The next big deal: Is it time for free trade in the Asia-Pacific region?

Photo: Gunawan Kartapranata/CC BY-SA 3.0

The TPP is dead. It is time for Asian governments to step up to agreeing new arrangements that will bring a new dawn of growth, opportunity and free trade.

By Tan Zhi Xin

It is time for Asia to step up to the plate as the world’s trading system comes under increasing threat from protectionism. Greater reforms and open markets are needed.

The Regional Comprehensive Economic Partnership (RCEP), an ASEAN-driven trade agreement that includes all ASEAN members and six other Asia-Pacific countries, could be the game-changer that Southeast Asia needs to strengthen growth.

The table below shows the importance of trade to each RCEP member country as compared to the United States. It painfully illustrates the region’s reliance on trade for growth and income. A successfully implemented RCEP arrangement that works in their favour would be an important asset. The problem is that after five years of negotiations governments have still not made a deal.

Countries Trade (% of GDP) Net Trade in Goods (BoP, current US$)
The United States 30.2 -752,169,000,000.0
Brunei Darussalam 99.2 7,443,475,514.5
Cambodia 129.0 -3,223,932,911.3
Indonesia 48.1 6,982,569,777.3
Lao PDR 96.6 -1,609,207,482.9
Malaysia 138.3 34,605,096,541.3
Myanmar 42.3 -1,872,439,898.7
The Philippines 61.3 -17,330,408,069.2
Singapore 359.8 79,626,770,845.7
Thailand 132.0 17,263,100,000.0
Vietnam 169.5 12,126,000,000.0
China 45.7 435,041,621,802.1
Japan 37.6 -99,824,695,777.4
Korea, Rep 95.3 88,885,400,000.0
India 48.8 -144,047,356,696.9
Australia 42.3 452,558,075.6
New Zealand 55.2 961,259,921.6

Source: 2014 World Bank Statistics

The deal’s membership is diverse and this causes problems

The fundamental weakness of the RCEP is that its proposed membership includes countries with wildly divergent level of development. Trade agreements are traditionally, agreements among equals. They seek to impose key common principles regardless of the interests of members.

The RCEP was designed to be “fit for purpose” and move away from this pitfall. The hope is that liberalisation will help open up markets across the region to improve prosperity and opportunities.

The reality is far from that and conflicts of interest are already bubbling up. For instance, China wants trade in goods to be liberalised, but India is concerned about a potential influx of Chinese products and rising competition. Australia wants more tariff cuts than India is willing to offer. India is prioritising its service industries and prefers to negotiate goods, services and investment together.

Intellectual property (IP) provisions are also proving difficult to agree. Leaked texts suggest that Japan and South Korea want to go beyond the obligations of the World Trade Organisation’s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). This will reduce the access to markets such as pharmaceuticals. India, the ASEAN nations and China have pushed back on the proposal.

The division between developed and developing member countries is at the root of this conflict. Developed countries have strong incentives to push for higher IP standards that safeguard their economic development. Developing countries reject such provisions as they do not have adequate safeguards, or correction mechanisms, to implement them. It is difficult to see how the two sides can be reconciled when each has so much to lose.

There is a lack of full commitment

Seven of the 16 RCEP members are also members of the Trans-Pacific Partnership (TPP). It is expected that America’s withdrawal from the TPP deal effectively marks its death but some RCEP members do not want to give it up.

TPP RCEP
Combined population 800 million 3.4 billion
% of global trade 40% 29%
Combined trade (US$) 295 trillion 10.7 trillion
Combined GDP 28.3 trillion 21.2 trillion
% of world’s GDP 38% 28%
Average per capita GDP > US$30,000 US$5800

Some country’s representatives called for a revival of the pact during the latest RCEP meeting in Kobe. Donald Trump could change his mind or the deal could proceed without the US, they said. This understandable inclination towards the TPP suggests a lack of faith or commitment in the RCEP. How sincere would these countries be in negotiations? Trade agreements are built on compromise, not self-imposed agreement.

There are similarities between the RCEP and the TPP

The challenge for advocates of the RCEP is not just to get a deal, but to differentiate the pact from the TPP. Dr Amitendu Palit of National University of Singapore describes the arrangement as a “virtuous 20th-century agreement, more about economics and trade rather than the geopolitics which is unavoidable if the US is part of the story”.

This is illusory. The two deals are very similar in their intellectual property provisions and could provide the US some advantage. Senior Global Policy Analyst, Jeremy Malcolm noted, “We might then, expect that RCEP could be the ‘anti-TPP’; a vehicle for countries to push back against the neo-colonial ambitions of the United States … But based on yesterday’s leaks, the promise of RCEP pushing back against the TPP is being squandered.”

The deal has reached a critical juncture

RCEP has the potential to chart a new trajectory in the global economic order and be the first step towards a free trade area in the Asia-Pacific region. This is only possible if member countries are able to address its weaknesses and problems.

To do this they will need to decide between speed and progress. The void created by the death of TPP could be so appealing that there is pressure to speed up the conclusion of the pact. This is dangerous ground.

As Japan’s former trade negotiator, Yorizumi Watanable puts it, “It is possible RCEP could take over from TPP as the model for future agreements. But if they try to rush, it might be thin.” Member governments may be keen to tackle the uncertainty left in the wake of the TPP but the right deal is more important than a quick deal. If not, the huge promise of the RCEP becomes just another paper-thin attempt to unite the region. Asia needs more.