Mega-regional trade deals in the Asia-Pacific

Jeffrey Wilson - Lecturer in International Political Economy at the Asia Research Centre, Murdoch University, Australia

The origins of the TPP and RCEP lie in the recent shift towards bilateralism in the Asia-Pacific trade system.  During the 2000s, Asian governments signed some fifty-one bilateral free trade agreements – due to a perception there was a ‘lack of action’ at the WTO, as well as a desire to use FTAs for geopolitical (rather than narrowly economic) purposes.  However, these agreements have caused several problems for the regional trading system.  First, most of the FTAs have been of relatively low quality, typically excluding a wide range of sensitive sectors and failing to deal with ‘new’ trade issues such as investment and intellectual property.  Second, they have created what is known as the noodle bowl problem – a fragmented set of incommensurate and overlapping trade rules undermining the cohesiveness of regional economic integration.

To fix these problems, many governments in Asia have proposed multilateralising the Asia-Pacific trading system by combining some of the many FTAs into a single and comprehensive regional agreement.  But when governments started devising strategies for multilateralisation, not one but two proposals were put forward: the TPP and the RCEP agreements.

The TPP was the first of the proposals.  It began life as a smaller trade agreement – the P4 agreement of 2006 – which covered issues such as investment, competition and intellectual property that many previous FTAs had ignored.  In 2008, the United States expressed interest in joining and expanding the P4 agreement into the TPP, for which negotiations began in March 2010.  While the TPP initially consisted of eight parties, Canada, Malaysia, Mexico and Japan all subsequently joined negotiations.  A framework agreement was agreed in late 2011 and the members have now completed 20 rounds of negotiation.  Members describe the TPP as a ‘21st century trade agreement’ that will extend on existing WTO rules – known as a ‘WTO Plus’ approach to trade liberalisation.  The scope of issues under negotiation is extensive, covering twenty areas as diverse as government procurement, environmental standards, financial services, intellectual property and investment. The TPP also has a very broad membership model, with one of its major selling points that it includes countries on the Pacific Rim – Australia, Canada and the US – which are major Asian trade partners.

But, at the same time, talks also began for a very similar mega-regional FTA: the RCEP.  Growing out of two previous FTA proposals made respectively by Japan and China to ASEAN, it was decided to combine these two proposals into a single ASEAN-led initiative in 2011.  At its core, RCEP’s primary goal is to ‘multilateralise’ Asia’s existing trade agreements by combining ASEAN’s five FTAs with regional partners into single agreement.  Where the TPP aims to solve the quality issues, RCEP has instead focused on the noodle bowl problem.  RCEP’s ambitions are much lower than those of the TPP, with its primary focus trade in goods.  Far less attention is paid to non-tariff issues, and the agreement aims only to be ‘WTO consistent’, rather than taking on the challenging ‘WTO Plus’ agenda.  RCEP also has a more restricted geographic scope than the TPP.  The negotiating partners have agreed to affirm the principle of ‘ASEAN Centrality’ and at present the only participants are those that already have FTAs with the ASEAN bloc.  This ‘Asian’ membership model has benefits and costs: while all Asian countries are included, the US is not.

It’s clear these mega-regional trade deals embody markedly different visions for how the Asia-Pacific trade system needs to evolve.  This poses difficult choices for regional governments – which should be accorded higher priority, and how should negotiating efforts be divided between the initiatives? Choosing between the TPP and RCEP will require governments to make complex decisions over what kind of regional trade system better suits their interests.

A first question relates to ambition – are Asia-Pacific governments ready to move towards WTO Plus-style trade liberalisation?  If not, RCEP is clearly preferable, as it excludes sensitive areas such as investment, intellectual property, services and agriculture.  But, if there is some appetite for deeper trade liberalisation, the TPP will be more attractive – not only for individual governments, but also because it contributes to broader regional efforts to promote trade liberalisation (such as APEC’s Bogor Goals).  Here, a major tension is caused by ‘development gaps’ within the region, as wealthier states such as Japan, Singapore and Australia clearly have more capacity for (and more potentially to gain from) WTO Plus liberalisation than developing countries in Southeast Asia.

A second question relates to so-called ‘ASEAN Centrality’ principle – to what extent will ASEAN be the lynchpin of economic regionalism in Asia?  RCEP is designed with ASEAN as the hub around which existing FTAs will be multilateralised and will cement the group’s position in the regional economic architecture.  In comparison, the TPP’s Asia-Pacific model is more attractive in purely economic terms (particularly by including the US), but does little to augment ASEAN’s status as a regional institution.  At stake is the question of how important ASEAN centrality is to Southeast Asian governments, and whether they will let this influence trade policy decisions.

A final question concerns geopolitics, and the dilemma of US and China competition.  Competition between the TPP and RCEP is essentially a proxy for US-China rivalry – with both promoting their own proposal while refusing to participate in the other.  Some analysts have even claimed the TPP is an American strategy to ‘contain’ Chinese economic influence in Asia, and that China only threw its weight behind RCEP to ‘balance’ against the TPP.  This reveals these agreements are not simply about trade, but also about a geopolitical struggle between the US and China over which will ‘lead’ the Asian region in coming years.  Choosing between the TPP and RCEP will force Asia-Pacific government to signal their allegiances between the two great powers in the region, and any choice will risk gaining favour with one party at the expense of relations with the other.