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The rush toward Asia-Pacific FTAs

by Michael Richardson

Following the recent launch of free trade negotiations between the United States and the European Union, there are now three mega-trade-and-investment liberalization blocs being shaped in various parts of the world.

Each is different in geographic coverage. But all have substantial economic clout. So whichever is first to conclude a credible agreement will have a significant impact on international trade and geopolitics.

With multilateral negotiations under the World Trade Organization stalled, the big bloc negotiators are, by default, setting key rules and standards for global commerce in the 21st century. This is important. All three mega-blocs are often referred to as free trade arrangements. But in practice, they would be preferential trading groups discriminating against nonmembers.

Of course, the three top economies — the U.S., China and Japan — have to be big players in this game. Each seeks stronger influence and market access, particularly in Asia, where economies, trade and investment have been expanding fast for several decades.

From a global perspective, economic activity breaks down into three segments: 6 percent growth in emerging markets (with Asia, minus Japan, playing a lead role); 2 percent growth in the U.S.; and no growth in the EU.

Still, the U.S.-EU deal would span the Atlantic, stimulating growth by integrating the world’s two largest trading zones. They account for nearly 50 percent of global GDP, at least for now. The other two proto-free trade agreements (FTAs) are tied to Asia.

One is the Trans-Pacific Partnership (TPP) linking North and South America to the Asia-Pacific region. It started its 18th round of negotiations in Kota Kinabalu, Malaysia, on July 15.

When Japan, the world’s third biggest economy, joins the round of talks in Malaysia, probably on July 23, the 12 negotiating states in the TPP will account for some 40 percent of global GDP, still significantly less than the U.S.-EU FTA. But the TPP appears to have better economic growth prospects and its members are already responsible for one-third of all international trade.

The first round of negotiations to form the other Asia-linked trade bloc, the Regional Comprehensive Economic Partnership (RCEP), was held in Brunei in May. The RCEP covers 13 economies in Southeast and Northeast Asia, but also includes Australia, New Zealand and India. With one-third of global GDP and the expectation of much faster than world-average expansion, the RCEP’s heft is less than that of the TPP, but still considerable.

There is some overlap in membership between the TPP and RCEP. However, one of the major differences between them is that the U.S. is in the TPP but not the RCEP, while China is in the RCEP but not the TPP.

In the global mega-bloc negotiations, the U.S. is in talks with Europe as well as in the TPP. Japan is in both the TPP and RCEP. Meanwhile, China is only in what is, arguably, the weakest and least ambitious of the two Asia-linked trade and investment groups.

This worries China, which has relied heavily on foreign trade and investment for economic growth and employment. China has accused the U.S. and Japan of using the TPP as an exclusive economic mechanism to stunt China’s future growth.

Beijing has asserted that the Obama administration’s military “pivot” to Asia serves a similar policy of containment, with the U.S. and its Japanese ally cooperating closely to counter China’s increasing military strength.

However, in the past few months, China’s attitude to the TPP has moderated to the point where some Chinese officials and analysts are separating the two issues and saying openly that Beijing should seek to join the TPP talks.

China is, after all, the second-largest trading partner of the U.S. after Europe. It is also the U.S.’ third-biggest export market, and its biggest source of imports. China cannot afford to be locked out of both the TPP and the U.S.-EU Transatlantic Trade and Investment Partnership.

U.S. and EU started detailed negotiations on their planned pact in Washington on July 8, with the aim of reaching a conclusion by late 2014. The TPP deal is supposed to be finalized by the end of this year, and the RCEP by 2015.

In a significant development, the U.S. and China agreed on July 11 to re-start long stalled negotiations on a bilateral investment treaty. Chinese officials have said that if this leads to reduced investment restrictions on both sides, it could pave the way for China to join the TPP.

In May, Global Times, an offshoot of the Chinese Communist Party mouthpiece, the People’s Daily, published an article noting that the TPP had been seen as part of a U.S.-led move to isolate and encircle China.

The newspaper said that while this concern should be carefully considered, it obscured the urgency of conducting deeper market-oriented reforms in China itself. “The real lesson China has to learn is how to be completely market-oriented to match the rapid development of the new free trade zones such as the TPP,” the Global Times article added.

China is probably not yet ready to bid for TPP membership. It will first need to push ahead with its own economic reforms. Beijing will also watch to see how successful Japan and communist-ruled Vietnam are in protecting their economic interests in the closing stages of the TPP negotiations.

Nonetheless, the signs of a more flexible approach are promising. Yu Jianhua, China’s deputy international trade negotiator at the Ministry of Commerce, told a FTA forum in Qingdao on June 21 that the TPP and RCEP had “common ultimate goals and will be the stepping stone for integrating Asia-Pacific’s FTAs if they are inclusive, open and transparent.”

Melding the TPP and RCEP would be a difficult economic challenge. But if they are no longer seen as competing blocs in a new Asian Cold War between China and the U.S., it would be easier to treat them as mutually reinforcing pathways toward an FTA of the Asia-Pacific region.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.