Having ruled Japan for the better half of a century, it is no surprise that the Liberal Democratic Party (LDP) has found it difficult to adapt to its role as Japan’s major opposition party.

But with the prospect of further political gridlock, it may be time for the LDP to reconsider its strategy.

At the LDP National Convention last month, Sadakazu Tanigaki, the party’s president, criticised Prime Minister Yoshihiko Noda and his Democratic Party of Japan (DPJ) for their handling of the Fukushima nuclear disaster, and labelled the proposed increase in Japan’s consumption tax rate ‘an empty cheat’. In order to return the LDP to power, Tanigaki has also vowed to pressure Noda to dissolve the lower house and call a snap election.

This uncompromising stance is largely in line with the obstructionist attitude adopted by the LDP when Noda’s predecessor, Naoto Kan, was in power, and is likely to continue throughout Noda’s term. Given that the government lacks an upper-house majority, the LDP can effectively block any of the government’s bills, but there are several reasons why this strategy is unlikely to pay strong electoral dividends in the long run.

First, Noda’s major policy agenda is ambitious in scope. He has proposed bills to raise the consumption tax rate from 5 per cent to 10 per cent by 2015, reform independent administrative institutions, reduce the salaries of government employees and advance Japan’s position in the Trans-Pacific Partnership (TPP) negotiations. Regardless of whether it can be achieved, Noda’s vow to break with ‘the politics that can’t decide’ and push forward with reform clearly puts the LDP on the defensive. Tanigaki has repeatedly warned that ‘Japan could experience an irreversible national crisis’ in pursuing Noda’s policies. But his party’s unwillingness to reach a compromise with the government exposes the LDP to criticisms of not acting in the national interest. If the prospect of a national crisis does not spur the LDP to enter negotiations with the government over the consumption tax, then what will?

Second, a number of Noda’s policies were either previously supported by the LDP, or overlap with the party’s traditional support base. Tanigaki has rejected talks with the ruling party on the grounds that there is no mention of the proposed consumption tax increase in the DPJ’s 2009 manifesto, but the LDP strongly pushed for the very same proposal in the 2010 House of Councillors election. Further, the DPJ’s support for Japan’s entry into the TPP negotiations, comprehensive reform of the social security system and the reduction of government employees’ wages leaves little room for the LDP to carve out a viable policy alternative. If the DPJ now represents the party of fiscal austerity, trade liberalisation and administrative reform, where exactly does the LDP fit into Japan’s party system, and how can it distinguish itself from the ruling party?

Third, despite declining electoral support for Noda’s cabinet, the LDP has failed to make the most of recent political events and increase its own standing. According to a recent Yomiuri Shimbun poll, support for the DPJ has risen from 22 per cent to 25 per cent, while the LDP’s popularity fell from 19 per cent to 17 per cent. Although one would expect the opposition to benefit in light of the planned austerity measures, this has not been the case; however unpopular a tax increase might be, 73 per cent of respondents still agree that the LDP-Komeito coalition should participate in policy deliberations with the government. It might seem obvious, but opposition for opposition’s sake is unlikely to return the LDP to power.

But with Tanigaki at the helm, the LDP’s current strategy of obstruction may be the best the party can hope for. Tanigaki’s term as LDP president expires in September (while Noda can delay calling an election until August next year). So failure to force an early election may seriously undermine Tanigaki’s prospects for re-election as party president, particularly as the current LDP secretary-general, Nobuteru Ishihara, has expressed interest in replacing Tanigaki.

Failure to match Noda’s policy agenda with sensible counter-proposals, added to the LDP’s refusal to debate the government’s key initiatives, may only further weaken the LDP’s electoral position at a time when smaller opposition parties are merging and forging new cooperative strategies in order to court the conservative vote. The People’s New Party and Stand Up Japan! have agreed to launch a new political party in March with Tokyo’s governor, Shintaro Ishihara. And Your Party, a centre-right party made up of former LDP members, also announced that it will be cooperating with Osaka’s increasingly popular mayor, Toru Hashimoto, and his party (Osaka Restoration Association) in the next election.

Still, a much larger problem is that for the LDP to only engage in policy-based discussions once in power belies the opposition’s role in a parliamentary system. It also offers little hope for the majority of Japan’s independent voters that the current LDP would govern any differently from the LDP that lost in the general election of 2009.

Kevin Placek is a recent graduate of the University of Melbourne, where he completed a Master of International Relations specialising in Japanese prime-ministerial politics.

1. The next Democratic Party of Japan prime minister
2. The Democratic Party of Japan’s credibility crisis
3. Japan must support liberal international order

Since China’s reform and opening-up policies began in the 1970s, the country’s average annual economic growth rate has hovered around 10 per cent.

Currently, China’s gross domestic product is second only to the United States; it is the world’s largest exporter and importer and the largest holder of foreign exchange reserves. Along with China’s remarkable economic rise comes an increase in China’s role in both regional and global development and governance.

With the economies of the US, the EU and Japan reeling from weak growth and burdensome debt levels, China is a key driver of global economic growth, contributing, along with other major emerging economies, nearly two-thirds of new global economic output. According to many projections, China will surpass the US as the largest economy in the world by 2030.

As its power emerges China will naturally become a more important player in shaping regional and global development and governance. Likewise, with its economy moving into a new phase through steady technological innovation and an explosion of domestic demand, China will play a bigger role as a major market and capital resource for regional and global economic growth.

China’s economy is highly integrated into the global market, so the country should participate actively in initiatives to reform the international economic system. While a stable and evolutionary reform process is important to China, the desired outcome should see structural changes that produce a new, more effective international system.

China is active in promoting efforts to improve regional governance through various forums involving the Asia Pacific region as a whole, East Asia, Central Asia and Northeast Asia. The goal is clear: to help create a favourable environment for economic cooperation, enhanced political trust and regional security.

It is significant that China’s strategy is focused broadly, encompassing more than just economic issues. An important part of these efforts are free trade agreements, whether bilateral or sub-regional, such as the FTA between China and the Association of Southeast Asian Nations (ASEAN). They are different from market-driven integration, because in addition to being compliant with the rules of the World Trade Organization, they provide a broader framework for cooperation among governments of different countries. Experience shows that FTAs can have a profound impact on improving governance in individual economies and regional systems.

In the past decade, China took the initiative to establish the China-ASEAN Free Trade Agreement (CAFTA) and played a leading role in the feasibility study for the East Asia Free Trade Agreement. China also actively sought to promote trilateral cooperation with Japan and South Korea. For China, CAFTA is more than just a trade agreement. It helps to provide a comprehensive framework for cooperation between China and the ASEAN countries. China is now the largest market for ASEAN exports, but relations go well beyond trade to include infrastructure, connectivity and capacity building for human development.

Although China participates in all regional arrangements, it views ASEAN +1 as its core regional relationship followed by ASEAN+3. China worries that the recent enlargement of the EAS from ASEAN+6 to include the US and Russia may weaken the cooperative spirit of East Asia because of different strategic interests.

Recently, the Trans-Pacific Partnership (TPP) led by the United States has received a lot of attention. Although China is the second-largest economy in this region, it is excluded from the TPP negotiations. China’s view is that the Asia Pacific Economic Cooperation (APEC) forum is the more appropriate for regional issues of the kind envisioned for the TPP.

While the United States is touting the TPP as a kind of high-level FTA for the 21st century, it will fundamentally change the nature of the APEC approach to regional relations. It can also be seen as a move by the United States to weaken East Asian integration and co-operation. This should worry ASEAN for two reasons. First, many member states aren’t included in the TPP. And second, it could have a negative impact on ASEAN’s central role in building an East Asian community.

In this context, a great concern is how China manages its relations with the US. That relationship today encompasses both economic prosperity and political security. By focusing on common goals such as global growth and prosperity, China and the US can establish and promote a partnership that will benefit both countries, as well as the rest of the world.

But promoting economic interdependence requires creating common interests and reducing incentives for conflict or instability. This is difficult in the current climate, where structural trade imbalances between China and the US are fuelling tensions. The US is pushing hard for China to allow the renminbi to appreciate quickly, while China is insisting on a gradual appreciation of the currency. With the US now part of the East Asia Summit, hopefully the two countries can use this framework to manage their interests and relations in a collaborative way.

The rise of China will end the current Western-dominated world order, but it will not end the Western world, as some alarmists in the West fear. In a highly interdependent world, human society’s future rests on true co-operation from all sides.

Zhang Yunling is Professor of International Economics, and Director of International Studies, Chinese Academy of Social Sciences.

1. Asia’s global responsibilities: Delivering through global and regional arrangements
2. A regional solution to global imbalances: We need a Beijing Accord
3. China’s Soft Power v America’s Smart Power

With the end of 2011, Singapore’s policy makers have ample reason to be satisfied with their economic management, and the results of the long-prevailing business location growth model.

Singapore’s macroeconomic indicators, excepting the inflation rate, exhibited encouraging trends in 2011. Real economic growth is projected at around 5 per cent for the year, generating about 100,000 new jobs in 2011, which is equivalent to 2.6 per cent of the total workforce, representing a solid performance. An impressive 61.5 per cent of Singapore’s total population was employed.

Still, the inflation rate, measured by the consumer price index, has hovered around 5 per cent, while the domestic supply price index surged by 9.3 per cent in the third quarter of 2011. These rates are uncomfortably high compared to those which Singapore is normally accustomed to.

The general and presidential elections held in 2011 highlighted the electorate’s growing concern with quality-of-life issues that encompass more than material living conditions. This is apparent across divergent demographic and economic groups. Citizens perceive that their quality of life does not reflect the wide range of options and choices they expect of an affluent country with a per capita GDP of US$43,867 in 2010, at current market prices. Their concerns have more recently manifested in demands for greater policy, media and electoral contestability.

There is substantial infrastructure investment currently under way in transport, health, housing and education, which could help narrow the gap between rapid demand increases and the supply response. But much more emphasis needs to be placed on the softer aspects of health care, childcare and education to mitigate concerns about poor quality of life for school-going children, as well as working mothers and other citizens. The generational shift, particularly as younger citizens have grown up in an affluent environment, has accentuated this perception of quality of life in Singapore. An important element in this perception is that citizens’ upward-mobility prospects are being limited by the presence of disproportionately large numbers of foreign workers, particularly at the professional and executive levels. At mid-year 2011, only 63 per cent of Singapore’s total population of 5.18 million were citizens, 10 per cent were permanent residents and 27 per cent foreign workers. The share of foreign workers in the labour force is much higher, and could reach two-fifths of the total labour force by the end of this decade.

Another important element is an increasing recognition of the growing inequalities in income and wealth to which government policies have contributed. Such policies include strong adherence to the business location growth model, with its concomitant rise in foreign workers; light taxation of capital income; and very limited measures designed to provide adequate retirement income and mitigate against retirement income risks.

The population, meanwhile, is ageing rapidly due to the ultra-low fertility rate of 1.15 births per woman in 2010 (when 2.15 is the replacement rate) and improved life expectancy. These trends will lead to an increase in the median age (38 years in 2011) and in age-related social expenditures, whose burden needs to be shared equitably — and not disproportionately by the individuals as is currently the case.

Policy makers appear to recognise these quality-of-life concerns, but their actions suggest a continued belief in the adequacy of enacting relatively minor changes in the business location growth model, with its serious reliance on foreign workers; planned infrastructure expenditure; and minor refinements in the mandatory savings scheme (as administered by the Central Provident Fund). It is the excessive single-minded zeal in pursing these policies, when circumstances require their moderation and the introduction of additional measures, which has led to quality-of-life concerns. More could be done, for instance, by focusing on relative poverty rather than absolute poverty. This policy approach will likely be tested in the coming years as ageing accelerates, and the electorate’s expectations and aspirations continue to diverge from the outcomes of the current assumptions underlying Singapore’s social and economic management.

Singapore’s prospects for 2012 depend on the global economy. The euro zone is experiencing a serious economic crisis, and growth in other industrial countries is expected to be anaemic. China and India are also facing challenges in sustaining relatively high growth. But Singapore is well positioned to benefit from any positive developments in the regional global economies, and to cushion any downside risk. Singapore’s participation in the Trans-Pacific Partnership negotiations — billed as a new-generation preferential economic agreement — is one indicator of its future economic preparedness.

Mukul Asher is Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

This is part of a special feature: 2011 in review and the year ahead.

1. Singapore: Economy bounces back, but…?
2. Singapore: Prospect of greater pluralism?
3. Singapore: positioned to weather the global shock

As if undermining the WTO’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the US has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP).

President Barack Obama announced this with nine Asian countries during his recent trip to the region.

The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade. But the opposite is true, and it is important that those who care about the global trading system know what is happening. One hopes that this knowledge will trigger what I call the ‘Dracula effect’: expose that which would prefer to remain hidden to sunlight and it will shrivel up and die.

The TPP is a testament to the ability of US industrial lobbies, Congress and presidents to obfuscate public policy. It is widely understood today that FTAs, whether bilateral or plurilateral (among more than two countries but fewer than all), are built on discrimination. That is why economists typically call them preferential trade agreements (PTAs). And that is why the US government’s public-relations machine calls what is in fact a discriminatory plurilateral FTA a ‘partnership’, invoking a false aura of cooperation and cosmopolitanism.

Countries are, in principle, free to join the TPP. Japan and Canada have said they plan to do so. But a closer look reveals that China is not a part of this agenda. The TPP is also a political response to China’s new aggressiveness, built therefore in a spirit of confrontation and containment, not of cooperation.

The US has been establishing a template for its PTAs that includes several items unrelated to trade. So it is no surprise that the TPP template includes numerous agendas unrelated to trade, such as labour standards and restraints on the use of capital account controls, many of which preclude China’s accession.

From the outset, the TPP’s supposed openness has been wholly misleading. Toward this end, the TPP was negotiated with the weaker countries like Vietnam, Singapore and New Zealand, which were easily bamboozled into accepting such conditions. Only then were bigger countries like Japan offered membership on a ‘take it or leave it’ basis.

The PR machine then went into overdrive by calling the inclusion of these extraneous conditions as making the TPP a ‘high-quality’ trade agreement for the 21st century, when in fact it was a rip-off by several domestic lobbies.

American regionalism closer to home shows the US now trying to promote the Free Trade Agreement of the Americas (FTAA). But its preferred template was to expand the North America Free Trade Agreement (Canada, Mexico and the US) to the Andean countries and include huge doses of non-trade-related issues, which they swallowed. This was not acceptable to Brazil, the leading force behind the FTAA, which focuses exclusively on trade issues. Brazil’s former President Luiz Lula Inácio da Silva, one of the world’s great trade-union leaders, rejected the inclusion of labour standards in trade treaties and institutions.

The result of US efforts in South America, therefore, has been to fragment the region into two blocs, and the same is likely to happen in Asia. Ever since the US realised that it had chosen the wrong region to be regional with, it has been trying to win a seat at the Asian table. The US finally got it with the TPP, simply because China had become aggressive in asserting its territorial claims in the South China Sea, and vis-à-vis India and Japan.

Many Asian countries joined the TPP to ‘keep the US in the region’ in the face of Chinese heavy-handedness. They embraced the US in the same way that East Europeans rushed to join NATO and the European Union in the face of the threat, real or imagined, posed by post-Soviet Russia.

America’s design for Asian trade is inspired by the goal of containing China, and the TPP template effectively excludes it, owing to the non-trade-related conditions imposed by US lobbies. The only way that a Chinese merger with the TPP could gain credibility would be to make all non-trade-related provisions optional. Of course, the US lobbies would have none of it.

Jagdish Bhagwati is Professor at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, and is the author of Termites in the Trading System: How Preferential Agreements undermine Free Trade. This article was originally available here at Project Syndicate and is published here with the permission of the author. 

1. U.S. trade policy in Asia: Going for the Trans-Pacific Partnership?
2. Trans-Pacific Partnership Agreement: Carrying the water for America
3. Is the Trans-Pacific Partnership idea a dead end?

The euro crisis hijacked the G20 Summit in Cannes — even by late December Europe’s leaders still had not fully diagnosed the problem, but without an accurate diagnosis how can there be an effective prescription?

This missing link accentuates two challenges that Asian integration will face in 2012: the consolidation of regional architecture and the need for deeper structural adjustments. The prevailing crisis prescription in Europe focuses on regional architecture: Germany insists on fiscal union and the implied centralised power over national budgets. This is in return for giving the European Central Bank more room to apply the tools of lender of last resort. But this focus comes at the expense of essential attention to the structural adjustments necessary to restore growth impetus in the deeply indebted southern members. Growth and restructuring are the only acceptable ways to reduce debt. Faced with shrinking economies and rising unemployment, and lacking exchange rate flexibility to restore price competitiveness in external markets, how will they grow? Other countries have successfully dealt with such situations; Canada, for example — which in the late 1990s faced a serious fiscal imbalance — restored its books to balance with a depreciating exchange rate and by focusing on trade with strongly growing international markets. Clearly Europe’s prospects for export-oriented growth do not lie in the OECD countries, but in emerging markets like those in Asia.

But external expectations of Asia are growing much faster than Asia’s capacity to meet them. Of course regional architecture is required for cooperative action. Yet with some notable exceptions, Asia’s focus remains on the architecture rather than the domestic and regional economic adjustments required to sustain growth momentum in the face of potentially serious external shocks from renewed European recession and near-stagnation in the US.

Following the Cannes Summit (3–4 November), Asian leaders participated in a series of summits: APEC in Honolulu (12–13 November), the ASEAN summit (17–19 November) and the East Asia Summit (EAS) (19 November). Despite the Cannes fiasco and Europe’s continuing troubles, the prominent feature of the Asia Pacific meetings was the ‘return’ of the US: as host at APEC, where President Obama re-launched the Trans-Pacific Partnership (TPP) negotiations, targeting a 12-month completion date; and as one of the newest members of the EAS, which some see as the forum most likely to link regional and global strategic issues.

The immediate problem remains global rebalancing: current account surplus countries should rely more heavily for growth on domestic demand and allow greater exchange rate flexibility. Yet the issues were at best tangentially discussed at these summits, which were mainly focused on trade and integration. The EAS came closest with its emphasis on connectivity, among 10 other issues.

What, then, should Asia’s priorities be in 2012? Two stand out: macroeconomic rebalancing and trade liberalisation.

To carry out macroeconomic rebalancing, discussions among ASEAN+3 governments should take place in the multilateralised Chiang Mai Initiative, yet little has been seen or heard of the secretariat’s activities. In its inaugural year this silence may be understandable, but it is troublesome when viewed in the context of potential risks from the global economy.

In terms of trade liberalisation, recent indications of interest in the TPP by Japan, Canada and Mexico ignited debate about a possible US hidden agenda of excluding China. Additional entrants will not be invited to join — they must apply. And the TPP’s uniqueness is its refreshingly explicit admission bar: applicants must be prepared to talk about everything. Just as in any serious trade agreement, the outcome is based on bargaining over potential gains and losses, with phase-in periods for sectors that must adjust. China should apply while the negotiating parameters are still up for discussion. Otherwise it faces the prospect, as do other latecomers like Canada, of being a policy taker rather than a policy maker.

It is understood that Asian economic integration is a long-term process based on consensus decision making. But a lot of bad things can happen while this long-term process is unfolding. The likelihood of new external shocks from Europe through financial markets and trade flows is not declining. The shocks of the 2008 global financial crisis revealed the vulnerabilities of continued reliance on export-led growth strategies and created, at least for a time, incentives to rebalance the sources of domestic and regional growth. But has enough progress been made?

Asia’s growing economic weight brings with it growing responsibilities within cooperative responses to the global imbalances that weigh so heavily on our collective growth prospects. But will it take another crisis to catalyse the emergence of Asian leaders and institutions as champions of a stable and open global economic system?

Wendy Dobson is co-director of the Institute for International Business in the University of Toronto’s Rotman School of Management and a former Associate Deputy Minister of Finance in the Canadian government.

This is part of a special feature: 2011 in review and the year ahead.

1. Asia, Europe and regional cooperation in 2012
2. The 2012 G20 Summit: facing down global challenges in Mexico
3. G20: step towards a new global architecture

Like all good fairytales, APEC was formed ‘once upon a time’ to promote trade and investment in the Asia Pacific.

Members like Australia, New Zealand and Japan fought hard to ensure it would not become a myopic trade bloc that discriminated against and sought to divert economic activity away from others. Its shining light was ‘open regionalism’ based on ‘concerted unilateralism’ — members acting voluntarily and unilaterally to reduce trade and investment obstacles on a most favoured nation (MFN) basis to grant non-APEC economies the same access.

The Bogor Goals reinforced APEC, with members agreeing to voluntarily achieve ‘free and open trade and investment’ by 2010 for developed countries and 2020 for developing countries. Despite weaknesses, APEC was contributing significantly to non-discriminatory regional trade and investment. But the US — reluctant to embrace unilateralism and insisting instead on reciprocal trade deals — always favoured a discriminatory APEC FTA trade bloc that would exclude non-APEC economies from any access benefits.

And two decades on, the US is getting its way as APEC economies, including Australia, jettison the MFN principle and rush to form discriminatory FTAs. APEC is now being subtly recast into an FTA trade bloc along traditional US lines, with the proposed Free Trade Area of the Asia-Pacific (FTAAP) a prime example of this new direction. The much heralded first instalment is to be the Trans-Pacific Partnership (TPP) Agreement between the APEC economies of Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, US, Vietnam, Japan and probably Canada and Mexico.

Australia should oppose the TPP and FTAAP for the same reasons it initially rejected APEC preferentialism. While the TPP and FTAAP may suit the US’ political and trade agendas, they are not in the economic interests of the region, APEC or Australia.

First, implementing the TPP and FTAAP would be a retreat to discrimination. The FTA label is deceptive — FTAs are really ‘Preferential Trade Agreements’ and have little to do with free trade.

Second, Australia and the APEC region already have a growing ‘noodle bowl’ of overlapping FTAs, and the TPP would simply compound this mess. For example, it would be Australia’s third FTA involving Singapore.

Third, it would further demean the non-discriminatory Bogor Goals, already fudged to support discrimination. The Australian government’s April 2011 Trade Policy Statement misleadingly claims that ‘Longer term, Australia and other APEC members aspire to the formation of a Free Trade Area of the Asia-Pacific … spanning all APEC economies’, and that the FTAAP is ‘a logical extension of APEC’s Bogor Goals but there are no prescribed paths for achieving it’. It further notes that the TPP is ‘one possible pathway’.

But the FTAAP is not a ‘logical extension of APEC’s Bogor Goals’; it is hard to see how forming a discriminatory APEC trade bloc will serve these non-discriminatory goals. Moreover, the Australian government’s claim ignores the advice of its independent advisor, the Productivity Commission, that Australia ‘should give weight, in prioritising and negotiating agreements, to non-preferential arrangements such as APEC, and to non-preferential provisions within other agreements’.

If the Australian government believes the TPP and FTAAP will benefit Australians, it should be honest and transparent in explaining why. FTAs are sold as comprehensive, groundbreaking and liberalising, but always fall well short of such ideals; FTAs are about politics and foreign policy. Despite the government’s sales pitch, the Productivity Commission highlighted that the economic outcomes of Australia’s FTAs have been oversold and disappointing.

This confirms World Bank research arguing that FTAs have failed to deliver the promised economic liberalisation needed to produce substantial economic benefits — especially in services requiring domestic ‘behind-the-border’ regulatory reforms that can only be tackled unilaterally. The Australian government should not sell the TPP, FTAAP and FTAs more generally by hiding behind unsupportable and exaggerated economic claims which fail to appreciate that the main economic benefits of trade reform result from self-liberalisation rather than gaining market access abroad.

Just how pursuing the TPP and FTAAP could ever be reconciled with the government’s five praiseworthy guiding principles — unilateralism, non-discrimination, separation of trade and foreign policy, transparency, and indivisibility of trade policy and economic reform — and how Australia aims to apply them, is a mystery.

If the government wants to return to the days when the main game was unilateral reform as signalled in its Trade Policy Statement, it should again embrace non-discrimination and fight against a discriminatory APEC. FTAs weaken the multilateral trading system and crowd out domestic efforts to adopt MFN-based unilateral trade reforms. They take focus away from what really matters — a strong domestic commitment to unilateralism supported by a well-functioning and liberalising WTO. Governments are hypocritical and counterproductive in preaching the virtues of unilateralism and the WTO while negotiating FTAs.

The Government-commissioned Ken Henry White Paper on Australia in the Asian Century provides an opportunity to rectify the government’s confused trade policy by putting Australian and regional efforts back on the path of unilateralism. Oddly, the Trade Minister’s paper released on the proposed White Paper compounds the confusion by asserting, quite contrary to what was agreed later in the TPP/FTAAP talks in Hawaii, that the ‘Gillard government’s commitment to free trade extends to negotiating bilateral and regional agreements on a non-discriminatory basis’. If the Henry White Paper is to achieve anything it will need to to bring a halt to that kind of hypocrisy.

Malcolm Bosworth and Greg Cutbush are Visiting Economists at ANU Enterprise.

An earlier version of this article was first published here in the Australian Financial Review.

1. Strategic choices for APEC in 2010 and beyond
2. What can Japan do with APEC?
3. Time to cure Australia’s FTA disease

The weather was awful outside the WTO Ministerial Conference in Geneva last week, but there was some sunshine within the convention centre.

Russia acceded as a member, along with Samoa, Montenegro and Vanuatu (the club still attracts new members, and as one minister said: ‘as far as I know, nobody has asked to leave’).

The Plurilateral Government Procurement Agreement was revised — after 10 years of negotiations — further opening up procurement markets to give foreign economies better access. China is also en route to joining, having agreed to do so on its accession to the WTO, after further negotiations took place.

But there were some strange decisions, like giving countries the option to waive most favoured nation (MFN) provisions, so as to allow least-developed countries preferential access to services markets. It is not yet clear how this will happen or how it would help resolve constraints in developing countries, which hinder reforms in their own service sectors. There were some non-decisions as well. No conclusion was reached on a set of principles for food security, for example, although the WTO’s Director-General rebutted a protectionist report from a UN official.

Why the lack of progress at this year’s Ministerial Conference? Here are five suggestions.

One factor is that ‘development’ has been mixed with trade. On the face of it, having a ‘development round’ seems positive, but lumping these two areas together complicates the process, and introduces new items for debate. The WTO should remain focused on the resource allocation gains from international business.

Another reason for the lack of progress is that the WTO cannot deal with the barriers that have now become relatively more important to business. This includes the rules and processes affecting international business which are not managed at the border. These barriers create significant rents — and those who currently gain from the arrangements resist their removal. Analytical work on these barriers is more and more important.

The third factor involves the uncertainties faced by policy makers when removing such barriers. Some were put in place for genuine public policy purposes, and policy makers are not confident about the likely consequences of their removal. Capacity building programs focused on this issue could help address the problem, and the EU and APEC, in particular, could work well together on this.

Fourth, the use of preferential agreements does not make the process any easier. Rents are created for local business, which are then shared with a state’s ‘favourite partners’ when preferential trade agreements find a way of allowing market access. In this way, the grand bargain once represented by the WTO has been diminished.

The US is the fifth reason why progress has stalled, although the US would likely say that other leading members were the problem. The US wants to create more domestic jobs — and good ones — which it associates with more market access, especially in countries like India, China and Brazil. These economies are not offering enough, and the US is therefore pursuing other options like the Trans-Pacific Partnership, or negotiations with the EU, to flush out some response from recalcitrant members. Meanwhile, this tactic promotes the use of FTAs and depreciates the political capital available to the WTO.

What will happen now?

Within the WTO, fundamental principles including MFN provisions and the ‘single undertaking’ will be challenged in the name of pursuing more-achievable — or less-ambitious — goals. Australian Minister for Trade Craig Emerson said the situation ‘argues for breaking the round into its component parts … instead of waiting for some grand bargain, magically, like a bolt from the blue, to strike us from the sky’.

Tension will be regarded as a plus, and created by excluding trading partners from special deals. Plurilaterals will proliferate, both within and without the WTO. We will move to a world in which there are clubs within clubs, and in which they all overlap. There is also the possibility of great tension in the Asia Pacific as ‘a line is drawn down the middle of the Pacific’.

It is not clear what the circuit breakers will be in this situation. Whatever happens, small group negotiations within the WTO could be okay if guided by the right principles. Some will call for new leadership at the top, in order to consolidate and multilateralise small groups outside the WTO. Others hope that the situation will be resolved from below, via competition; some clubs will exit (in effect, if not in name) or amalgamate, and what remains will be (hopefully) efficient. 

Our best chance is to build confidence in reform led from within economies. This requires transparency and benchmarking (via strong trade-policy reviews in the WTO, good peer reviews in APEC and clones of Australia’s Productivity Commission). It will also require us to demonstrate the real linkages between policy and performance, and the ability to translate that work into compelling public commentary. We then have to think through where world trade policy is at now, and develop a new, more coherent global strategy.

Christopher Findlay is Executive Dean at the Faculty of the Professions, University of Adelaide.

1. Implementing the G20 commitment to World Trade Reform
2. World trade policy in crisis
3. Trade policy needs to go global

In Washington and Beijing last week there were important meetings that are likely to be influential in where the Trans-Pacific Partnership (TPP) negotiations on regional trade arrangements lead down the track.

In Washington, the US administration called in ambassadors from the eight negotiating partners to up the ante on an early deal. USTR Ron Kirk had declared on 30 November that the US wants a deal by the end of next year, much to the incredulity of Washington observers who doubt that the White House will want a full-on debate about the TPP and the necessary Trade Promotion Authority in the middle of an election year. Now Congressman Kevin Brady, Chairman of the Subcommittee of Trade of the House Committee on Ways and Means, has called Hearings on TPP from Wednesday, 14 December, saying that ‘it is vital that we complete an ambitious and comprehensive 21st century agreement as quickly as possible’.

China has not been invited to join the negotiations; Indonesia sees the risks of regional division and does not want to. In the end this may not matter, and both China and Indonesia have cause to be relaxed since, given the way it’s being prosecuted, the TPP may not have a substantial impact after all.

Peter Drysdale is the Editor of the East Asia Forum

1. Are there real dangers in the Trans Pacific Partnership idea?
2. The India-China Strategic Economic Dialogue
3. China and global economic governance: History matters

In President Obama’s landmark speech in Canberra last month, an over-riding theme was that the United States welcomes China’s rise so long as it plays by the global rules.

Yet those rules are dynamic, and there is a need to have China involved in setting them given the scale of China and its importance to the regional and global economy, as well as to global security.

China needs to help set the rules and agree to them so that it has buy-in — not have those rules created around it. The latter scenario may have been possible a decade ago, but not now. It is crucial, then, that a major trade policy initiative in the Asia Pacific, such as the Trans-Pacific Partnership (TPP), include China, else it will become one of the set of rules created around China, constraining not promoting one of the main trans-Pacific economic relationships.

As the major growth engine of the global economy, China’s exclusion from the TPP raises questions about the TPP’s likely success. The TPP’s purpose is to weld the region together and lock in growth of trans-Pacific economic relationships. The central strategic challenge for the TPP, therefore, relates to China’s membership.

But can China join? And should it join? The biggest risk of the TPP is political: that it might divide the region strategically between its members and the rest, with China being on the outside. The TPP has been supported by two prominent US trade policy figures, Fred Bergsten and Jeffrey Schott of the Petersen Institute of International Economics, as a way, they say, for the US to engage in East Asia as ‘China propelled the advance of Asian regionalism’. ‘These countries are well on the way toward creating an Asian bloc, a development that could “draw a line down the Pacific” by discriminating against [the US]’, they add.

Yet if the TPP proceeds on terms set by the US, it would be very difficult for China to join, and the TPP itself, according to Christopher Findlay, may ‘drive the region apart with systematic exclusion of non-members, including China’. This wedge through the middle of the Pacific will be political as well as economic. China would have to join the TPP on US terms as the TPP has now become a creature fashioned largely by Washington. Bergsten and Schott give priority to Japanese and Korean membership, envisioning the use of those strengthened alliance relationships to balance the influence of China.

The difficulty for China in joining the TPP stems from aiming for an agreement designed by, and for, countries able to digest US-moulded intellectual property rights (IPR), labour and environment standards, and other commercial settings. Many will be watching the conditions which are defined for Vietnam’s entry, the least developed country in the current TPP line-up. If the standards of entry for Vietnam are appropriate, there will need to be long phase-in periods to meet them. The benefits of US market access may dominate potential costs for Vietnam; this is not necessarily the case with China.

The US has been pushing for more regulatory discipline for state-owned enterprises (SOEs) in the negotiations around the TPP and, in particular, competitive neutrality between SOEs and private enterprises in member economies. Vietnam and Malaysia are the two economies currently involved in the TPP negotiations in which SOEs are prominent or dominant. Reform of SOEs and the privatisation process is a deeply domestic issue that will not be resolved quickly in China.

The WTO accession experience shows that locking China into reforms can only occur, especially now given its size, when it is committed to using external institutions as tools in its own interest to open up and reform its domestic economy. A TPP agenda and negotiations in which the US effectively declares itself the gatekeeper is likely to make it extremely difficult for China to commit to the TPP and join.

If China is ever to accede to the TPP, the agreement would need to be designed with open accession terms that allow China to meet its own interests. It is not that China should not be bound by TPP rules: it is that China would need to be persuaded to bind itself, consistently with its own reform agenda, in the areas covered by the TPP and on its own terms. If the TPP ends up being a set of related bilateral agreements (a bowl of noodles within a bowl of noodles), for which the US has thus far revealed a preference (see Claude Barfield), China will have to negotiate bilaterally with the US in order to join a broader TPP — no matter what the wishes of other members; and any agreement would require separate approval by the United States Congress. That is rightly viewed as a set-up.

Expansion of membership and creation of an inclusive agreement was the original aim of the TPP, and that is where its potential economic benefits lie. But easy expansion of membership is perhaps the biggest challenge. The risk is that, once an agreement is negotiated in whatever shape or form, sign-on by non-members in the region (an explicit goal) will be difficult with extra requirements for new members and individual-member veto over new membership, notably, by the US. If the agreement requires consensus from members (or incumbents) on new entrants rather than the meeting of carefully-constructed and transparent rules of entry, effective veto-power on new membership will be built into the arrangement.

A transparent and established process with clear criteria in application for membership is needed for two reasons. First, it will give members less discretion over the conditionality they can add to individual members for accession. Second, a membership bid would not have to be triggered by an invitation from members — membership that is contingent on invitation would create maximum discretion for incumbents and is not congenial to expanding membership. Automatic sign-on is not constitutionally easy for the US given that Congress will have to approve each new member separately. But that was exactly the original idea of the TPP’s predecessor, the P3 and P4 agreements with Chile, Brunei, New Zealand and Singapore.

Perhaps China should announce it wants to join negotiations right away, not to play spoiler, but so that it can engage directly in defining what the rules for much of Asia Pacific trade should be. That would be the surest strategy in ensuring that the TPP was open and dynamic, not static and exclusive. Otherwise there are likely to be one of two broad outcomes from the TPP initiative. The first is that the US succeeds quickly, as it has signalled it wants to, in locking the other 8 pliant negotiators into an early deal that is full of exceptions and has limited or negative liberalising effect but the exclusionary features of which maintain symbolic pressure on non-members like China. This might be called the just-another-trivial-FTA-outcome. The second is that the negotiators hold to more rigorous liberalising targets that will take much longer to negotiate. That is likely to entrench Chinese exclusion more deeply. Either way there is no indication that the intention is to draw China into the process. And that will not only be to China’s cost, but also to cost of China’s partners in the region and global welfare.

Shiro Armstrong is a research fellow at the Crawford School of Economics and Government at the Australian National University and is co-editor of the East Asia Forum. He is also editor of the new book The Politics and the Economics of Integration in Asia and the Pacific (Routledge, 2011). A longer version of this essay can be found here as EABER Working Paper No. 71, 9 December 2011.

1. U.S. trade policy in Asia: Going for the Trans-Pacific Partnership?
2. The Trans-Pacific Partnership
3. Trans-Pacific Partnership update

The global financial crisis forced East Asian nations to get serious about regional architecture.

As global trade entered a precarious decline during the height of the crisis in 2008–09, one of the obvious areas of focus for East Asia was trade regionalism, aimed at making East Asia a more efficient production network and, over time, a final market in its own right. At last, these initiatives are starting to bear fruit.

This year has seen significant progress in negotiations. This was revealed at the November ASEAN+3 summit which saw the heads of state agree to bureaucrat-level negotiations outlined earlier in the year.

Early indications that agreement on an East Asian trade area might finally be reached occurred in August at the 14th ASEAN Economic Ministers Plus Three (AEM+3) Meeting in Indonesia. The final communication welcomed a joint proposal by China and Japan, declared as the ‘Initiative on Speeding up the Establishment of an East Asia Free Trade Area (EAFTA) and Comprehensive Economic Partnership in East Asia (CEPEA)’.

Until this joint proposal the whole process had been held hostage by Sino–Japanese strategic rivalry. But the deadlock was broken by the worsening global economic situation and Washington’s bid to boost its flagging growth through exports, driving a return to Asia via the under-negotiation Trans-Pacific Partnership (TPP) agreement.

For China, the TPP is a potentially threatening arrangement, as its intellectual property and investment protection requirements will pose formidable barriers to joining. That’s if China was invited — which it has not been. And it seems this reality has been enough to shift China’s priorities towards reaching a regional trade agreement in East Asia, even if it means moving towards Japan’s position on issues of coverage and membership.

The outcome of all this is the joint proposal by China and Japan calling for the East Asian Free Trade Area to cover goods, services and investment — that is, an agreement which brings in Japan’s WTO-plus interests. Since the outset of negotiations on the EAFTA, Japan has focused on the investment-related issues (in contrast to tariff liberalisation). As Japan has few tariffs left to cut — and those that remain are in the politically-sensitive agricultural area — any EAFTA which focuses solely on tariff measures would be of little political interest to Japan.

Japan is also unwilling to enter into agreements with China that fail to address Japanese firms’ concerns about investing in the growing Chinese market. It is partly for this reason that the bilateral China–Japan FTA remains frozen. But outside the bilateral negotiations, and in the context of the EAFTA, China is now willing to discuss Japan’s wider set of economic interests. This year Japan and China have jointly sponsored setting up three working groups to deal with trade in goods, services and investment which will begin work in early 2012.

More importantly, the joint agreement is a promising step toward resolving long-standing disagreement over the grouping’s membership. While China had been adamant about the EAFTA being limited to ASEAN+3 members only (the ASEAN 10 plus Japan, South Korea and China), it appears that the final agreement will be expanded to include the ASEAN+6 grouping, adding Australia, New Zealand and India.

It is likely that these three countries would be brought into the new trade area via the so-called ‘ASEAN + +’ institutional mechanism. The framework is being negotiated at the ASEAN Plus Working Groups, and under consideration are rules of origin, tariff nomenclature, customs procedures and economic cooperation. These will feed into the working groups on trade, services and investment to provide a single template agreement.

Still, there remain hurdles. First, the terminology is not yet settled, with ‘EAFTA’ and ‘CEPEA’ still being bandied around. This suggests there do remain some tussles over membership — with China favouring an East Asia–Southeast Asia-only grouping. Second, while the Japanese and Chinese leaders have directed the bureaucrats to start negotiations, political leadership will be required to sign the agreement into force. However, the Heads of Government only enter the process next year, and in the meantime another flare up in Sino–Japanese relations could put everything back into deep freeze.

Notwithstanding those issues, the halting trend towards the realisation of an EAFTA is progressing. There will no doubt be more setbacks; but an EAFTA now seems more a question of when than if.

Joel Rathus is an EAF postdoctoral scholar and a regular contributor to the East Asia Forum.

1. A closer look at East Asia’s free trade agreements
2. The TPP, APEC and East Asian trade strategies
3. The de facto ‘free trade area’ in East Asia