the TPP to include other countries that have expressed some interest to join.
Thailand and the TPP
The addition of China, Indonesia, South Korea, the Philippines and Thailand to the TPP could boost its projected gains to more than $1.9 trillion, nearly equal the gains from the FTAAP, the East-West Centre study showed. These countries are now excluded from the TPP not due to economic rivalries, but because they are reluctant or unprepared to meet the high standards of the “21st-century” pact, which aims to blaze a trail for the next generation of FTAs.
Elms is among those who expect China to eventually join the TPP. “Chinese firms are increasingly in supply chains and not just as a final assembly point. The benefits for firms inside the TPP will be substantial,” she says. But Menon believes the FTAAP is a more likely route than an expanded TPP.
“It is difficult to imagine conditions under which China may join the TPP, if and when it is concluded, or indeed the US coming into RCEP,” he says, noting that new entrants have to accept the terms agreed to by existing members.
“It would be easier to start from scratch, and the FTAAP provides one such opportunity.”
Dr Mireya Solis of the Brookings Institution adds that entry into the TPP would not grant China the same clout as spearheading its own initiative like the FTAAP.
“China would have to abide by disciplines negotiated by others and would have to make significant concessions to ensure its accession,” she noted in a commentary last month.
Still, any expansion of the TPP or convergence of the existing mega trade agreements will have to overcome a few obstacles.
One is the disparity in economic development between different Asia-Pacific countries, which will make it difficult to implement a one-size-fits-all FTA. A way around this could be a step-up FTA, where the least developed economies initially achieve RCEP standards, with a view to eventually meeting FTAAP and then TPP requirements.
Another, perhaps more crucial, hurdle is the political conflict between major economies – not just between the US and China, but also among the East Asian powers of China, Japan and South Korea.
That will be trickier to negotiate. But concluding each individual mega trade pact, which should continue to be the focus for now, would provide some practice and perhaps give the countries in question a preview of the benefits they can expect if they set aside their differences.

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