Two visions for free trade in the Asia-Pacific

The race is on between the US and China to dominate the rules-setting game for trade by being the first to be able to announce plans for a free trade area in the Pacific Rim. China hopes to use its position as this year’s chair of the Asia-Pacific Economic Cooperation (APEC) forum to propose a feasibility study on a Free Trade Agreement for the Asia-Pacific (FTAAP), first mooted in 2006.  In other words, negotiations towards an FTAAP that would cover more than 60 percent of the world economy would commence, for all practical purposes.

But if the Trans Pacific Partnership (TPP) can be concluded, or substantial and credible progress demonstrated so that an impressive announcement can be made at the APEC meeting in Beijing in November 2014, the US would steal China’s thunder. If such an announcement is not forthcoming or not credible, China will likely announce a ‘Beijing Road Map’ for a free trade agreement (FTA) of the Pacific Rim, building on APEC rather than the TPP. Billions of dollars in trade are potentially at stake.

It will be difficult for leaders from the TPP countries to ignore a declaration endorsing a feasibility study for the FTAAP if they cannot offer an alternative.  Reports on whether the US has been able to dissuade China from floating the proposal have been mixed. The US has succeeded in leaving the door slightly ajar for the TPP to play a future role by blocking reference to a deadline for completion of the FTAAP, to have been set for 2025. ‎Although deadlines can be missed, as the TPP itself demonstrates, setting one implies it is not just a vision but a plan bounded by a timeframe.  The fear is that pursuing the FTAAP could derail the TPP by dispersing attention.

But will the FTAAP be any easier to conclude than the TPP? If too much diversity among its members (and therefore in in negotiating positions) is restricting progress in the TPP, then APEC will face an even greater challenge. APEC has more diversity than the TPP since it has an additional nine members.

But the large membership has its positives too.  APEC may be the more inclusive choice to build an agreement in the Asia-Pacific because unlike the TPP, APEC includes China, and, unlike the ASEAN+6 Regional Comprehensive Economic Partnership (RCEP), it also includes the US.

Although APEC’s membership is diverse, it does currently exclude a few RCEP countries that may not be fully prepared for the kind of reforms proposed. Among those excluded are India, a country that may single-handedly derail the WTO’ Trade Facilitation Agreement, and the newest members of ASEAN — Cambodia, Laos and Myanmar — which are already struggling to implement the five ASEAN+1 FTAs, among others. But engaging countries like Russia and Papua New Guinea brings its own challenges, not to mention dealing with Sino-Japanese or US-Russian tensions, or those relating to member countries in dispute over territory in the South China Sea. To illustrate the extent of the problem, it remains unclear if the leaders of China and Japan will meet directly in a bilateral meeting even days before the Leaders’ Summit is to commence.

But APEC’s goals are also not as elusive as the high standards set by the TPP. To some extent, the less ambitious nature of the proposal may offset the constraint imposed by greater diversity in membership.

Given the way that the TPP negotiations have struggled — and based on the information exposed by WikiLeaks — it appears that if the TPP is to be concluded anytime soon, it will likely be in a highly compromised form (Menon 2014a). If so, can it still form the basis of a Pacific Rim agreement? It boils down to a question of credibility, a bit too much of which may have been eroded in the eagerness to reach an apparently premature conclusion.  The improved prospects of President Obama receiving fast-track or trade promotion authority (TPA) from a Republican-controlled Senate will help but it is unlikely to make a big difference now.  TPA may be a necessary condition for the TPP to have any chance of being concluded, but it is certainly not sufficient.

What then can we expect?

APEC and its Beijing Road Map appears most likely, assuming that the report in the Wall Street Journal on 2 November (Davis 2014) suggesting China has been bullied into junking the proposal is misguided. Although APEC’s achievements since its inception in 1989 may be modest, its approach is generally viewed as being consistent with, if not mutually reinforcing of, the multilateral system and the WTO. This is mainly through its support for non-binding, unilateral actions in implementing its action plans. Although this approach has flexibility as its greatest appeal, the temptation of a free ride needs to be resisted.  With this approach, it is all about the carrot — there is no stick.

An FTA for the Asia-Pacific, whether steered by the US or China, cannot be the end-game though. It would still mean a world trade system that is fragmented: the TPP, FTAAP, or RCEP would merely be the largest of the fragments. And then we have the European Union of course, and possibly its Trans-Atlantic Trade and Investment Partnership (T-TIP) with the US, the African Economic Community, the Pacific Alliance and many other independent or overlapping fragments scattered throughout the trade landscape. In a presumed best case scenario, where all of these pacts are concluded as intended, success paints a rather ugly picture, characterised by an unsustainable amount of disorder and incoherence.

Multilateralising the results

Looking forward, and short of resurrecting and reforming the WTO (Baldwin 2013), unilaterally multilateralising the preferences of the FTAAP and the many other FTAs is the only way to address the growing distortions and fragmentation. In a sense, it would involve moving towards the FTAAP by continuing the process preferred by APEC of joint but non-binding unilateral actions.

In Asia for instance, we find that more than three-quarters of imports of most of the RCEP countries are already covered or about to be covered by an FTA (Menon 2014b). Therefore, there is little point in holding out to negotiate reciprocity with a residual number of countries accounting for a very small share of trade. The benefits of multilateralisation also greatly outweigh those of reciprocity when preference utilisation is low, as it is in Asia (Menon 2014c). And this is before accounting for the administrative costs, sometimes crippling in the poorer countries, of administering multiple FTAs and their various rules of origin.

Conclusion

Since almost two-thirds of all trade liberalisation to date has come from unilateral action (World Bank 2005), the ‘multilateralisation via unilateralism’ approach offers hope. The political economy suggests that the resistance from FTA partners towards multilateralisation decreases as the number of FTAs increase, due to preference erosion (WTO 2011). It is not only the sensible way forward, but a practical one too.

Author’s note: The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, its Board of Governors or the governments they represent.

References

Baldwin, R. (2013), “WTO 2.0: Thinking ahead on global trade governance“, VoxEU, 22 December.

Davis, B. (2014), “U.S. Blocks China Efforts to Promote Asia Trade Pact“, Wall Street Journal,  2 November.

Menon, J. (2014a), “TPPing Over?” VoxEU, 1 July.

Menon, J. (2014b), “From Spaghetti Bowl to Jigsaw Puzzle? Fixing the Mess in Regional and Global Trade“, Asia & the Pacific Policy Studies 1(3), pp. 470-83.

Menon, Jayant (2014b), “Multilateralization of Preferences versus Reciprocity when FTAs are Underutilized“, The World Economy 37, pp. 1348-66.

World Bank (2005), Global Economic Prospects: Trade, Regionalism, and Development,Washington, D.C.: World Bank.

WTO (2011), World Trade Report 2011. Geneva: WTO.

Published in collaboration with VoxEU

Author: Jayant Menon is the Lead Economist at the Office for Regional Economic Integration at the Asian Development Bank

Image:  A man talks on a mobile phone near the Pudong financial district in Shanghai July 17, 2014. REUTERS/Carlos Barria