TPP trade deal is a threat to Asean economic integration

In short, it was created to achieve economic integration in Southeast Asia.

At the same time, nearly three months before the AEC’s launch, 12 Asia-Pacific countries concluded negotiations on the Trans-Pacific Partnership (TPP). Among the 12 are four Asean members: Brunei, Malaysia, Singapore and Vietnam. 

The inclusion of some Asean members in the TPP and the exclusion of the rest has three potentially disruptive effects on Asean economic integration:

1. Trade and investment diversion.

2. Increasing gaps between countries. 

3. Growing negative sentiment among Asean leaders.

The first of these disruptions occurs when trade and investment move away from one country to another as a result of trade agreements. 

In Asean’s case, trade and investment could be diverted away from non-members and towards members of the TPP. This is because the TPP offers benefits to its members, such as lower trade barriers and better protection for foreign investors.

Trade and investment diversion caused by the TPP is a significant issue because the US, Japan and Australia – all TPP members – are among the top 10 trading partners of Asean.

Together they accounted for US$511 million in trade, 20.2 per cent of total Asean trade in 2014 – only a little less than intra-Asean trade, at 24 per cent.

As for foreign direct investment (FDI), the US, Japan, Australia and Canada are among the top 10 sources of FDI inflow to Asean. Together they accounted for $33.3 million, or 24.5 per cent of total FDI in Asean in 2014 – higher than intra-Asean FDI at 17.9 per cent.

From the perspective of regional integration, trade and investment diversion is a direct attack against one of the AEC’s most important characteristics: a single market and production base.

As for the second disruptive effect, economic disparities between Asean countries have been huge from the beginning. Asean consists of member-countries with populations as large as Indonesia (252 million) and as small as Brunei (413,000), gross domestic product (GDP) as high as Indonesia (US$984 billion) and as low as Laos ($12 billion), GDP per capita as high as Singapore ($56,000) and as low as Cambodia ($1,000), international merchandise trade volumes as high as Singapore ($776 billion) and as low as Laos ($5 billion) and FDI inflow as high as Singapore ($72 billion) and as low as Brunei ($568 million).

The TPP will potentially further widen the already-existing gaps between Asean countries because Southeast Asia’s TPP members will likely improve in those indicators at the expense of other members. Additionally, the TPP will also potentially increase gaps in economic management. 

Due to the high standards required by the TPP, its Asean members will be motivated to enhance their economic management capacities (better rules and regulations, more efficient production, and so forth). 

Those countries will allocate more resources to do so because, unlike non-TPP Asean members, they have incentives to do so.

One reason for the AEC’s creation was to avoid some Asean countries pursuing their own economic agendas in the region at the expense of the other members. Thus, the AEC seeks to strengthen trade and investment links with non-Asean countries through a unified, coherent approach. 

Rather than acting individually, Asean countries agree to collectively negotiate with other countries under the direction of regional unity.

However, the TPP is destroying that harmony by splitting Asean into two categories: TPP members and non-TPP members. The division could revive the old fear that some Asean members will pursue individual economic interests at the expense of region-wide collective economic interests. 

For example, at the Asia-Pacific World Economic Forum held in Jakarta last April, Cambodian Prime Minister Hun Sen said: “We should review again … why the Trans-Pacific Partnership did not include [all] 10 Asean members. What is the purpose, real intention of establishing [the] Trans-Pacific Partnership … that they include half of Asean to be partners … leaving half of Asean outside?”

His words echoed an earlier statement by Philippines’ Finance Secretary Cesar Purisima: “If there’s a lag between the joining of the others in a high-quality agreement such as TPP, there can be resentment, especially as we continue to integrate.” 

The growing concern among Asean leaders sends an alarming signal that the project to integrate Southeast Asia’s economies is in danger.