The China/Japan/South Korea FTA which is
under negotiation will lend support to the ASEAN-led pathway to a region-wide
FTA in Asia. Will it be complementary or competitive to the US-led TPP? The
Trilateral Summit Leaders should follow through with bold actions to conclude
the negotiations expeditiously.
The
Trilateral Summit last month announced that negotiations would begin later this
year on a China/Japan/South Korea FTA or the C/J/K FTA. This suggests that two
pathways to a region-wide FTA are starting to evolve in Asia. One is the
ASEAN-led East Asian FTA and the Comprehensive Economic Partnership for East
Asia (CEPEA). The alternative pathway is the US-led Trans-Pacific Partnership,
which is already under negotiation.
In the
past two decades the world has witnessed a proliferation of free trade
agreements (FTAs), with Asia in the forefront. The number of FTAs signed by
Asian countries increased from 3 in 2000 to 71 in 2012. Of these, 62 FTAs are
in effect. This proliferation has occurred mainly because multilateral
negotiations under the Doha Development Round have stalled. Although recent
research results are more sanguine, proliferation of FTAs lead to the so-called
“noodle bowl” effect which refers to the increased administrative and transaction
costs due to multiple rules of origin.
One way
of reducing the “noodle bowl” effect of FTAs and making them stepping stones,
rather than stumbling blocks, to multilateralism is to broaden their membership
and to deepen their coverage beyond tariffs to areas such as promotion of
investment and technology cooperation. Region-wide FTAs are less trade
diverting and more trade creating than bilateral ones. Consolidation of FTAs
is, therefore, in order.
Two Pathways
The
ASEAN-led pathway begins with the ASEAN FTA which has been in place since 1992,
combining it with the ASEAN+1 FTAs with China, Japan, Korea, India, Australia,
and New Zealand, and then consolidating these with the trilateral C/J/K FTA.
The resulting East Asian FTA could then be expanded to cover all of the ASEAN+6
and become the CEPEA. This sequential approach to trade integration reflects
Asia’s pragmatic bottom-up approach to integration that supports sub-regional
cooperation as the building blocks of an eventual broader, deeper and more
unified regional architecture.
The
alternative pathway, the US-led Trans-Pacific Partnership (TPP), is also
gaining currency. In addition to the nine countries in three continents –
Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, United
States, and Vietnam, at the APEC Summit in Honolulu in November 2011, three
more countries – Japan, Canada, and Mexico – expressed their interest in
joining the negotiations as well. The 12th round of negotiations just concluded
in Dallas, Texas, and the target is to try to wrap it up by the year end. A key
element of the Obama Administration’s commitment to make US engagement in the
Asia-Pacific a top priority, the TPP focuses on a deep “high quality, 21st
century” FTA which covers not only trade in goods and services, but also
intellectual property rights, government procurement, labour standards,
environmental regulations, and small and medium enterprises. It seeks to
eventually achieve the APEC’s stalled Free Trade of the Asia-Pacific (FTAAP).
Complementary Or Competitive?
Are the
two pathways to region-wide FTA in Asia, complementary or competitive? Japanese
Prime Minister Noda has been quoted as saying: “We will promote the TPP and the
trilateral FTA in parallel. These efforts can be mutually reinforcing to each
other”. Others have a different take. An eminent trade economist from Columbia
University, Professor Jagdish Bhagwati, has argued that one of the major
reasons for the stalled efforts to promote the Free Trade of the Americas
between North America and South America was the insistence by the US that high
doses of non-trade related issues including labor standards be included in the
talks. Brazil’s former President Luiz Lula Inacio de Silva, flatly rejected the
inclusion of labour standards in trade. The US efforts, therefore, led to the
division of South America into two blocks.
The C/J/K FTA
When
the Leaders of China, Japan, and Korea announced on 13 May 2012 that they had
agreed to begin negotiations on the C/J/K FTA later this year, they also
announced a complementary agreement on a three-way investment treaty. Although
the C/J/K FTA had been on the drawing board for some time, progress had not
been made in the past as the three North-eastern neighbours are divided by
political distrust, protectionist interests, and divergent investment policies,
as well as by regional worries about China’s expanding economic and military
power. Why the sudden change?
The
Leaders described their steps as a means to not only boost trade but also to
cement East Asian regionalism and build political trust among each other. All
three countries are major global exporters and together they account for nearly
20% of world GDP. The Xinhua news agency reported recently that the C/J/K FTA
could lift China’s GDP by up to 2.9%, Japan’s by 0.5%, and Korea’s by 3.1%.
Still
many hurdles remain for the successful negotiation of the C/J/K FTA. In
addition to those mentioned above, China is unlikely to make concessions that
would threaten the state’s ability to control what it perceives as strategic
industries, and agriculture producers in Japan and Korea have the political
clout to defend the extensive trade barriers that benefit them.
If the
intent of the Leaders’ announcement last month was to show support to the
ASEAN-led pathway to a region-wide FTA in Asia – in view of the perceived
threats from the US-led pathway – they should overcome the political and other
obstacles and conclude the negotiations as expeditiously as possible. At the
end of the day that is what matters and not expressions of interest to begin
negotiations.
Pradumna
B Rana
Pradumna B. Rana is Associate Professor in
International Political Economy at the S. Rajaratnam School of International
Studies (RSIS), Nanyang Technological University and coordinator of economic
multilateralism and regionalism studies at the RSIS’ Centre for Multilateralism
Studies.
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