First posted on:
The Asan forum, 23 August 2018
With the long-standing failure of multilateral negotiations in the WTO and the recent US retreat to economic nationalism and ‘America First’, Asian trade and investment liberalisation and regional integration are increasingly where the action is for global economic advances. This reality is illustrated by three moving targets: the completion and expansion of the Comprehensive Trans-Pacific Partnership agreement (CPTPP); the determination by member states to complete this year negotiations for the Regional Comprehensive Economic Partnership (RCEP) agreement; and the rise of new, advanced bilateral trade agreements, particularly between Asian and non-Asian economies. Because today’s trading world is built upon the internet and supply chains, the two regional agreements cited above (though quite different in depth) will yield much greater economic benefits for their members than multiple bilateral pacts – including those that may be offered by the US.
Before analysing the three regional movements, there are also important subthemes that are vital to underscore. First, with regard to CPTPP, Japan’s leadership has been a paramount – and unprecedented – phenomenon in the successful negotiation and ratification of the original TPP by the eleven member states after the US withdrawal from the pact. Prime Minister Abe Shinzo stepped forward and became an indefatigable advocate of the rump agreement, both publicly and behind the scenes, coaxing initially sceptical members such as Canada and Vietnam. In trade negotiations since WWII, Japan played the role of supporter and follower (sometimes reluctantly) of efforts to advance regional and global trade and investment liberalisation. In this instance however, Abe become the driving force for the CPTPP.
Conversely, and also in unprecedented fashion, the US is conspicuously absent from major calculations regarding future East Asian integration plans. Having foolishly dropped out of the TPP, the Trump administration – though claiming to be pursuing bilateral alternatives to regional initiatives – thus far has been unable to persuade any Asian nation to begin such negotiations. At the recent ASEAN ministers’ conference, US Secretary of State Mike Pompeo (while announcing a pathetically small US development fund ($113 million) for Southeast Asia, still laid out only vague plans for further US trade initiatives.
The US foundering leads to a third starting point to note and explain: why the Trump administration’s concept of an “Indo-Pacific strategy” will not be discussed in detail. Put bluntly and succinctly, the argument here is that this is a concept in search of substance either in economic or strategic terms. As such, it betokens the Trump administration’s fitful search for an Asian regional strategy after its summary withdrawal from the TPP, the most viable and visible vehicle for projecting US leadership in Asia. (To be fair, the Obama administration also occasionally used the term, with equally fuzzy details.) This is not to ignore that there are large and fast-growing economic and some investment crossties between East Asia and the nations surrounding the Indian Ocean. But beyond some recent bilateral ties and shallow economic agreements, there are no prospects for true regional economic or security architecture. A concept that runs from China and Japan in the east, through Singapore, Australia and Malaysia in the middle, to Bangladesh, India, Sri Lanka, Pakistan in the west dissolves into incoherence when it is buttressed with so few policy clarifications and so qualified international support.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership
Concluded in 2015, the CPTPP remains the most advanced trade agreement among major trading nations. In addition to lowering or eliminating thousands of tariffs, the CPTPP is most forward-looking in reducing non-tariff barriers in services, investment, agriculture, food and chemical safety regulations, and public government procurement. Uniquely, the CPTPP includes digital trade rules that provide for free data flows and restrict data localisation. And for the first time, rules are set forth to begin to limit the anti-competitive activities of state-owned-enterprises. Though some 20 provisions (largely related to intellectual property) were put on hold after the US left, no section from the original agreement was deleted. Even without the US, the combined GDPs of the eleven nations constitute almost 14% of the world’s GDP. Recent economic analysis has concluded that incomes in CPTPP countries will be $157 billion higher than before enacting the CPTPP liberalisation.
Further, the CPTPP provides a route to expand this particular model beyond Asia, in that the agreement already includes non-Asian nations such as Chile, Peru, Mexico, and Canada. In addition to Asian countries such as Thailand, the Philippines, and South Korea, non-Asian economies such as the UK, Colombia, and Costa Rica have expressed a desire to join.
The Regional Comprehensive Economic Partnership
Negotiations for the RCEP were launched in 2012 on the sidelines of the East Asia Summit in Cambodia. The agreement includes the ten nations of ASEAN, plus China, India, Japan, Australia, New Zealand, and South Korea. Together, these nations comprise almost half of the world’s population and some 30% of world GDP. In contrast (relative) to the TPP, RCEP’s member states include huge disparities in their level of development and per capita income – from very high-income nations such as Japan, Australia, and New Zealand down to very low-income nations such as Laos and Cambodia. Given this reality, from the outset, the negotiating rules dictated differing levels of standards, and varying timetables for market access openings and compliance with regulations and rules adopted during RCEP negotiations.
Politically, while China is not dictating the terms of the agreement, Beijing has been a central force in pushing for a successful conclusion of the pact. This was particularly true from 2012 to early 2017 when the US withdrew from the TPP; but even subsequently, China views RCEP – built upon substantive provisions with which it is comfortable – as central to its vision of an East Asian regional economic architecture. RCEP, however, is actually building upon the centrality of ASEAN, and the trade obligations among ASEAN member states-and upon ASEAN Plus 1 free trade agreements. As noted above, negotiating dynamics are impacted by the disparities in development levels, but there are also other forces. For instance, it is natural that those countries that are already members of the TPP would press for the most liberal trade terms; conversely, India, which has traditionally been a reluctant trade and investment liberaliser, has often joined less-developed ASEAN nations in holding back from leaps into market openings.
Since 2012, there have been some 22 negotiating sessions. At one point a deadline was set for the end of 2016. That proved impossible to meet, so now more urgently, the 16 nations are attempting to conclude a final pact by the end of this year. At this point, very few of the 22 chapters are complete and closed. What follows is a rundown on what is known from public sources and various leaks to the media.
On goods, because there seemed to be no prospect for across-the-board reductions in many tariff lines, bilateral negotiations are now in process, as is the case with key agricultural issues. There is still hope that in the end meaningful reductions in overall tariff averages will emerge, possibly up to 90% of tariff lines at zero – but with substantial national exceptions in key sectors. To achieve this, it will also be necessary to allow long timelines. In this area, India continues to be the outlier, both because it has always protected its manufacturing and agricultural sectors, and because it fears being swamped by Chinese goods. Overall, it has held out for key exceptions and for an overall rate of only 80% zero tariffs.
On services, again a split will likely occur, with the TPP members adhering to their negative list by sector (liberalisation unless specifically excepted). Other RCEP members are still negotiating on sectoral openings, though observers state that many offers are better than existing service obligations. For India, there is a trade-off here: it is pressing for greater services liberalization, particularly in information services where it has a strong competitive advantage. With regard to investment and trade facilitation (customs clearance), there are good prospects for important liberalisation advances. On investment, ASEAN nations for several decades have been eager participants in global supply chains, with concomitant, relatively open investment regimes.
RCEP will include chapters covering dispute settlement, standards, development, and small and medium-sized enterprises. There are three areas where little advance is likely: e-commerce and digital trade (data flows), state-owned-enterprises, and some areas of intellectual property. China will likely block advances toward CPTPP on SOEs and data flows, and India likewise has deep reservations about certain aspects of IP rules and on free data flows. Close observers of the negotiations are optimistic that a set of compromises will be reached by the end of 2018, or early in 2019. While the final outcome of the negotiations cannot be known at this point, signs point to a complex agreement that will move beyond RCEP members’ existing liberalization obligations, but well short of the standards set in the CPTPP.
Bilateral free trade agreements
Nations in Asia have been quite active in negotiating bilateral FTAs, both with nations within and outside the region. There are some 150 FTAs negotiated by Asian nations, about half with economies outside of the region. Many of the earlier agreements ae shallow, covering only some goods and a smattering of service sectors. A number of Asian countries, however, are in the process of upgrading existing these existing FTAs. For this commentary, this section is meant to illustrate a simple point: that with the US withdrawal from the TPP, newer bilateral FTAs are leaving the US behind and subject to substantial discrimination. For instance, as a result of the recent EU-Japan FTA, US agricultural goods, including beef, will receive less favourable treatment in the Japanese market. Similarly, Australia received more favourable treatment from Japan on meat products in its recent FTA with Japan. Other examples of recent, more advanced, though still limited, FTAs, include the Australia-Indonesia FTA, and the Canada-Vietnam FTA.
Outside of Asia, the EU and Mercosur (Brazil, Argentina, Uruguay, and Paraguay) have doubled down on negotiations to complete a long-promised FTA, which if completed, will result in significant discrimination against US manufacturing and agricultural products. Having removed itself from the TPP in Asia, and failing to move forward with promised, if inefficient, bilateral FTAs, the Trump administration is finding itself excluded from trade concessions not only in Asia but also around the entire trading world.
Priorities going forward
Looking ahead, it must be assumed that the Trump administration will not change its negative view of regional trade agreements in Asia (though in contradiction, Trump has talked favourably of reviving the US-EU trade pact talks). Whatever the future erratic follies of the president and his team, the view espoused here is that East Asia should continue efforts to increase regional trade and investment liberalisation through all available channels.
With the vehicle for the deepest East Asian integration, once the requisite number of members have formally ratified the agreement, CPTPP nations should move quickly to add additional nations, both within Asia and beyond, through the carefully constructed CPTPP accessions process. South Korea should be a top priority. Though South Korea pressed to join the original TPP, recently the Moon administration has reacted coolly to suggestions to join the CPTTP with dispatch. Apparently, old economic fears regarding competition with Japan have resurfaced.
This reticence is misguided for two reasons. First, in the decision to apply for membership in the original TPP, South Korea had already taken into account the competitive pressures that would ensue from lower barriers with both the US and Japan. While Japan’s economy will present challenges, many South Korean manufacturing sectors – particularly in advanced electronics – have come of age and can compete on a level-playing field. Further, and more important, South Korea should look beyond the immediate impact of the CPTPP and focus on the much larger implications of a regional architecture based upon the advanced principles and rules in the CPTPP – not least with its groundbreaking e-commerce provisions.
Beyond the future of the CPTPP, hopefully RCEP nations will be able to reach agreement over the next few months on at least a modest set of advances in market access and new rules for services, investment, and other nontariff barriers. RCEP, which includes more nations than the CPTPP at present, can provide a complementary path toward free trade for less-developed East Asian nations.
Finally, there is one other bilateral trade issue looming: US pressure on Japan to form a separate bilateral FTA independent of both the CPTPP and RCEP. Assuming the Trump administration persists, the proposal presents a difficult dilemma. On the one hand, a successful bilateral agreement between two major trading nations such as the US and Japan would have both symbolic and practical positive impact on a beleaguered world trading system. On the other hand, it would further fractionalise markets, adding to the ‘spaghetti bowl’ effect. In addition, given the record of Trump administration’s protectionist demands on South Korea, Canada, and Mexico, it is possible that retrograde elements in such an agreement would predominate. Japan’s best course, then, is to resist a separate deal. As a possible compromise, Japan has suggested that the US accept the terms of the CPTPP as the basis for a bilateral FTA. If forced to negotiate with the US, Japan should stick with this proposal.
As is evident from the above analysis, East Asian regional integration and further trade liberalization represents the cutting edge of advances toward a 21st century trade regime. Hopefully, though a variety of negotiating venues, it will become a model for other regions, for the multilateral trading system, and for the future of global trade.