Looking to the future, institutions are of increasing significance for taking up at least three roles: governing efficient global value chains, meeting the challenges of returning G20 growth to its long-term potential, and addressing climate change.
Global value chains have become significant drivers of integration, relying on institutions and policies to reduce trade costs, facilitate investment, and encourage efficient and competitive services industries. Asia’s governments are cooperating to remove barriers to trade in goods, services and investment flows, and to provide financial oversight. Establishing a secure and predictable environment for investment has gained importance as Asian economies have become significant outward investors. Cooperative trade institutions were only created in the early 1990s, when the ASEAN free trade area was negotiated. The free trade area has since become a pillar of the ASEAN Economic Community Blueprint for a single market and production base to be negotiated by 2015.
Much progress has been made on removing tariffs on goods and reducing trade costs. But there has been less action to remove restrictions on services trade and investment, achieve mutual recognition of credentials, harmonise standards and implement infrastructure agreements. Nervous neighbours are accelerating the formation of collective economic and security institutions to engage China as the region’s largest economy. A complex network of bilateral free trade agreements now criss-crosses the region. By 2013 governments and ASEAN had completed 76 agreements, with more in the works. Many are complex and difficult for enterprises to understand, raising questions about the net benefits to enterprises.
The scope of trade agreements is also changing. Previously subregional agreements were confined to reducing tariffs on goods, but these barriers are shrinking in importance in modern agreements, which aim to free up investment flows and services in global value chains. Consensus is also emerging that the largest gains from trade are to be found in region-wide or trans-Pacific agreements and institutions. ASEAN’s Regional Comprehensive Economic Partnership (RCEP) aims to complete negotiations among ASEAN and six other countries by 2015 and intends to harmonise the maze of differing rules of origin for goods, expand trade in services and investment, and promote economic and technical cooperation.
It remains to be seen whether such ambitious targets will be met. It has proved difficult to maintain the commitment to a comprehensive high-quality 21st century agreement among the 12 parties negotiating the Trans-Pacific Partnership (TPP). While members have met the bar for admission — willingness to negotiate such issues as services, investment and competition policy — the diversity of economic systems and sensitivities about sectors such as agriculture have increased the complexity of the talks.
A process of competitive liberalisation is under way between the RCEP, which includes China, and the TPP, which does not (yet). Neither negotiation precludes consolidating the two and access to both the Chinese and US markets is the big potential prize for the other players. The most desirable outcome would be US–China cooperation in consolidating the two agreements into APEC’s vision for a Free Trade Area of Asia and Pacific. This precedent of multiple pathways could be a catalyst for reform of the global trading system and WTO.
Establishing a secure, predictable environment for investment is an essential public good in Asia. And the large current account surpluses of Asian economies are now leading to large-scale investment abroad. Thus Asia’s interests range from institutions that ensure access to foreign assets that might be considered strategic to protecting the personnel, technology and financial resources of foreign invested firms. Companies that invest in Asia, seek stronger protection through bilateral or multilateral investment treaties. Global initiatives to create treaties that embody such protection have so far have failed, but a dense network of bilateral treaties now connects most major trading countries.
Are Asian institutions creating the necessary public goods to mitigate climate change?
The answer is mixed but hopeful. The answer is mixed because, in the context of diverse levels of development, the introduction of binding emission reduction targets has stalled, due to the vague commitments of wealthier nations at the United Nations talks so far. It is hopeful because local demands for cleaner environments at home are pushing governments to reduce energy intensity and encourage renewable energy and green technologies. But local action on this global challenge is only a start. Global action is essential. Asia’s contribution to a truly global push to mitigate climate change occurred around the APEC summit in Beijing in November 2014, when leaders of China and the US — the world’s two largest emitters — reached agreement on emission reductions targets for the next round of UN talks in December 2015. Others will now have to step up.
In these ways, finding solutions to regional challenges by liberalising trade and investment, and mitigating climate change could become the bases for new global architectures. But continued focus on needed institutional reforms and innovations will also depend critically on those institutions that maintain the peace and political stability which have been the foundation stone for Asia’s spectacular progress.
Wendy Dobson is a Professor and Co-director of the Rotman Institute for International Business at the University of Toronto and author of Partners and Rivals: The Uneasy Future of China’s Relationship with the United States (2013).
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’’.