A breakthrough for Asian integration?

Author: Peter Drysdale, Editor, East Asia Forum

There has been a surge of interest in the conclusion of mega-regional trade deals in the past few years. The United States, as part of its pivot to Asia strategy, pressed ahead with serious negotiation of the Trans-Pacific Partnership (TPP) in 2011 at the APEC Summit in Honolulu.

National leaders, including New Zealand Prime Minister John Key, Australian Prime Minister Julia Gillard and US President Barack Obama discuss the Trans-Pacific Partnership deal at a meeting in Phnom Penh, Cambodia, on 20 November 2012. (Photo: AAP)

The ASEAN+6 group of nations (ASEAN plus Australia, China, Japan, Korea, India and New Zealand) launched the Regional Comprehensive Economic Partnership (RCEP) negotiations in 2012. At the G8 Summit in Northern Ireland last week, the United States and Europe launched negotiation of the Transatlantic Trade and Investment Partnership (TTIP) deal, which is supposed to be completed by the end of next year.

One motive for these mega-regional negotiations is that the Doha Round of multilateral negotiations is yet to be brought to a conclusion. At the same time, bilateral preferential trade deals (so-called Free Trade Agreements) are increasingly seen as inadequate instruments for dealing with the new cross-regional and multilateral trade issues (including supporting the growth of production networks or international value chains). And geopolitical factors are driving the alignment of these new trade and investment groupings.

In Asia and the Pacific there appears to be an economic and geopolitical contest between the TPP (ordered around the United States and its agenda for economic engagement with Asia but excluding China) and RCEP (ordered around the ASEAN+ trade arrangements and China’s interest in regional integration but excluding the United States). How these arrangements evolve over time is another thing altogether, but it is clear that should either or any of them be put in place soon, it would prompt a major re-think of what to do in the WTO. Some see the RCEP and the TPP as a competition for a template for trade rules in the vacuum that the WTO has left. That is a priority issue for consideration by global leaders in the G20.

Whether these mega trade deals can be achieved on the schedules that have been announced or whether they will in the end fulfil the ambitions that have been claimed for them is quite problematic. The TPP has already missed two deadlines and is most probably going to miss its next (of October this year).

There is growing anxiety among the RCEP partners that the 2015 deadline is unrealistic and acknowledgement that the negotiations have so far gone virtually nowhere. There is a sense of despair about the negotiations and the unproductive way in which they are being pursued.

Jayant Menon’s lead essay this week puts the problem bluntly and correctly: ‘the RCEP faces some key challenges if it is to live up to its potential’. Menon worries about the ‘flexibility’ built into RCEP’s negotiating principles. ‘Flexibility could be a boon or bane for the RCEP’, Menon argues. ‘While it could help break deadlocks and protect disparate national interests, it could also limit change or curtail progress in achieving greater liberalisation. Indeed, there is much to negotiate — and many breakthroughs needed — if RCEP is to supersede existing agreements’.

‘The existing five ASEAN+1 and twenty three ratified bilateral FTAs vary greatly in terms of almost everything up for negotiation. One example is rules of origin (ROOs), which determine the country of origin of products and in turn their eligibility for preferential treatment in international trade. There are at least 22 different ROOs among ASEAN+1 FTAs, even after aggregating those that are similar but not the same. Only about 30 per cent of tariff lines across the ASEAN+1 FTAs share common ROOs. With bilateral agreements — the Japan–India FTA for instance — there are 12 types of ROOs, seven of which are unique from the ASEAN+1 FTAs. The sheer number of ROOs — and their lack of commonality across FTAs — will make the task of harmonising and consolidating them that much harder’.

If the RCEP is pursued like just another traditional FTA negotiation it is very likely to founder. There is now an intense awareness of the wrong-headedness of this way of thinking about RCEP in the region. The Economic Research Institute for ASEAN and East Asia (ERIA) recently convened an Experts Roundtable for all partner countries to reconsider the strategy for implementing RCEP (of which I was a member). Its report is due to be presented to ministers this month.

Currently, RCEP is being pursued in the same way as preferential trade agreements. The intended coverage is similar to so-called 21st century trade agreements, covering trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement and other issues. In many ways, RCEP seems to be modelled on the potential TPP that is being pursued by the United States and its partners. Indeed, RCEP is perceived by many as an alternative to the TPP project. In this view, both seek to create trading blocs that include economies accounting for a very significant share of global output and trade.

A more productive strategy is to see a streamlined trade agreement as one of the several steps that will be needed for an RCEP that embraces a more comprehensive program of regional economic integration and development. That would parallel the strategy for creating the ASEAN Economic Community (AEC). Upgrading of the ASEAN Free Trade Agreement (AFTA) of the 1990s to the more comprehensive ASEAN Trade In Goods Agreement (ATIGA) was one of the first steps taken to implement the AEC, alongside a broader program including work to implement the Master Plan for ASEAN Connectivity. Negotiating an innovative umbrella FTA among RCEP participants can be pursued in parallel with the many other steps needed to achieve deeper economic integration and development goals.

RCEP participants should not have to wait until a single undertaking on trade liberalisation by all participants and all new rules are agreed before taking up the other opportunities for beneficial economic integration.

Institutional support for the several dimensions of economic integration to be pursued under RCEP should be created as soon as possible. Working groups or commissions can be set up to do this. One of these could oversee the progress towards a trade agreement, with additional commissions focused on reaching targets set in plans to improve connectivity, regulatory reform, enhanced customs procedures, e-commerce and other essential dimensions of integration.

In this conception, the most effective strategy to achieve these ambitions on the timeline that has been determined will be a creative combination of agreed and binding targets for 2025; initial commitments (the down payment) negotiated by 2015; and thereafter the disciplined cooperation and negotiations to implement these targets by all members carried forward as from 2015. A strategy along these lines would address Menon’s worries that are widely shared across the region. It might also just deliver a major and successful mega-regional cooperation initiative and a significant innovation in the global trading system.

Peter Drysdale is Editor of the East Asia Forum.

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