Home .International Trade TPP or East Asia FTA?
TPP or East Asia FTA?
Friday, 11 March 2011 08:46

 

Trade with the dynamic emerging economies of East Asia will continue to be a major source of economic growth for mature economies like the US and Japan, as well as for the Asian economies themselves.

 

Opening of markets has been a big driver of this trade.  But much more market opening and policy reforms are necessary to maintain the momentum of this trade. 

 

How best to go about this?  By progressively and carefully constructing a free trade agreement for East Asia?  Or by a Trans Pacific Partnership jointly led by the US and Japan?

 

The past decade has seen a veritable flurry of activity in free trade agreements (FTAS) in East Asia, as the Doha trade talks under the World Trade Organization have been bogged down.  It all started with the ASEAN Free Trade Area (AFTA) almost 20 years ago.  And then FTAs were negotiated between ASEAN and economies like China, India, Japan, Korea, Australia-New Zealand and the EU.  There are also FTAs between some individual ASEAN countries and these other countries, which go deeper than the pure ASEAN agreements.

 

Many Asian regionalists believe that the time has come to build on this by negotiating an “East Asia Free Trade Area” among ASEAN, China, Japan and Korea (ASEAN+3).  The first step in this process would be an FTA between China, Japan and Korea.  These three countries have been discussing an FTA for many years through study groups, and so on.  But thorny issues like agriculture and difficult politics mean that these discussions are stuck in a rut.

 

These same regionalists would then see the following step as a Comprehensive Economic Partnership for East Asia (CEPEA) among the ASEAN+3 countries, and Australia, India and New Zealand (ASEAN+6).  And then may be after that, they could think about the US.

 

This all sounds like a nice way of building an East Asian Community that many Asian leaders have been talking about.  But is it realistic when China, Japan and Korea still have so many difficulties even talking with each other?  In addition, does this approach really serve the interests of the “leading edge” companies in countries like Japan and Korea?  These leading edge companies are exposed to large transactions costs, business risks and uncertainties.    

 

These ASEAN FTAs don’t go deep or broad enough in terms of opening markets.  Agriculture and other things are left out.  And effective market opening requires dealing with a whole range of issues like making a better business environment, improving logistics, protecting intellectual property, investment rules, competition policy and so on.  Most of Asia’s developing economies have done much of the easy reforms, but still do not have the high quality institutions of a sophisticated market economy.

 

Entering into the scene, we now have the “Trans-Pacific Partnership” (TPP).  It is the case of a mouse that is now roaring.  The original TPP was Lilliputian in scale.  Brunei, Chile, New Zealand and Singapore signed up in 2005.  Now Australia, Malaysia, Peru, United States, and Vietnam, are currently negotiating to join the TPP.  And the US is pushing Japan to join the group. 

 

The US and Japan have a joint economic interest in a TPP.  They both need the growth of emerging Asian markets to drive their own growth.  A TPP could provide another wing to the US/Japan Alliance.  True, Japan has the problem of agriculture to deal with.  But the US also has agriculture problems.  The key thing is to come up with special policies, not protectionism, to give these sectors a future.  Japanese agriculture should not be defensive.  It should be targeting the premium end of the market.   

 

At the 2010 Yokohama APEC summit, leaders of the nine countries endorsed President Obama’s proposal to set a target for the settlement of TPP negotiations by the Hawaii APEC summit in 2011.  Japan’s Prime Minister Kan has set a deadline of June 2011 for his government’s decision on joining the TPP negotiations. 

 

Kan is pushing the TPP agenda, and has opened up a national debate on Japan’s outrageous agricultural sector protection.  Now the whole nation of Japan is discussing this.  There is an emerging consensus that the nation must “bite the TPP bullet” as the most realistic way of hooking on to the potential of the Asia-Pacific region as a new source of growth.

 

The TPP is a different animal from the ASEAN FTAs.  The TPP is a “high quality” trade agreement.  It covers trade in goods, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, trade in services, intellectual property, government procurement and competition policy.

 

From a trade policy and business point of view, the TPP is certainly much more attractive than the ASEAN+3 agreements.  It also offers the prospect that Asia’s developing countries could aspire to joining it, and using the necessary policy reforms as a new driver of growth.  A number of ASEAN economies are now suffering from less dynamic economic performance, and risk falling into the “middle income trap”.  The US and Japan could provide policy assistance to these countries to help them lift the quality of their institutions.

 

The now US-driven TPP is a very bold and potentially divisive initiative for several reasons:

 

.  Asian economic and political cooperation, including FTAs, have used ASEAN as a hub, in part because of the animosity between China, Japan and Korea. A US/Japan led TPP could usurp ASEAN centrality, and mean that the Asia-Pacific’s leading developed economies would be back in the driver’s seat – something that would ruffle ASEAN’s feathers.  In reality, the TPP brings the region’s trade policy back to the idea of the Free Trade Area of the Asia Pacific proposed by APEC.    

 

.  In the various versions of the East Asian Community proposal, the role and position of the US is not clear.  Many “Asianists” would prefer to keep the US out.  By driving the TPP discussions, the US is putting itself clearly in the centre of an Asian-Pacific community, and proposing joint US/Japan leadership of the region.  Will everyone be happy with that? 

 

.  In the first instance, China could not become a member of the TPP because its policies and institutions are not up to the mark.  Joining the TPP would require as much effort from China as WTO membership did.  So China, now the world’s number 2 economy, would be relegated to second tier status – even though it is in many ways leading Asian regionalism through its rapidly growing market, its investments everywhere, its infrastructure links with all of its Asian continental neighbors, and its development assistance to many poorer countries, including in the Pacific.  China could be an observer to the TPP discussions.  But would they be happy with that? 

 

The TPP is still unfolding, and many cards are yet to be played.

 

Watch this space

 


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