Trade Regionalism in the Asia-Pacific : Developments and Future Challenges [1 ed.] 9789814695459

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TRADE TRADE REGIONALISM REGIONALISM IN THE THE ASIA-PACIFIC ASIA-PACIFIC IN

ISEAS–Yusof Ishak Institute (formerly the Institute of Southeast Asian Studies) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publications works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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TRADE REGIONALISM IN THE ASIA-PACIFIC

Edited by Sanchita Basu Das and Masahiro Kawai

First published in Singapore in 2016 by ISEAS Publishing 30 Heng Mui Keng Terrace Singapore 119614 E-mail: [email protected] Website: bookshop.iseas.edu.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the ISEAS–Yusof Ishak Institute. © 2016 ISEAS–Yusof Ishak Institute, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data Trade Regionalism in the Asia-Pacific : Developments and Future Challenges / edited by Sanchita Basu Das and Masahiro Kawai. Papers originally presented at a Symposium on Regionalism in the Asia-Pacific : Current and Future Developments, held in Singapore on 21 August 2014.  1. Regionalism—Asia.  2. Regionalism—Pacific Area.  3. Asia—Economic integration.   4. Pacific Area—Economic integration.   I. Basu Das, Sanchita.   II. Kawai, Masahiro, 1947  III. Symposium on Regionalism in the Asia-Pacific : Current and Future Developments (2014 : Singapore) HC412 R34           November 2015 ISBN 978-981-4695-44-2 (soft cover) ISBN 978-981-4695-45-9 (E-book PDF) Typeset by International Typesetters Pte Ltd Printed in Singapore by Markono Print Media Pte Ltd

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CONTENTS Foreword vii Acknowledgments ix List of Abbreviations xi The Contributors xv 1. Introductory Overview — Trade Regionalism in the Asia-Pacific: Developments and Future Challenges Sanchita Basu Das and Masahiro Kawai I.

1

The Trans-Pacific Partnership (TPP) Agreement

27

2. The Origins and Evolution of TPP Trade Negotiations Deborah Elms

29

3. The Political Economy of Joining TPP: The Case of Malaysia Cassey Lee

50

4. China and the TPP: Reflections and Responses Wang Yuzhu

71

5. Japan and Entanglement of Regional Integration in the Asia-Pacific: Combining Cutting-Edge and Traditional Agendas Takashi Terada

85

II. The Regional Comprehensive Economic Partnership (RCEP) Agreement 6. RCEP Prospect and Challenges: Political Economy of East Asian Integration Yose Rizal Damuri

103 105

v

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vi Contents

7. Challenges Facing the RCEP Negotiations Sanchita Basu Das

122

8. From AEC to RCEP: Implications for the CLMV Vo Tri Thanh

147

9. RCEP: An Indian Perspective Amitendu Palit

167

III. Regional Economic Integration: A Multi-stage Approach

183

10. AEC and ASEAN+1 FTAs: Progress, Challenges and Future Chia Siow Yue

185

11. CJK FTA Rationale, Prospects and Challenges Hyung-Gon Jeong and Boram Lee

213

IV. Old and Emerging Approaches to Asia-Pacific Regional Integration

237

12. APEC at 25: Political Realities Realized Malcolm Cook

239

13. The TTIP, Mega-regionalism and Asia Michael G. Plummer

256

14. The Pacific Alliance: A Bridge between Latin America and the Asia-Pacific? Sebastián Herreros

273

V. Asia-Pacific Regional Integration: Towards Convergence?

295

15. APEC, TPP, and RCEP: Towards an FTAAP Robert Scollay

297

16. The Implications of Mega-regional Trade Agreements on the World Trade Organization Patrick Low and Michael Yeo Chai Ming

323

Index 341

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Foreword Masahiro Kawai, Professor at the Graduate School of Public Policy, University of Tokyo and Sanchita Basu Das, Fellow at ISEAS–Yusof Ishak Institute, have brought together a valuable collection of short papers written by leading thinkers on the subject of regional economic cooperation. I congratulate all the authors and editors for their contribution to the current debate on the Asia-Pacific regionalism. Regional Trade Agreements (RTAs) have been proliferating in the Asian region in the post-Cold War period, especially after multilateral trade talks led by the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC) stalled. These RTAs are seen as alternative paths for trade liberalization and cooperation. Southeast Asia countries are strong proponents of this approach. Pushing first for the ASEAN Free Trade Area, and more recently the ASEAN Economic Community, individual ASEAN member countries are also pursing separate Free Trade Agreements (FTAs) among “like-minded” partners across Asia and the Pacific-Rim nations. Against this backdrop of a growing number of economic cooperation arrangements, governments started to explore options for a consolidated and coherent Asia-Pacific trading architecture. This has led to the development of two mega-regionals, namely the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), the former spearheaded by the United States, and the latter by ASEAN. Meanwhile, a Free Trade Area of the Asia-Pacific (FTAAP), first discussed in APEC meetings in 2004, has been revitalized after China restarted the discussion again in 2014 at the APEC Leaders’ Meeting that year. This book volume is a timely contribution to the on-going deliberations on the Asia-Pacific regional cooperation. It provides analytical discussions at four levels. First, the publication discusses in detail the two mega-regionals, the TPP and the RCEP, that are ongoing at this moment. Second, it examines the feasibility of the ASEAN Economic Community and the China–Japan–Korea Trilateral Agreement serving as building blocks for vii

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viii Foreword

the more comprehensive agreements in Asia. Third, it sheds light on the other regionals, like the Asia-Pacific Economic Cooperation (APEC), the Transatlantic Trade and Investment Partnership (TTIP) and the Pacific Alliance (PA), and examines their potential for linking the Pacific and Asia. Lastly, the publication examines the possibility for a FTAAP and its implications for the WTO. While it is difficult to foresee how these trade agreements will develop in the future, the discussions presented in this volume will contribute to a better understanding of what has happened since the early years of their inception, the underlying issues and their future development. I hope that policymakers, business leaders and the interested public will find this publication stimulating and useful. Tan Chin Tiong Director ISEAS–Yusof Ishak Institute Singapore

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acknowledgements We would like to thank the chapter writers for their contributions, especially their excellent work in revising their original papers. We are highly grateful to Mr Michael Yeo Chai Ming and Ms Pham Thi Phuong Thao, both Research Officers at ISEAS–Yusof Ishak Institute for their editorial assistance without which this book would not have been possible. Many thanks also go to Mr Tan Chin Tiong (Director of ISEAS–Yusof Ishak Institute), Mr Rodolfo Severino (former Head, ASEAN Studies Centre at ISEAS–Yusof Ishak Institute), and Dr Francis Hutchinson (Coordinator of Regional Economic Studies Programme at ISEAS–Yusof Ishak Institute) for their valuable advice and support. We would also like to thank Ms Reema Bhagwan Jagtiani (Research Officer at ISEAS–Yusof Ishak Institute), Mrs Y.L. Lee (Head of Admin) and her associates for helping to organize the symposium on 21 August 2014 at ISEAS, on which this edited volume is based. Finally, we sincerely thank the staff of ISEAS Publications Unit, especially Mr Ng Kok Kiong (Head, Publishing and Managing Editor), for their efforts and support in getting this book published. Sanchita Basu Das and Masahiro Kawai The Editors

ix

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list of abbreviations AANZ AANZFTA ABAC ACFTA ACIA ADB ADBI AEC AFAS AFC AFTA AIA AICO AIFTA AIIB AIMR AJCEP AKFTA ALBA APC APEC APT ARF ARIC ASEAN ASEAN-6 ASEM ATIGA CAFTA

ASEAN–Australia–New Zealand ASEAN–Australia–New Zealand FTA ASEAN Business Advisory Council ASEAN–China FTA ASEAN Comprehensive Investment Agreement Asian Development Bank Asian Development Bank Institute ASEAN Economic Community ASEAN Framework Agreement of Services Asian Financial Crisis ASEAN Free Trade Area ASEAN Investment Area ASEAN Industrial Cooperation ASEAN–India FTA Asian Infrastructure Investment Bank ASEAN Integration Monitoring Report ASEAN–Japan Comprehensive Economic Partnership ASEAN–Korea FTA Bolivarian Alliance for the Peoples of Our America Asia-Pacific Community Asia-Pacific Economic Cooperation ASEAN Plus Three ASEAN Regional Forum Asia Regional Integration Centre Association of Southeast Asian Nations Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand Asia–Europe Meeting ASEAN Trade in Goods Agreement China–ASEAN FTA xi

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xii

CBNI CECAs CEP CEPAs CEPEA CEPT CER CGE CJK CJK FTA CK FTA CLM CLMV CTC CTH CTSH DDA E3 EAC EAFTA EAI EAS ECLAC EHP EPA EPU ERIA ETP EU FDI FTA FTAA FTAAP FTZ GATS GATT GCC GDP

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List of Abbreviations

Capacity Building Needs Initiative Comprehensive Economic Cooperation Agreements Comprehensive Economic Partnership Comprehensive Economic Partnership Agreements Comprehensive Economic Partnership of East Asia Common Effective Preferential Tariff Closer Economic Relations computable general equilibrium China, Japan, Republic of Korea China–Japan–Korea FTA China–Korea FTA Cambodia, Lao PDR and Myanmar Cambodia, Lao PDR, Myanmar and Vietnam Change in Tariff Classification Change in Tariff Heading Change in Tariff Sub-Heading Doha Development Agenda Expanded Economic Engagement East Asian Community East Asia Free Trade Area Enterprise for ASEAN Initiative East Asia Summit Economic Commission for Latin America and the Caribbean Early Harvest Programme Economic Partnership Agreement Economic Planning Unit Economic Research Institute for ASEAN and East Asia Economic Transformation Programme European Union Foreign Direct Investment Free Trade Agreement Free Trade Area of the Americas Free Trade Area of the Asia-Pacific Free Trade Zone General Agreement on Trade in Services General Agreement on Tariffs and Trade Gulf Cooperation Council Gross Domestic Product

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List of Abbreviations

GFC GLCs GNI GST GTP GVCs HDI HSL IAI ICT IEG IP IPR ISDS JBIC JETRO JSC KIEP KJFTA LDP LEP MERCOSUR MFN MILA MNC MPAC MRAs NAFTA NKEA NEP NGO NTBs NTMs OCPs ODA OECD PA PECC PSE

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xiii

Global Financial Crisis Government-Linked Corporations Gross National Income Goods and Services Tax Government Transformation Programme global value chains Human Development Index Highly Sensitive List Initiative for ASEAN Integration information and communications technology Investment Expert Group Intellectual Property Intellectual Property Rights investor–state dispute settlement Japan Bank of International Cooperation Japan External Trade Organization Joint Study Committee Korea Institute for International Economic Policy Korea–Japan FTA Liberal Democratic Party Look East Policy Mercado Común del Sur [Southern Common Market] most-favoured nation Latin American Integrated Market multinational corporation Master Plan for ASEAN Connectivity Mutual Recognition Arrangements North American Free Trade Agreement National Key Economic Areas New Economic Policy non-governmental organization non-tariff barriers non-tariff measures Operational Certification Procedures Official Development Assistance Organization for Economic Cooperation and Development Pacific Alliance Pacific Economic Cooperation Council producer support estimate

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xiv

PSR PTA RCA RCEP REI ROO RTA RVC SHPFTA SFTZ SITC SL SMEs SOE SOPA SPR SPS TBT TIFAs TiSA TPA TPP TPSEP TPS-OIC TRIPS TRQs TTIP UN TRAINS UN Comtrade UNCTAD USTR WO WTO

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List of Abbreviations

Product Specific Rule Preferential Tariff Agreement revealed comparative advantage Regional Comprehensive Economic Partnership Regional Economic Integration Rules of Origin Regional Trade Agreement Regional Value Content Shanghai Pilot FTA Shanghai Free-Trade Zone Standard International Trade Classification Sensitive List small and medium-sized enterprises state-owned enterprise Stop Online Piracy Act Specific Process Rule sanitary and phytosanitary Technical Barriers to Trade Trade and Investment Framework Agreements Trade in Services Agreement Trade Promotion Authority Trans-Pacific Partnership Trans-Pacific Strategic Economic Partnership Agreement Trade Preferential System among the Member States of the Organisation of the Islamic Conference Trade-Related Aspects of Intellectual Property Rights tariff-rate quotas Transatlantic Trade and Investment Partnership United Nations Trade Analysis and Information System Database United Nations Commodity Trade Statistics Database United Nations Conference on Trade and Development United States Trade Representative Wholly Obtained or Produced World Trade Organization

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the contributorS Sanchita BASU DAS is a Fellow and Lead Researcher (Economics) at the ASEAN Studies Centre and the Coordinator of the Singapore APEC Study Centre, both based at ISEAS–Yusof Ishak Institute in Singapore. She is also a co-editor of the Journal of Southeast Asian Economies (formerly ASEAN Economic Bulletin). Prior to joining the Institute in 2005, she has worked in the private sector as an economist in India and Singapore. Ms Basu Das has an MBA from the National University of Singapore and an MA from the Delhi School of Economics, University of Delhi, India. She is the author/editor of seven books, special editor of three journal issues and author of numerous book chapters and policy papers. Her latest co-edited book publications include: Moving the AEC Beyond 2015: Managing Domestic Consensus for Community-Building (2016); The ASEAN Economic Community: A Work in Progress (2013); Asia and the Middle Income Trap (forthcoming). Her research interests include economic integration in ASEAN and the Asia-Pacific region, regionalism and economic development, and macro-economic issues in Southeast Asia. CHIA Siow Yue is a Senior Research Fellow at the Singapore Institute of International Affairs (SIIA). Prior to joining SIIA, she was the Director of the Institute of Southeast Asian Studies and Director of the Singapore APEC Study Centre as well as the Regional Coordinator of the East Asian Development Network and former Professor of Economics at the National University of Singapore. Her research areas are international economics and development economics, particularly foreign direct investment, trade policy, and regional economic integration. She has authored, co-authored and edited more than forty books and reports and published more than one hundred papers and articles in academic books and journals. She serves as a committee member and resource person in numerous international and regional organizations. xv

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xvi

The Contributors

Malcolm COOK is a Senior Fellow at ISEAS–Yusof Ishak Institute in Singapore. From 2003 to 2010, he was the inaugural East Asia Program Director at the Lowy Institute where he remains a non-resident fellow. He left the Institute in 2010 to become the inaugural Dean of the School of International Studies at Flinders University in Adelaide. Dr Cook obtained his PhD in International Relations from the Australian National University, holds an MA in International Relations from the International University of Japan and an honours degree from McGill University in Canada. He has lived and worked in Canada, Japan, South Korea, the Philippines, Australia, and Singapore, and enjoys working at the intersections between academia, government, media, and business. Yose Rizal DAMURI is the Head of the Department of Economics, Centre for Strategic and International Studies (CSIS). Currently, he is in charge of preparing CSIS’s monthly updates on Eurasia’s Stability Index for Indonesia. He is also responsible for the further development of the WAYANG Model, a general equilibrium model for Indonesia, developed earlier by a consortium of research institutes that include CSIS. He also teaches at the Faculty of Economics, University of Indonesia and several economic and finance short courses in Jakarta. In addition, he occasionally writes in local and national newspapers. He received his PhD in International Economics from the Graduate Institute of International Studies, Geneva, Switzerland. Deborah ELMS is Executive Director of the Asian Trade Centre in Singapore. She is also a Senior Fellow in the Singapore Ministry of Trade and Industry’s Trade Academy. Previously, she was Head of the Temasek Foundation Centre for Trade & Negotiations (TFCTN) and Senior Fellow of International Political Economy at the S. Rajaratnam School of International Studies at the Nanyang Technological University, Singapore. Her research interests are negotiations and decision making, and her current research involves the Trans-Pacific Partnership (TPP) negotiations and global value chains. She has provided consulting on a range of trade issues to governments including the United Arab Emirates, Sri Lanka, Cambodia, Taiwan, and Singapore. Dr Elms received a PhD in Political Science from the University of Washington, an MA in International Relations from the University of Southern California, and bachelor’s degrees from Boston University.

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Sebastian HERREROS is an Economic Affairs Officer at the Trade and Integration Division of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Before joining ECLAC in 2009, he worked on trade policy issues for thirteen years at the Chilean Ministry of Foreign Affairs. Between 2002 and 2007, he served as a Counsellor at the Chilean Mission to the World Trade Organization (WTO) in Geneva and was responsible for the Doha Round negotiations on agriculture and market access for non-agricultural products. Mr Herreros holds a Bachelor of Arts in Business Administration from the Catholic University of Chile and a Master of Science in International Political Economy from the London School of Economics. He lectures on International Economics at the University of Chile and is the author of several articles and book chapters on regional economic integration and trade negotiations. Hyung-Gon JEONG is currently the Vice President of the Korea Institute for International Economic Policy (KIEP). He graduated from the University of Bonn, Germany and holds a PhD in Economics from the University of Cologne, Germany. He was a Fulbright Visiting Scholar at Johns Hopkins University, School of Advanced International Studies (SAIS). He serves as a Consultant at the Fair Trade Commission, the Advisory Committee of Free Economic Zone of the Ministry of Trade, Industry and Energy. He is also a member of the Standing Committee at the National Unification Advisory Council. He had participated in the Korea–China–Japan Joint Research Project as a Research Fellow from 2010 to 2011 and conducted joint research projects with the Institute of Developing Economies (IDEJETRO) in Japan and Development Research Center of the State Council (DRC) in China from 2006 to 2010. He also served as a Consultant of Special Economic Zone for the governments of Vietnam, Uzbekistan, and Kazakhstan as part of the Korean knowledge-sharing projects. Before joining KIEP, Dr Jeong was Director General of the Office of Strategic Planning at the National Security Council (NSC), the Blue House from June 2003 to December 2005. He has published many refereed journal articles, books and working papers on trade and investment, transition economy, and the North Korean economy. Masahiro KAWAI is a Professor at the Graduate School of Public Policy, University of Tokyo. He began his career as a Research Fellow at the Brookings Institution. He then became an Associate Professor in the department of political economy, Johns Hopkins University and a Professor of Economics at the Institute of Social Science, University of Tokyo. He also served as

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The Contributors

Chief Economist for the World Bank’s East Asia and the Pacific Region, as Deputy Vice Minister of Finance for International Affairs of Japan’s Ministry of Finance, as President of the Policy Research Institute of Japan’s Finance Ministry, as Special Advisor to the Asian Development Bank (ADB) President in charge of regional economic cooperation and integration, and as Dean and CEO of the Asian Development Bank Institute (ADBI). He assumed his current position in April 2014. Dr Kawai’s recent publications focus on economic regionalism in Asia. He has published a number of books and academic articles on economic globalization and regional economic integration and cooperation in Asia. His recent co-edited books include: Monetary and Currency Policy Management in Asia (2012); The Global Financial Crisis and Asia (2013); The Political Economy of Asian Regionalism (2014); New Global Economic Architecture: The Asian Perspective (2014); and A World Trade Organization for the 21st Century: The Asian Perspective (2014). He holds a BA in Economics from the University of Tokyo, an MS in Statistics and a PhD in Economics from Stanford University. Boram LEE is a Senior Researcher in the Department of Northeast Asian Economies at the Korea Institute for International Economic Policy (KIEP). Her work at KIEP is on Northeast Asian and East Asian economic cooperation, focusing on trade-related issues. Before joining KIEP in 2011, she graduated from the Graduate School of International Studies, Ewha Womans University, Seoul. Cassey LEE is currently a Senior Fellow at ISEAS–Yusof Ishak Institute in Singapore. His previous appointments include Senior Lecturer at the University of Wollongong (Australia), Associate Professor of Industrial Organization at the Nottingham University Business School, Malaysia and Associate Professor at the Faculty of Economics and Administration, University of Malaya. Dr Lee received his PhD in Economics from the University of California, Irvine. He specializes in industrial organization with extensive research and consulting experiences in industries such as manufacturing, financial services, infrastructure (land transport, railways, ports, telecommunications and water) and motion pictures. His current research focuses on competition policy, regulatory reforms and firm-level studies related to innovation, productivity and trade. He has published in peer-reviewed journals such as the Journal of Economic Dynamics and Control, Kyklos, Journal of Economic Surveys, Journal of Asian Economics, and Economic Modelling.

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Patrick LOW is Vice President for Research at the Fung Global Institute in Hong Kong. Until August 2013, he was Chief Economist at the WTO, having worked for the organization since its foundation in 1995. He was appointed Chief Economist in 1997 and served as its DirectorGeneral Mike Moore’s Chief of Staff from 1999–2000. He worked in the World Bank’s research complex (International Trade Division) from 1990–94. Prior to that, he taught at El Colegio de México in Mexico City from 1987–90 and was a consultant for a range of governments and inter-governmental institutions. From 1980–87, he worked at the GATT (General Agreement on Tariffs and Trade) Secretariat in Geneva. Dr Low was also an Adjunct Professor of International Economics at the Graduate Institute of International and Development Studies, Geneva, from 2004 until mid-2013. He holds a PhD in Economics from Sussex University in the United Kingdom and has written widely on a range of trade policy issues. Amitendu PALIT is a Senior Research Fellow and Research Lead (trade and economics) at the Institute of South Asian Studies (ISAS), National University of Singapore. An economist specializing in international trade and investment policies, comparative economic studies, and political economy of public policies, he has been with ISAS since April 2008. Prior to that, he was with the Indian Council for Research on International Economic Relations (ICRIER), a leading economic policy research institute and think-tank in Delhi. Dr Palit is a columnist for India’s well-known financial daily, Financial Express and a regular contributor for the China Daily and Business Times. He appears regularly as an expert on the BBC, Bloomberg, Channel News Asia, CNBC, Australian Broadcasting Corporation (ABC), Doordarshan (India) and All-India Radio. He is a visiting faculty for several leading management and business schools and has been a consultant for the Commonwealth Secretariat, International Labour Organization (ILO), United Nations Development Programme (UNDP) and the Indian Institute of Foreign Trade (IIFT), India. His latest book is The Trans Pacific Partnership, China and India: Economic and Political Implications (2014). His earlier books include China–India Economics: Challenges, Competition and Collaboration (2011) and Special Economic Zones in India: Myths and Realities (2008, co-authored).

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The Contributors

Michael G. PLUMMER is Director, SAIS (School of Advanced International Studies) Europe, and the Eni Professor of International Economics at the Johns Hopkins University. He is also Editor-inChief of the Journal of Asian Economics (Elsevier); President, American Committee for Asian Economic Studies (ACAES); and (non-resident) Senior Fellow, East-West Center. He was Head of the Development Division of the Organisation of Economic Co-operation and Development (OECD) from 2010–12. Prior to these positions he was Associate Professor of Economics at Brandeis University (1992–2001), where he received tenure in 1998, and Director of its MA programmes at the International Business School. He has also been a Fulbright Chair in Economics and Pew Fellow in International Affairs, Harvard University; a research professor at Kobe University; and a Visiting Fellow at the Institute of Southeast Asian Studies, the University of Auckland and Doshisha University. Professor Plummer has worked on numerous projects for international organizations, development and other government agencies, and regional development banks, including the Asian Development Bank (ADB), the ASEAN Secretariat, and the ADB Institute. He is on the editorial boards of World Development, the ASEAN Economic Bulletin, and the Asian Economic Journal. His main academic interests relate to international trade, international finance, and Asian economic integration, especially in the ASEAN context. His PhD in Economics is from Michigan State University. Robert SCOLLAY received his economics education at the University of Auckland, New Zealand and the University of Cambridge, England. He is Director of the New Zealand APEC Study Centre at the University of Auckland, New Zealand, where he is also a member of the Economics Department. He is a former international coordinator for the PECC (Pacific Economic Cooperation Council) Trade Forum, and led a number of its research projects, some of which were undertaken for the APEC Business Advisory Council (ABAC), including an early study of the proposed Free Trade Area of the Asia-Pacific (FTAAP). Much of his recent research and publications have focused on regional trade agreements and regional economic integration, including recent developments such as the TransPacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

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Takashi TERADA is a Professor of International Relations, Doshisha University, Kyoto, Japan. He received his PhD from the Australian National University in 1999. Before taking up his current position in April 2012, he was an Assistant Professor at the National University of Singapore (1999– 2006) and associate and full professor at Waseda University (2006–11). He has also served as a Visiting Professor at the University of Warwick, U.K. (2011 and 2012) and a Japan Scholar at Woodrow Wilson International Center for Scholars, Washington D.C. (2012). His areas of specialty include international political economy in Asia and the Pacific and theoretical and empirical studies of regionalism and regional integration. His articles have been published by major international academic journals including The Pacific Review, Contemporary Politics, Australian Journal of International Affairs, International Negotiation, and Studia Diplomatica. He has been regularly consulted on national and international affairs by the Japanese, Australian and Singapore governments. He completed a major book project in Japanese in 2013 concerning power struggles over regional integration in the Asia-Pacific with a focus on the role of the United States, China and Japan. He is the recipient of the 2005 J.G. Crawford Award. VO Tri Thanh is formerly the Vice President of the Central Institute for Economic Management (CIEM), Vietnam. He holds a Bachelor of Science from the Moscow State University, a Masters and a PhD degree in Economics both from the Austraºlian National University. Dr Vo’s core research interests include trade liberalization, international economic integration and macroeconomic policies. His other areas of interests are institutional reforms, financial systems and economic development. WANG Yuzhu is a Senior Research Fellow at the National Institute of International Strategy (NIIS) (formerly the Institute of Asia-Pacific Studies), Chinese Academy of Social Sciences (CASS), Beijing, where he works on China–ASEAN relations and regional cooperation in the Asia-Pacific. He joined CASS in 2000, and received his PhD from the Graduate School of CASS. His publications appear mainly in Chinese journals and mostly focus on China–ASEAN relations, East Asian cooperation and the strategic thinking behind China’s regional cooperation. Currently, he is a member of the East Asian Cooperation Expert Group of the Ministry of Commerce of China. He is also the head of APEC and Regional Cooperation Center of CASS.

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The Contributors

Michael YEO Chai Ming is a Research Officer at ISEAS–Yusof Ishak Institute in Singapore, where he is also the Editorial Assistant of Sojourn: Journal of Social Issues in Southeast Asia. He received a BA (Hons) in History from the School of Oriental and African Studies in 2013, and an MSc in Economic History from the London School of Economics and Political Science in 2014. Mr Yeo’s research interests include the global histories of commodities and technology from the eighteenth century.

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1 Introductory Overview trade Regionalism in the Asia-Pacific: Developments and Future challenges Sanchita Basu Das and Masahiro Kawai Introduction In the last five years, the mega-regional trade agreements of the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) have caught the fancy of many countries across the Asia-Pacific region. In addition, the Transatlantic Trade and Investment Partnership (TTIP) is also being negotiated and the Pacific Alliance (PA) is being formed, in order to align their participating members with the forces of globalization and hence benefit from the Asia-Pacific’s emerging regional agreements. While the prognosis on these mega-regional deals is unclear at this juncture, it is certain that they will shape the global trade architecture of the twenty-first century — particularly the RCEP and the TPP — because of their sheer size and scope, covering issues that go beyond trade liberalization. However, it has been and will be difficult to first conclude the negotiations and thereafter to implement these mega-regionals as they are bound to face complex challenges. Though the broad text of the 1

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Sanchita Basu Das and Masahiro Kawai

TPP has been agreed by the twelve member nations, its full ratification is expected to take sometime. The RCEP process has been slow since the beginning of its journey in May 2013, and missed the deadline of end 2015, as promised earlier. This overview chapter looks at the literature on Regional Trade Agreements (RTAs), followed by a discussion on the role of RCEP and TPP, covering both economic and strategic aspects, in the bigger geography of the Asia-Pacific region. The chapter, thereafter, provides a short narrative of what is to be expected from the rest of the book. In the final section, it pulls strands from the subsequent chapters to give a flavour of where the future of the global trade environment could be headed.

Literature Review The post-Cold War proliferation of Free Trade Agreements (FTAs) — a form of new regionalism — has gained prominence as countries struggle to balance the challenge of globalization against domestic interests. The General Agreement on Tariffs and Trade (GATT) received 123 RTA notifications from 1948 to 1994,1 while the World Trade Organization (WTO) has received notifications for over 300 additional arrangements covering trade in goods and/or services since its inception in 1995. As of April 2015, 406 of the 612 RTA notifications (counting goods, services, and accessions separately) received by the GATT/WTO were in force.2 Compared to earlier FTAs, which only pertained to goods trade liberalization, these recent agreements have wider coverage and are considered a form of economic diplomacy. Additionally, they allow its participating economies to explore new avenues of regional economic cooperation, while complying with the WTO’s rules for multilateral trade liberalization. Asia fostered this trend of bilateral and plurilateral FTAs and joined the wave of “new regionalism” mainly with the advent of the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) in 1992. Subsequently, the drive for regionalism accelerated after the 1997–98 Asian financial crisis and the collapse of negotiations at the WTO Ministerial Conference of 1999. Singapore began its trade strategy of pursuing FTAs by signing its first bilateral FTA with New Zealand in August 2000, a policy soon adopted by many other Asian countries, both ASEAN and non-ASEAN members. The larger Asian economies — China, India, Japan, and South Korea — actively pursued a strategy of establishing FTAs to meet their economic and strategic goals. This rapid proliferation of

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Introductory Overview

3

FTAs in Asia is said to be the result of a “domino effect”, which pushed non-FTA members to join trade arrangements for fear of being left out (Crawford and Laird 2001). In parallel, ASEAN started to explore ways for further intra-regional integration through the ASEAN Economic Community (AEC). The objective of the AEC was “to create a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio-economic disparities in year 2020” (ASEAN 2003). During the ASEAN Summit in Cebu, Philippines in January 2007, the deadline to realize the AEC was brought forward by five years to 2015 (ASEAN 2007). In the same year, ASEAN also adopted the AEC Blueprint that laid out a road map to strengthen economic integration and realize the goals of the AEC by 2015 (ASEAN 2008). It should be noted that FTAs, compared to the multilateral liberalization process, are controversial because they are discriminatory in nature — non-members of FTAs are inevitably excluded from the benefits of these agreements. In that case, why embrace a “second-best” policy of pursuing FTAs, when the best option is available through the WTO’s multilateral system? This is mainly because of three reasons. First, the stagnation of the WTO’s multilateral trade talks has forced both developed and developing countries to explore alternative routes of liberalization — through bilateral or plurilateral initiatives — which are also “WTO consistent”, as per the rules in Article XXIV of GATT. Second, although the WTO multilateral process is useful in reducing cross-border impediments to trade in goods (tariffs and non-tariff barriers to trade) and in some services, it is not effective in addressing other issues, such as the “Singapore issues” (trade facilitation, investment, competition, and government procurement)3 and behind-the-border regulatory impediments to trade and investment. FTAs are effective in addressing such WTOplus issues. Third, bilateral and regional trade arrangements are not only meant to achieve economic, but also diplomatic and security, ends (Ravenhill 2006). Hence, unlike regionalism in its previous manifestation, when FTAs were driven largely by economic motives, new regionalism is driven also by strategic considerations, especially in Asia, which might override economic rationales (Sen 2006). Indeed, we observe a new phenomenon of economic cooperation that has economic consequences beyond merchandise trade (Banda and Whalley 2005). FTAs now encompass services and investment

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liberalization, and facilitation measures like standards, safeguard provisions, and customs administration. With the expansion of the scope of these agreements to cover more WTO-plus issues — such as competition policy, government procurement, environmental and labour standards, education, and other forms of economic cooperation — they are often termed as Comprehensive Economic Partnership Agreements (CEPAs). As different FTAs are negotiated under different frameworks, they vary widely from each other in terms of issues covered, depth, implementation deadlines, and forms of negotiation. For example, in the case of ASEAN, in addition to its own economic integration process, the grouping also pursued FTA negotiations with Australia–New Zealand, China, India, Japan, and South Korea. This is because in addition to intra-ASEAN trade in goods, which is limited to around 25 per cent of ASEAN’s total trade, extra-ASEAN trade with China, Japan, and other partners is equally important (together, China and Japan account for 24 per cent of ASEAN’s total trade). A key characteristic of these ASEAN+1 FTAs is their comprehensive nature. While most of them are termed as FTAs (like the ASEAN–China FTA), the ASEAN–Japan agreement is known as a CEP. In addition to liberalization measures, these FTAs comprise of trade and investment facilitation, competition policy, mutual recognition agreements, economic and technical cooperation, among others. Because of the different levels of economic developments among the member countries, economic and technical cooperation assumes special importance in these regional FTAs. However, specific features differ among these FTAs, depending on a country’s interest. Japan may look for trade and investment liberalization and facilitation, as such measures would provide free, transparent, and stable business environments for Japanese firms that participate in Asia’s production networks. While Singapore, Japan, and Korea may push for intellectual property rights, developing countries such as those in ASEAN, China, and India may have less interest in this protection system. For example, India could be keener on liberalizing services trade — such as IT (information technology) software, legal, financial, and medical services — rather than opening up its goods sector. This leads to significant differences among the ASEAN+1 FTAs. This varied nature of FTAs has raised criticisms as benefits from FTAs remain patchy and limited and the opportunity costs of mobilizing large numbers of government officials for prolonged FTA negotiations are high. There are also concerns about having many different FTAs because

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5

of their complexity, potential incompatibility, and the “noodle bowl” effect of overlapping FTAs that arise from different rules and regulations, particularly multiple rules of origin (ROO). While the importance of FTAs has been recognized, especially given the spread of global production chains, questions have been raised about the inconsistency between the numerous FTAs, and how that might not benefit the private sector by imposing business costs of using FTA preferences. In a survey of 841 export-oriented firms supported by the Asian Development Bank Institute (ADBI), Kawai and Wignaraja (2011) found that Japanese and Korean firms have low FTA utilization rates of 29 and 21 per cent respectively, although Chinese firms have a relatively high rate of 45 per cent. This is also the case for firms from ASEAN countries: Thailand (25 per cent), the Philippines (20 per cent), and Singapore (17 per cent). Companies reported that the reasons for not using FTAs include the lack of information on FTAs, low margins of preference, the prevalence of non-tariff barriers (NTB), the existence of exclusion lists, multiple ROOs, and administrative costs. This makes it important to analyse the trade and welfare effects of FTAs. Typical analyses are based on the seminal customs union model by Jacob Viner (1950), which assesses the net welfare effect of trade creation and trade diversion. In short, trade creation is the phenomenon of displacing the less efficient domestic production with more efficient production in the partner countries of trade agreements. This leads to economic gains as the country’s resources are now more efficiently utilized.4 However, it is also possible that the preferential treatment extended to a partner country will replace a more efficient non-FTA partner. In that case, there will be trade diversion, in which the importing country uses a less efficiently produced import. Earlier analytical works or simple modelling techniques on welfare effects were largely restricted to analysing trade in goods, and focused on advocating the reduction of tariff barriers and ROOs. They did not cover the recent CEPs that are wider in scope, and venture into both liberalization and facilitation measures. These limitations also exist when analysing welfare effects in ASEAN, as acknowledged by Banda and Whalley (2005), as researchers find it difficult to undertake focused evaluations of the impact of ASEAN’s FTAs on the global trading system when using analytical techniques of trade theory. Subsequently, Computable General Equilibrium (CGE)5 modelling was used extensively to evaluate the effect of comprehensive trade policies.

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One such study undertook a broad approach to studying trade costs by defining it as more than just the removal of tariffs and non-tariff barriers, including indirect expenses such as time and uncertainties due to customs clearance, aligning standards, and other facilitation measures (Brooks, Roland-Holst, and Zhai 2005). When using this broad definition of trade cost, the study found that the rise of real incomes in Southeast Asia due to more liberal trade policies were in the range of 35.5 to 116.6 per cent, compared to a range of 1.9 to 6.6 per cent when using a narrower definition. Other more recent studies using definitions that included both direct and indirect trade costs also came up with similar results. Petri, Plummer, and Zhai (2012, p. 115) used a CGE model — based on the assumptions of key AEC blueprint initiatives — to conclude that: [The] AEC could yield benefits … amounting to 5.3 per cent of the region’s GDP and more than twice that if … the AEC leads to free trade agreements with key external partners. Every ASEAN member will share in these benefits. There will be mild trade and investment diversion effects, but the world as a whole will benefit from the AEC.

In parallel to these analyses, there are also lively discussions on whether FTAs are “building blocks” or “stumbling blocks” to the multilateral trading system (Bhagwati 1993; Bhagwati and Panagariya 1996). Although this debate has produced some insightful hypotheses, it has not yielded any generally accepted conclusions (Winters 1999). One such hypothesis is that, FTAs, if crafted well, can result in more trade creation than trade diversion. In other words, new regionalism can be taken as a building block, and not a stumbling block, towards globalization. However, there are certain caveats to this: (a) FTAs should undertake full liberalization in the goods and services sector; (b) they should have homogenous ROOs and a robust dispute settlement mechanism; and (c) they should be open to new members on similar terms and conditions (Sen 2006). More recently, researchers have argued that it would be possible to “multilateralize” the world’s different FTAs, to create a more coherent global trading system. In other words, there could be an emerging trend when FTA members would attempt to resolve the “spaghetti bowl” impact of different forms of FTAs, so as to rationalize global trade relations (Baldwin and Low 2009). This literature focused on tariffs, ROOs, and rules of cumulation, and envisioned the possibility of FTAs becoming a

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step towards eliminating tariffs globally. A key aspect of such efforts is to reduce regulatory divergence between the different FTAs, especially the mega-regionals, which would pave the way for global trade liberalization. Baldwin (2014) further differentiated between “20th century regionalism” and “21st century regionalism”, highlighting the “internationalization of production processes from high-wage to low-wage nations” — or developments of global value chains (GVC) (p. 39). He argued that this difference is important because regionalism and FTAs are now primarily about supporting GVCs, meaning that old concepts — such as “trade creation and diversion” — might no longer be applicable (Baldwin 2014, p. 5). Thus, a future shift in mindset when thinking about twenty-first century regionalism and mega-regionals might be necessary. This leads to the next section of the chapter, which discusses two mega-regionals — the RCEP and the TPP — that are currently being negotiated to consolidate the smaller existing FTAs in the Asia-Pacific region, thus multilateralizing regionalism.

The Mega-regionals of RCEP and TPP Asian economies have been working on two mega-regional agreements: the RCEP and the TPP. Their memberships are summarized in Table 1.1.

Table 1.1 Memberships of RCEP and TPP Negotiations and an FTAAP RCEP India ASEAN Cambodia Lao PDR Myanmar

FTAAP

China Korea

Japan Australia New Zealand

NAFTA US Canada Mexico

Indonesia Philippines Thailand

Brunei Darussalam Malaysia Singapore Vietnam

Chile Peru TPP

Chinese Taipei, Hong Kong, Papua New Guinea, Russian Federation

Source: Authors’ compilation.

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The RCEP is an FTA currently negotiated by the ASEAN+6 countries and is generally understood as being centred on ASEAN. The ten ASEAN member countries have made persistent efforts to integrate their economies into a coherent economic region. These efforts have culminated in the members’ establishment of the AEC at the end of 2015 as mentioned earlier. One of the four pillars of the AEC is to integrate ASEAN with the global economy.6 The RCEP is an important step in this direction. It is an attempt to consolidate the five ASEAN+1 FTAs — ASEAN’s FTAs with its major dialogue partners of Australia–New Zealand, China, India, Japan, and Korea — into a single mega-regional FTA. Its distinct feature is that it is a grouping of countries that have formed a web of East Asia’s production networks and supply chains. The TPP is an FTA for Asia-Pacific Economic Cooperation’s (APEC) twelve countries and has the North American Free Trade Agreement (NAFTA) in its core. The TPP is an extension of the Trans-Pacific Strategic Economic Partnership (TPSEP or the Pacific Four [P4]) Agreement which was implemented by Brunei Darussalam, Chile, Singapore, and New Zealand in 2006. The P4 set an ambitious goal of reducing all tariffs by 90 per cent among member countries by January 2006, and all trade tariffs to zero by the year 2015. In 2008, the United States and other countries decided to negotiate with the P4 members for a more comprehensive agreement, now called the TPP, bringing the total number of involved countries eventually to twelve. The TPP attempts to achieve a high-quality, comprehensive FTA with the twenty-first century trade and investment rules for the Asia-Pacific. It covers many supply chain countries in the Asia-Pacific. Since 2010, APEC leaders have focused on the idea of creating a Free Trade Area of the Asia-Pacific (FTAAP), which they regard as a “major instrument” for integrating APEC economies. In 2014, APEC leaders endorsed the “Beijing Roadmap for APEC’s Contribution to the Realization of the FTAAP”, strongly promoted by China as the APEC chair country. Both the RCEP and the TPP are now considered to be pathfinders for the proposed FTAAP.

The RCEP The RCEP negotiations among the ASEAN+6 countries began in May 2013. It covers trade in goods, trade in services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlements, and other issues. The negotiations have faced difficulties since the beginning and missed the completion deadline of the end of 2015.

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The RCEP is a major initiative that attempts to consolidate the five ASEAN+1 FTAs characterized by “noodle bowls” into a single, coherent agreement and thus to support the supply chain activities of business firms in East Asia (Kawai and Wignaraja 2013). As stated below, however, the RCEP faces significant challenges and may not be concluded anytime soon. First, no official target has been set for the level of tariff elimination to be achieved. The extent of trade liberalization achieved so far varies considerably across the ASEAN+6 members. Table 1.2 shows that the Table 1.2 Tariff Elimination Coverage by Country under the ASEAN+1 FTAs (%) AANZFTA

ACFTA

AIFTA

AJCEP

AKFTA

Average

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam ASEAN-6 CLMV ASEAN

 99.2  89.1  93.7  91.9  97.4  88.1  95.1 100.0  98.9  94.8  97.4  91.0  94.8

 98.3  89.9  92.3  97.6  93.4  94.5  93.0 100.0  93.5 n.a.  95.1  94.0  94.7

85.3 88.4 48.7 80.1 79.8 76.6 80.9 100.0 78.1 79.5 78.8 81.2 79.7

 97.7  85.7  91.2  86.9  94.1  85.2  97.4 100.0  96.8  94.4  96.2  88.1  96.2

 99.2  97.1  91.2  90.0  95.5  92.2  99.0 100.0  95.6  89.4  96.8  92.2  94.9

 95.9  90.0  83.4  89.3  92.0  87.3  93.1 100.0  92.6  89.5  92.8  89.0  91.3

Australia–New Zealand PRC India Japan Korea, Rep. of

100.0 — — — —

—  94.1 — — —

— —  78.8 — —

— — —  91.9 —

— — — —  90.5

100.0  94.1  78.8  91.9  90.5

Average

 95.7

 94.7

 79.6

 92.8

 94.5

 91.3

AANZFTA = ASEAN–Australia–New Zealand FTA; ACFTA = ASEAN–PRC FTA; AIFTA = ASEAN–India FTA; AJCEP = ASEAN–Japan CEP; AKFTA = ASEAN–Republic of Korea FTA; ASEAN = Association of Southeast Asian Nations; CEP = Comprehensive Economic Partnership; CLMV = Cambodia, Lao PDR, Myanmar, and Vietnam; FTA = Free Trade Agreement; Lao PDR = Lao People’s Democratic Republic; n.a. = not available; PRC = People’s Republic of China. Note: Harmonized System HS2007 version, HS six-digit base. Data for Vietnam under ACFTA are not available. Data for Myanmar under ACFTA are incomplete as no data are available for HS01–HS08. Source: Authors’ compilation from Fukunaga and Isono (2013).

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tariff elimination coverage rates of the CLMV countries (Cambodia, Lao PDR, Myanmar, and Vietnam) are low, as are those of India and Indonesia (when India is an FTA partner). It has been reported that India proposed a much lower tariff elimination coverage for the RCEP than other countries, hindering substantive progress for negotiations. India seems to fear that the development of its manufacturing industry might be hampered if its markets were made open to other RCEP members, particularly China. Given that India’s inclusion in the RCEP is slowing down negotiations, some negotiating countries have considered excluding India from the initial deal. Second, some FTAs are still missing among non-ASEAN members, such as those between China and Japan, Japan and Korea, and China and India. To complete RCEP negotiations, the missing agreements between these countries need to be reached. The conclusion of the ongoing China– Japan–Korea (CJK) FTA negotiations that started in November 2012 would substantially alleviate this problem. As China and Korea have already signed their bilateral FTA, what is needed is the successful completion of Japan’s agreements with China and Korea. But the three countries are still trying to set the overall negotiation framework including the scope and coverage of the negotiations. The delicate political relationships between Japan and China and between Japan and Korea seem to be hampering progress on trilateral negotiations. Third, it remains to be seen if the RCEP can be of a higher standard than any of the existing ASEAN+1 FTAs. The issue covers not only the level of tariff eliminations but also ROOs, services trade liberalization, and WTO-plus issues. If the RCEP turns out to be less than the best of the existing ASEAN+1 FTAs, it only adds one more complexity to the “noodle bowl”. From this perspective, the ASEAN–Australia–New Zealand FTA (AANZFTA) is believed to be the best among the ASEAN+1 FTAs, though it does not provide hard WTO-plus disciplines on services, investment, and sanitary and phytosanitary measures, and does not cover government procurement (Sally 2013). To summarize, the RCEP should aim to achieve the following: • The acceleration of the pace of trade and foreign direct investment (FDI) liberalization on the part of slow liberalizers (India, Indonesia, and the CLMV countries), with special and differential treatment allowed for the CLMV countries; • The early conclusion of a trilateral FTA among China, Japan, and Korea; • The attainment of the liberalization level of the AANZFTA while covering the measures not adequately addressed by it;

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• The adoption of a negative list approach to services trade and opening all four modes of services supply;7 and • The adoption of harmonized and liberal ROOs with regional cumulation and generous co-equal rules.8

The TPP As a comprehensive, high quality twenty-first century FTA, the TPP covers twenty-one areas (with thirty chapters), including market access, government procurement, intellectual property rights, competition policy, financial services, investment, environmental standards, and labour standards. Negotiations took more than five years since March 20109 and reached a broad agreement in October 2015. The prolonged nature of negotiations was due to difficulties in finding compromises on contentious issues among the twelve countries which had different national priorities and interests. The complete elimination of tariffs that were expected in the original TPP agenda has not been achieved, although the agreement will likely attain a high degree of tariff elimination over time.

Features of TPP The TPP has three important features. One is that it provides a forum for a de facto Japan–U.S. bilateral FTA, given that the United States and Japan collectively account for almost 80 per cent of the gross domestic product (GDP) among the twelve prospective member countries. The two countries share common interests on many trade and investment issues. At the same time they face market access issues, particularly in agricultural products (in Japan) and automobile products (in the United States). In the absence of a formal bilateral FTA between the two countries, the TPP provides an opportunity for them to agree on both market access issues and trade and investment rules for the twenty-first century Asia-Pacific. The second feature of the TPP is that it is an FTA between developed and developing countries. It thus poses a challenge for both parties on contentious issues such as government procurement, intellectual property rights, state-owned enterprise (SOE) reforms as part of competition policy, labour standards, and environmental protection. Under the TPP, no consideration is given to special and differential treatments for developing countries in principle, but some exceptions have been granted to developing countries on certain issues.

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The third feature of the TPP is that it is perceived as having significant strategic implications by key leaders of the negotiating countries. For example, President Barack Obama considers the TPP a component of the United States’ Asian “pivot” strategy in reaction to Asia’s economic rise and integration efforts such as the RCEP (Basu Das 2014). Hence, any failure with respect to the TPP would mean that China might draft the rules of international trade and investment in the Asia-Pacific. This is a situation that President Obama would presumably desire to avoid as he wants to ensure that the United States draft these rules. Prime Minister Shinzo Abe is of the view that the TPP provides not only economic benefits but also long-term security implications by cementing Japan–United States political ties.

Contentious Issues During Negotiations The presence of several key contentious issues was the major reason for prolonged negotiations. Market access issues were negotiated bilaterally between two individual countries under the TPP framework.10 In contrast, trade and investment rules were negotiated multilaterally among all participating countries. Table 1.3 summarizes some of the most contentious issues during TPP negotiations. On market access, the United States was aggressive in opening the Japanese markets for agricultural products, particularly for beef, pork, and rice. Japan was aggressive in opening U.S. markets for manufactured products, particularly for automobiles. In the final agreement, Japan was able to protect much of the five critical product categories (though tariffs on pork and beef will be substantially reduced in ten to sixteen years), while the United States was able to protect the automobile market by allowing twenty-five years for the automobile tariff to be eliminated. In another example, New Zealand was aggressive in opening the Canadian, Japanese, and U.S. markets for dairy products. The issue of intellectual property rights was perhaps the most contentious in TPP negotiations. Responding to pressure from industry interests in sectors such as pharmaceuticals, media, and entertainment, the United States demanded heavy protection of intellectual properties (copyrights, trademarks, geographical indications, patents, etc.). A sharp division seemed to have existed between the United States and several other countries on new biological drugs. It was reported that the United States demanded the period of data protection granted to companies that develop, and hold patents on, biological drugs to be twelve years, while

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US (Japan) vs. Australia, Malaysia, New Zealand, and Vietnam

US (Australia, Japan) vs. Brunei Darussalam, Malaysia, and Vietnam

US, Singapore (Japan) vs. Brunei Darussalam, Malaysia, and Vietnam

US (Japan) vs. Australia (Malaysia, New Zealand)

US (Canada and Japan) vs. Malaysia and Vietnam

Intellectual property rights

Competition policy

Government procurement

Investment

Environment

Source: Updates of Table 1 of Kawai (2014).

US vs. Japan; and New Zealand vs. US, Canada, Japan

Economies most involved

Market access

Areas

Issues

• US and others argued that environmental standards for firm activities should be improved, while Vietnam and others were reluctant.

• US and Japan argued that the investor–state dispute settlement (ISDS) rule should be introduced, while Australia and others were against it.

• Singapore and others argued that government procurement should be opened to foreign firms, while Malaysia and others were reluctant.

• US claimed that policies that favoured SOEs (such as subsidies) should be abolished to establish a level playing field for private firms, while Malaysia and others argued against such a claim. 

• US demanded a long period of protection of intellectual properties, such as copyrights, trademarks, geographical indications, and patents. US particularly wanted patent on data for pharmaceutical products to be protected for a long period, while Australia, Malaysia, New Zealand, and others claimed that such protection should be for a short period.

• US claimed that Japan’s tariffs on agricultural products should be substantially reduced, while Japan claimed that automobile tariffs in the US should be eliminated. • New Zealand demanded that markets in the US, Canada, and Japan should be open to dairy products.

Table 1.3 Contentious Issues During TPP Negotiations

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Australia, Malaysia, and New Zealand wanted five years of protection as the latter countries depended on generic drugs to contain health costs. A deal was struck at eight years effectively as the period of data protection. On the issue of SOE provisions proposed by the United States as part of competition policy, Malaysia, Vietnam, and others initially expressed concerns, as these countries had sizeable SOE sectors in their economies.11 Malaysia particularly had feared that the provisions could force the government to dismantle its bumiputra policy of supporting indigenous Malays because SOEs functioned as promoters of the policy. As the TPP negotiations proceeded, however, the agreed provisions were narrowed on those SOEs that are active in trade and investment abroad. Essentially, the final provisions attempted to ensure a level-playing field for foreign private firms by eliminating favourable treatment — i.e., tax advantages and interest-rate and other subsidies — for such SOEs. While accepting the SOE provisions, Malaysia, Vietnam, and others obtained some exceptions from the provisions. Investment provisions included granting national treatment to foreign firms, the non-requirement of local content and technology information disclosure, the non-expropriation of property without proper compensation, and the adoption of the investor–state dispute settlement (ISDS) procedure. The ISDS rule provides a foreign investor with the right to use dispute settlement proceedings against a host-country government that causes financial losses because of its policy and regulatory changes. However, Australia had taken a firm stance against the ISDS on the grounds that it limited the capacity of governments to implement legislations and policies related to legitimate public concerns, such as health and environmental protection, labour rights, and human rights.12 To avoid the misuse of the rule, the final provisions focused on the importance of improving the openness and transparency of disputes and accelerating the process of rejecting claims in the absence of clear legal bases.

Other Issues The agreed provisions on the ROOs in the TPP are not of the highest standard, because the United States and Mexico insisted that the TPP’s rules should be based on the same or similar principles as the rules in the North American Free Trade Agreement (NAFTA). For example, the regional value content for using tariff preferences was agreed at 55 per cent, a ratio much higher than that set in AFTA (40 per cent).

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Thus the TPP will not fully support supply chain activities spread across the Asia-Pacific region. This may be acceptable in the long run as most tariffs will come down to zero over time. An important factor that contributes to the successful implementation of the TPP is the ratification of the agreement by member countries. It has been agreed that, for the TPP to be implemented, at least six countries that account for more than 85 per cent of regional GDP should ratify the agreement. This means that without the United States’ or Japan’s ratification, the TPP would not be implemented. The most significant challenge in the ratification process is likely to be from the U.S. Congress, as was the case of the Trade Promotion Authority (TPA) which was granted to President Obama by the Congress after painstaking efforts in June 2015.13 With the TPA in place, non-U.S. countries can be more ready to satisfy the TPP.

About the Book The main objective of this book is to present a deeper understanding and analysis of the mega-regional agreements of the Asia-Pacific, against the backdrop of the region’s recent advancements in economic cooperation. Sections I and II respectively provide regional and country perspectives of the RCEP and the TPP, while Section III examines the building blocks of these agreements. Section IV introduces two other mega agreements — the TTIP and the PA — which are currently being negotiated or formed in the other parts of the world and are likely to have linkages to the mega-regionals of the Asia-Pacific. It also looks at what APEC has achieved to date and whether it is still relevant. Section V concludes the book by examining the feasibility of converging these mega-regional agreements and their implications for the WTO. This volume is the result of a symposium organized under the auspices of the Singapore APEC Study Centre and the ASEAN Studies Centre of the Institute of Southeast Asian Studies on 21 August 2014. The book brings together authoritative chapters on the current state, issues, and challenges of negotiating mega-regional agreements that are likely to shape the future of the Asia-Pacific’s trade architecture. Although these chapters were written over a period of twelve months (July 2014 to June 2015) by prominent experts and academicians, they have been updated in line with new developments since then. Following this introduction, the next four chapters examine the TPP agreement in detail. It takes a regional perspective by discussing its

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evolution, role, negotiation processes, and challenges, and also countrybased perspectives by examining why certain countries like Malaysia and Japan decided to join the agreement, while China still sits on the fence. In Chapter 2, Deborah Elms describes the genesis of TPP since it was conceptualized as a trade deal linking four small countries to a twelvemember grouping that has brought together developing and developed economies across three continents for the last five years. According to her, concluding negotiations for the agreement proved to be extremely difficult as the TPP is not only broader in scope than most of the existing trade agreements, but also reaches deeper into the “behind the border” regulatory and domestic policy arena of its members. Cassey Lee (Chapter 3) discusses Malaysia’s interest in the TPP and states that it can be traced back to the country’s desire to conclude an FTA with the United States. He argues that political changes in 2009 provided the impetus for the Najib administration to embark on TPP negotiations with minimal political costs. Although Malaysia is expected to gain substantially economically from its membership in the TPP, there are adverse impacts too, especially on the government’s redistributive policies. As it will take at least a year or so for TPP ratification by key members (though parliamentary ratification is not required in Malaysia), the Malaysian government has time to prepare for some of the adverse impacts. Wang Yuzhu, in Chapter 4, describes the TPP from the perspective of China, which is currently not a member of the trade deal. He looks into the current literature that is divided between two schools of thought: (i) the TPP is a tool by the United States to contain China; and (ii) the TPP is a mechanism to develop new trade rules that would benefit the global economy. Although it is still unclear which argument the Chinese government subscribes to, it seems that the decision makers have softened their views on the TPP and are preparing the country for the rules that may govern international trade and investment in the future. Chapter 5, by Takashi Terada, provides a Japanese perspective on the TPP, the RCEP, and the CJK FTA. It describes what Japan expects to achieve from each of these trade agreements. The chapter concludes that Japan wants to be part of the advanced rule-making process through the TPP, while desiring greater market access in China, India, and Indonesia through the RCEP. Japan’s interest in the CJK FTA is due to its wish to promote the idea of investment protection in the region. The chapter further discusses the latest developments in the

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reforms of Japan’s agriculture sector, which have been undertaken to ensure that the country can commit more effectively in regional integration measures. The next four chapters examine the RCEP agreement by first looking at its evolution, rationale, and challenges at a regional level, before providing country-based perspectives — particularly those of less developed economies and an emerging giant, India. In Chapter 6, Yose Rizal Damuri discusses the evolution of economic integration initiatives in East Asia and the Pacific, and describes the politico-economic need of a region-wide FTA, like the RCEP. The chapter further examines the state of the RCEP negotiations and provides policy recommendations on how to move forward. It concludes that it is difficult to reach a consensus over the RCEP’s issues and objectives, despite the necessity of the agreement to generalize the region’s smaller FTAs and its potential to introduce more regulatory coherence across member economies. Sanchita Basu Das, in Chapter 7, states the possible challenges during the RCEP negotiations. She discusses two sticking points — agriculture and the services sector — that have always been difficult to negotiate in a trade agreement. This is followed by a discussion on: (i) the development gaps between RCEP member economies; and (ii) a plausible foundation for the RCEP agreement, identifying a template that facilitates negotiations on additional market access. The issue of an RCEP template is of special significance as the current ASEAN+1 FTAs are very different from each other and do not adequately cover new trade rules and regulations. Basu Das fears that if the RCEP is designed in line with the existing ASEAN+1 FTAs, it is difficult to visualize ASEAN’s capacity to lead the regional architecture in the future. In Chapter 8, Vo Tri Thanh examines the implication for the CLMV countries in being part of the RCEP agreement, keeping in mind the TPP negotiations. The author concludes that, although the RCEP agreement is said to bring benefits to these developing countries, much depends on their capacity to carry out domestic reforms. ASEAN countries should use the AEC as an integration model for the RCEP or any other future initiative on regional architectures. To facilitate ASEAN’s integration process, Vo argues that the development gap should be narrowed and the idea of “ASEAN centrality” should be exercised. Amitendu Palit, in Chapter 9, gives India’s perspective on the RCEP negotiations, the largest trade agreement that India is part of. He

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outlines the economic and strategic rationale of India as a member of the RCEP. Although the author mentions that India is set to gain from the agreement, there are significant challenges on the domestic front. There is a lack of enthusiasm from domestic industries for FTAs and a lack of a holistic approach in negotiating trade agreements. Nevertheless, Palit argues that the RCEP agreement offers India an opportunity to be part of an emerging trade architecture in the broader Asian region and hence should not be ignored by Indian policymakers. The subsequent two chapters look at smaller FTAs, like the AEC and the CJK, which are viewed as building blocks for the larger RCEP trade agreement. While the AEC is the central agreement on which the ASEAN+1 agreements and the RCEP (ASEAN+6) are built, the CJK FTA is key to concluding RCEP negotiations. In Chapter 10, Chia Siow Yue describes ASEAN’s production networks, which are mainly market driven but are increasingly facilitated by FTAs. She also looks into the state of the AEC and the ASEAN+1 FTAs to examine its implications for the mega-regionals. The author concludes with four key points. First, one should not distinguish between production networks and FTAs. While production networks are driven by multinational corporations, FTAs are developed to facilitate the process. Second, although the ASEAN countries have not met all their targets of the AEC initiative, it should be viewed as an ongoing effort in economic integration and implementation that can be carried out beyond 2015. Third, the ASEAN+1 FTAs lack a common template and have different scopes, coverage of WTO-plus issues, tariff elimination/reduction schedules, and ROOs. Finally, the RCEP has emerged to resolve the differences in the ASEAN+1 FTAs, and to offer ASEAN countries a platform where they can talk in a “united voice”. The latter is of particular importance as the world economy will witness the development of other trading arrangements, such as the TPP and the TTIP, going forward. In Chapter 11, Hyung-Gon Jeong and Boram Lee examine the challenges of the CJK FTA. They look into the economic rationale behind the three countries to form the agreement and lays out the economic benefits of the CJK FTA. Despite its stated benefits, the authors bring out the challenges in negotiating the agreement. They look at the comparative advantages, tariff rates, and trade patterns of the countries, and identifies the respective countries’ sensitive sectors. Jeong and Lee conclude that the success of the CJK FTA depends on the willingness of the three countries to adopt a flexible and cooperative attitude during negotiations.

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The next few chapters look into two new agreements — the TTIP and the PA — that are currently being negotiated or formed in other parts of the world. These two, even though at present they are not linked to the RCEP and the TPP, will have implications on them in the future. APEC, a forum that has existed for the past twenty-five years without making substantial contributions to Asia-Pacific trade regionalism, is also discussed in this part of the book. However, APEC has recently gained attention when its leaders announced their intention to form an FTAAP, an agenda pushed by China as the 2014 APEC Chair. In Chapter 12, Malcolm Cook analyses the political realities and limitations of APEC as an organization from 1994 to 2013. He observes that the recent discussion of the APEC-led FTAAP largely ignores the realities of contemporary trade negotiations. APEC has long advocated voluntary regional economic integration process and is committed to “open regionalism”. Its membership is varied in terms of their development levels and hence interests. Keeping in mind APEC’s limitation, Cook argues that rather than delivering on a region-wide FTA, the organization should focus on trade facilitation measures where it can deliver noticeable changes. Chapter 13, by Michael Plummer, looks into the proposed TTIP agreement being negotiated between the United States and the European Union (EU). These two economies are not only the largest markets in the world, but are also the most important external markets for each other, in terms of trade and FDI. The author argues that the TTIP is not only useful for the United States and the EU, but also for Asia. This is because, in addition to its direct economic benefits, there are potential indirect benefits of deeper cooperation engendered by this agreement. More precisely, the TTIP agreement could contribute to the strengthening of EU–U.S. leadership at the WTO. The two can design a “gold standard” trade agreement embracing cutting-edge trade-related issues in the twenty-first century. Sebastian Herreros, in Chapter 14, reviews the origins, achievements, and prospects facing the PA, an economic integration initiative established in 2011. Although its membership comprises of only four Latin American countries (Chile, Colombia, Mexico, and Peru), the PA has sparked great interest worldwide, as reflected in its membership of more than thirty observer states. Herreros pays particular attention to the role the agreement could play in bridging ongoing integration initiatives in East Asia and the Americas. He discusses topics such as the PA’s strategic and economic rationale, and its links with the TPP project. Herreros

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lays out some key challenges the PA must overcome if it is to make a meaningful contribution to broader Latin American economic integration and to regional links with the Asia-Pacific. At present, considerable uncertainty remains on both counts, with the PA project still in its early stages. The last two chapters examine the issue of convergence of the megaregionals in the future and implications for WTO. In Chapter 15, Robert Scollay discusses Beijing’s announcement of an FTAAP during China’s 2014 chairmanship of APEC. He argues that the strong promotion of the FTAAP by China provides confirmation that it sees an FTAAP as the ultimate goal of economic integration in the Asia-Pacific region. The APEC leaders emphasized that an FTAAP must address both “conventional” and “next generation” trade issues, which Scollay highlights should be resolved before achieving such a target. He also discusses the TPP and the RCEP and examines how far these two models, which are also seen as possible pathways for an FTAAP, can resolve these contentious issues. The author concludes with a speculative discussion of the possible future roles of the TPP, the RCEP, and an FTAAP in the trade architecture of the Asia-Pacific. The last chapter by Patrick Low and Michael Yeo Chai Ming (Chapter 16) explores the impact of mega-regional trade agreements on the relevance of the WTO and its objective of achieving multilateralism. They cite five notable challenges for the WTO: (i) the diversion of negotiating resources; (ii) the rise of competing trade blocs; (iii) preferentialism and its effect on global peace and stability; (iv) the cost of multiple ROOs; and (v) the risks of regulatory divergence. Low and Yeo accept the inevitability of mega-regional trade agreements and conclude that, in order to remain relevant, the WTO needs to complete the Doha Round, multilateralize preferential agreements, and update its agenda.

Conclusion: The Future of Regionalism in the Asia-Pacific To conclude, it is important to discuss a bit on the future of regionalism in the Asia-Pacific. This is mainly because either or both of the RCEP and the TPP agreements are seen as pathways to an FTAAP. It is well noted that the RCEP includes China but not the United States, while the TPP is led by the United States and excludes China. This observation might lead one to conclude that the RCEP and the TPP are

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inherently adversarial to each other and thus cannot be combined to form an FTAAP. However, we argue that the two are in fact complementary to each other and can be combined. How can they be combined to create an FTAAP? There are at least three approaches. First, once the RCEP and the TPP are in effect, the concerned APEC governments may declare that an FTAAP be created as an umbrella or a linked framework to embrace the RCEP and the TPP as its components. However, this declaration may have no substance if there is no coordination or effort to promote convergence between the RCEP and the TPP. Second, the members of the RCEP and the TPP may coordinate a convergence to form a single, larger FTA. This may be possible if: (i) the standards of the TPP are lowered to the levels of the RCEP; (ii) the standards of RCEP are raised toward the levels of TPP; or (iii) some combination of the two is achieved. All three are unlikely, however, as the United States will not want to see a lower-standard TPP, and the RCEP members will find it difficult to raise their standards to the levels of the TPP. Third, convergence may take place over time with some RCEP members that are ready to accept higher standards also joining the TPP. Currently seven countries (Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore, and Vietnam) out of the sixteen RCEP negotiating members have concluded TPP negotiations. In addition, India, Korea, the Philippines, and Thailand have expressed interest in joining the TPP, and they are realistic candidates to join the TPP once the TPP is implemented. China has been studying the TPP and may also consider joining the TPP at a later stage as it will be costly not to join it. Additionally, RCEP membership may expand as other ASEAN dialogue partners, such as Bangladesh, Pakistan, and Sri Lanka, might join the RCEP. In our view, the third scenario — convergence towards higher standards — is most likely to happen. The seven overlapping countries can play an important role in inducing such convergence. Essentially, developing countries that are ready to undertake market liberalization and accept a certain set of trade and investment rules may join the RCEP first, and once they have gone through significant domestic structural reforms under RCEP and are ready to accept higher trade standards may join the TPP. In this sense, the RCEP and the TPP are complementary to each other. The TPP and a potential FTAAP pose challenges for ASEAN and its centrality. Given that four of the ASEAN member countries (Brunei

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Darussalam, Malaysia, Singapore, and Vietnam) are TPP members and that Indonesia, the Philippines and Thailand may also join the TPP at a later stage, ASEAN will continue to be divided between TPP members and non-members. If APEC were to take a leading role in any FTAAP process and an FTAAP becomes a distinct possibility, then the notion of ASEAN centrality could lose traction in ways that undercut ASEAN. If ASEAN wishes to maintain its centrality, it needs to make serious efforts to help reform the countries left behind (Cambodia, Indonesia, Lao PDR, and Myanmar) so that they could eventually join the TPP and a potential FTAAP. Furthermore, the AEC needs to integrate the ASEAN economies deeper than is currently envisaged to remain relevant, such as through forging a customs union and a truly integrated market (Kawai and Naknoi 2015).

Notes  1. RTAs here include bilateral and plurilateral Free Trade Agreements (FTAs), customs unions, and common markets. This chapter uses mainly FTAs which also mean RTAs depending on the context.   2. WTO website, (accessed 19 July 2015).   3. The WTO Ministerial Conference of 1996 in Singapore set up four working groups focusing on the so-called “Singapore issues”, i.e., transparency in government procurement, trade facilitation, trade and investment, and trade and competition. These four issues were supported by the EU and Japan (and only lukewarmly by the United States), but opposed by most developing countries. Because of wide disagreements between developed and developing economies, they were dropped at the Ministerial Conference of 2003 in Cancún.  4. This is the same effect as the WTO’s approach to non-discriminatory trade liberalization.  5. CGE models provide an empirical foundation to trade policies that can quantify the magnitude of the effects identified in the theory of net welfare gain from trade creation and trade diversion.  6. The AEC’s four pillars are: (i) single market and production base; (ii) competitive economic region; (iii) equitable economic development; and (iv) integration into the global economy.   7. While opening to Mode 1 and Mode 2 is generally accepted, there is greater resistance to Mode 3 (right of establishment) and Mode 4 (movement of natural persons). The four modes of services supply are: Cross-border trade (Mode 1), defined as delivery of a service from the territory of one

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country into the territory of other country; Consumption abroad (Mode 2), covering supply of a service of one country to the service consumer of any other country; Commercial presence (Mode 3), covering services provided by a service supplier of one country in the territory of any other country; and Presence of natural persons (Mode 4), covering services provided by a service supplier of one country through the presence of natural persons in the territory of any other country.  8. The most common rules of origin among the ASEAN+1 FTAs are the regional value content of 40 per cent or the change in tariff heading at the 4-digit level. The RCEP may start adopting at least these co-equal rules.   9. There were nineteen rounds of negotiations between March 2010 and August 2013 and another sixteen meetings for chief negotiators and ministers from September 2013 to July 2015. 10. This means that the agreed-on tariff schedules for a country will not be common vis-à-vis all TPP partner members, which is a NAFTA approach. Under NAFTA, Canada, Mexico, and the United States allow each country’s tariff schedules to be different depending on bilateral partners. 11. The proposal was also viewed as being targeted pre-emptively at China as a potential future participant in the TPP. 12. Confronted with the ISDS claim by Philip Morris which challenged tobacco advertising restrictions, the Australian government decided not to pursue the ISDS in its FTAs in 2011. 13. Under the TPA, the Congress can only approve or disapprove a submitted trade bill without getting into the details of the bill. Before the TPA was put in place, non-U.S. negotiating countries did not wish to provide maximum concessions as they feared that the agreements might be renegotiated as a result of interventions by the U.S. Congress.

References ASEAN Secretariat. ASEAN Economic Community Blueprint. Jakarta: ASEAN Secretariat, 2008. ———. “Cebu Declaration on the Acceleration of the Establishment of an ASEAN Community by 2015”. Cebu, Philippines, 13 January 2007. . ———. “Declaration of ASEAN Concord II (Bali Concord II)”. Bali, 7 October 2003. . Baldwin, Richard. Multilateralising 21st Century Regionalism. Paris: OECD, 2014. (accessed 14 January 2015).

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Baldwin, Richard and Patrick Low, eds. Multilateralizing Regionalism: Challenges for the Global Trading System. Cambridge: Cambridge University Press, 2009. Banda, O.G. Dayaratna and John Whalley. “Beyond Goods and Services: Competition Policy, Investment, Mutual Recognition, Movement of Natural Persons and Broader Cooperation Provisions of Recent FTAs involving ASEAN Countries”. NBER Working Paper no. 11232. Cambridge, MA: National Bureau of Economic Research, 2005. Basu Das, Sanchita. “The Political Economy of the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) Agreements: An ASEAN Perspective”. Trends in Southeast Asia, 2014 #02. Singapore: Institute of Southeast Asian Studies, 2014. Bhagwati, Jagdish. “Regionalism and Multilateralism: An Overview”. In New Dimensions in Regional Integration, edited by Jamie de MeIo and Arvind Panagariya. Cambridge: Cambridge University Press, 1993. Bhagwati, Jagdish and Arvind Panagariya. The Economics of Preferential Trade Agreements. Washington, D.C.: AEI Press, 1996. Brooks, Douglas H., David Roland-Holst, and Fan Zhai. Asia’s Long-term Growth and Integration: Reaching beyond Trade Policy Barriers. ADB ERD Policy Brief no. 38. Manila: Asian Development Bank, September 2005. Crawford, Jo-Ann and Sam Laird. “Regional Trade Agreements and the WTO”. North American Journal of Economic and Finance, no. 12 (2001): 193–211. Fukunaga, Yoshifumi and Ikumo Isono. “Taking ASEAN+1 FTAs towards the RCEP: A Mapping Study”. ERIA Discussion Paper Series ERIA-DP2013-02. Jakarta: Economic Research Institute for ASEAN and East Asia, January 2013. Kawai, Masahiro. “Japan’s Approach to the TPP”. In New Directions in AsiaPacific Economic Integration, edited by Guoqiang Tang and Peter A. Petri. Honolulu: East-West Center, 2014. Kawai, Masahiro and Kanda Naknoi. “ASEAN Economic Integration through Trade and Foreign Direct Investment: Long-Term Challenges”. ADBI Working Paper no. 545 (October 2015). Tokyo: Asian Development Bank Institute, 2015. Kawai, Masahiro and Ganeshan Wignaraja. Patterns of Free Trade Areas in Asia. East-West Center Policy Studies, no. 65. Honolulu: East-West Center, 2013. ———, eds. Asia’s Free Trade Agreements: How is Business Responding? Cheltenham/ Massachusetts: Edward Elgar Publishing, 2011. Petri, Peter A., Michael G. Plummer, and Fan Zhai. “The ASEAN Economic Community: A General Equilibrium Analysis”. Asian Economic Journal 26, no. 2 (2012): 93–118.

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Ravenhill, John. “Regionalism”. In Global Political Economy, edited by John Ravenhill. Oxford: Oxford University Press, 2006. Sally, Razeen. “ASEAN FTAs: State of Play and Outlook for ASEA’s Regional and Global Integration”. In The ASEAN Economic Community: A Work in Progress, edited by Sanchita Basu Das et al. Manila and Singapore: Asian Development Bank and Institute of Southeast Asian Studies, 2013. Sen, Rahul. “‘New Regionalism’ in Asia: A Comparative Analysis of Emerging Regional and Bilateral Trading Agreements involving ASEAN, China and India”. Journal of World Trade 40, no. 4 (2006): 553–96. Viner, Jacob. The Customs Union Issue. New York: Carnegie Endowment for International Peace, 1950. Winters, Alan. “Regionalism vs. Multilateralism”. In Market Integration, Regionalism and the Global Economy, edited by Richard E. Baldwin, Daniel Cohen, Andre Sapir, and Anthony Venables. Cambridge: Cambridge University Press, 1999.

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Section I

The Trans-Pacific Partnership (TPP) Agreement

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2 The Origins and Evolution of TPP Trade Negotiations Deborah Elms In the Beginning… The Trans-Pacific Partnership (TPP) trade negotiations began life as a different trade agreement. Now known as the P4 or “Pacific Four”, the official name of the agreement, announced at the APEC (Asia-Pacific Economic Cooperation) Trade Ministers meeting in June 2005, was the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) (Lim, Elms, and Low 2012). The P4 linked together Brunei Darussalam, Chile, New Zealand, and Singapore. It grew out of attempts within APEC to create a larger economic free trade area. When these talks foundered, the leaders of the P4 countries pressed ahead with plans to demonstrate how small, largely open economies could still benefit from trade liberalization.1 However, given the quite modest levels of trade between the four, the P4 came into force in 2006 with very little attention (Elms and Lim 2012). The original P4 negotiations closed without resolution on two difficult areas of negotiation — financial services and investment. The four country leaders elected to finish the agreement and then relaunch discussions on these outstanding issues within two years.

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When the negotiations started in February 2008 over the two missing chapters, the United States also began to participate in the discussions (Business Day 2008).2 In September 2008, U.S. participation deepened with the announcement that the United States would seek to join the agreement in its entirety. When this happened, the P4 moved from a small experiment into something larger and much more interesting. Australia, Peru, and Vietnam also joined the talks.3 In 2008, the P4 agreement had morphed into the TPP with eight members. The United States’ involvement with the P4 was an important decision given its relatively low number of trade deals. The United States opted to join the agreement in the twilight days of the George W. Bush administration. The U.S. announcement was made in September 2008, with the elections looming in November. To make such a pronouncement ahead of a tight election might seem especially odd. At a minimum, it could have been argued that the decision could be easily postponed until after the election so the new administration could decide whether or not they wished to be involved in the trade arrangement. Instead, United States Trade Representative (USTR) Susan Schwab chose to ensure U.S. participation regardless of which party won control of the government.4 This decision came about because when senior Bush administration officials looked at the world in mid-2008, they were concerned about the growing discussions in Asia regarding the creation of new trade arrangements in the region that might exclude the United States (Schwab 2009).5 The Doha negotiations at the World Trade Organization (WTO) had collapsed over the summer. Options to anchor the United States firmly in Asia were limited. For example, the Bush team judged that APEC alone would not be sufficient to keep the United States engaged in the region. Creating a new trade agreement would require complicated and difficult negotiations within the United States.6 Hence, joining an existing, small-scale agreement like the P4 appeared to be an attractive option. New Zealand was keen to have the United States participate. The two sides did not have an existing Free Trade Agreement (FTA), largely stemming from fallout over the country’s ban on U.S. nuclear ship refuelling and the size and composition of the New Zealand market. The domestic market in New Zealand was small, with just four million citizens, but the country was famous for having a competitive agricultural sector, led by the dairy industry. Given the sensitivity of the dairy industry in the United States, as well as the beef and lamb industries,

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bilateral negotiations were likely to be difficult. A TPP agreement would be the best hope for New Zealand firms to gain access to the U.S. market. Neither Brunei nor Vietnam had existing access into the U.S. market via an FTA. The TPP represented an excellent way for both to ensure preferential access for their exporters into the largest global market. Many of the existing and incoming TPP members in 2008 were already linked together by a dense web of existing FTAs (Elms and Lim 2012). For some members, like Chile or Peru, this new agreement was less about offering new market access to the United States or others. Chile, after all, had trade agreements with everyone. Singapore had three separate deals linking its market with New Zealand’s. Instead, these members looked for the opportunity to engage further with different regions. Another key objective was to craft a deal that would knit together overlapping, pre-existing FTA provisions in new and innovative ways. Australia, for example, had been a party to discussions in the late 1990s in APEC with the United States, Chile, New Zealand, and Singapore. It had not moved ahead with the P4 countries, but once the United States announced in 2008 its intentions to join the expanded chapters, Australia also quickly said it would join. For Australia, the primary motivation was not so much about trade expansion, given the country’s links with every potential member except for Peru. Instead, it was largely about getting Australian voices at the negotiating table when drafting what were already seen as the “new rules of the trade game” (Capling and Ravenhill 2012).

Getting Started with the TPP Negotiations did not begin for more than a year, however, as the United States was switching administrations and the incoming Obama White House was deciding on how to proceed. In fact, it was not until November 2009 when President Barack Obama was on his way to an APEC leader’s summit that he made his first public pronouncements about the deal. In a speech in Tokyo, he declared that the United States would “engage with” the TPP countries. He continued, I know that the United States has been disengaged from these [multilateral] organizations in recent years. So let me be clear: those days have passed. As an Asia-Pacific nation, the United States expects to be involved in the discussions that shape the future of this region and to participate fully in appropriate organizations as they are established and evolve.7

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As President Obama’s statement suggests, the White House spent time in 2009 carefully considering the motivations for the United States’ participation in the TPP. In particular, the Obama administration came to fold the trade agreement into a larger “pivot” or “rebalance” to Asia. The Obama team came into office determined to shift attention away from the Middle East. Secretary of State Hillary Clinton penned an article for Foreign Policy in 2011 that outlined the policy in greater detail, as she became the chief spokesperson for the concept (Clinton 2011). Kirk Campbell, U.S. Assistant Secretary of State for East Asian and Pacific Affairs, later defined the pivot as premised on a desire for a peaceful, stable and economically prosperous region — a vision shared with America’s Asian partners. … From friends in Asia, the United States seeks nothing less than their active commitment to building and sustaining this effort on all fronts, so that all countries in the Asia-Pacific region play their part in finding and implementing solutions to shared regional and global challenges, from the proliferation of dangerous weapons to the impacts of climate change (Campbell and Andrews 2013).

Although the pivot was not all about economics, for the Obama administration, markets mattered in crafting its foreign, economic, and security policies. In 2009, the economic centre of gravity was clearly to be found in Asia, with 60 per cent of global gross domestic product (GDP) and nearly half the world’s international trade (Fergusson and Vaughn 2011). United States Trade Representative (USTR) Ron Kirk noted that the United States was not a party in the proliferating trade agreements in Asia. As a result, he wrote, “these agreements, as well as other economic developments, have led to a significant decline in the U.S. share of key Asia-Pacific markets over the past decade” (USTR 2009). The TPP, Kirk promised, was one way to help reverse these trends.

USTR Notifies Congress Kirk formally notified Congress of the Administration’s intention to enter into negotiations with the TPP countries on 14 December 2009 (Fergusson and Vaughn 2011). Kirk took this step because the White House was following a domestic policy procedure in Washington, D.C. known as the Trade Promotion Authority (TPA). TPA, which used to be called “fast track”, authorizes the Executive Branch to negotiate trade deals on behalf of Congress (Destler 2005).

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This formal notification was not technically required, as TPA had expired in 2007 and had not been renewed.8 However, from the beginning, USTR chose to negotiate the TPP agreement “as if ” TPA rules were in effect. There were four key elements of the provision for officials. First, each time the bill was authorized, Congress spelled out the broad trade negotiating mandates to be followed and outlined the procedures for consultation. Second, under TPA, negotiations could not begin with a new partner in a trade agreement until ninety days passed. This allowed time for Congress, companies, and the general public to comment on the proposed negotiations. Third, TPA required the Executive Branch (in practice, the Office of the Trade Representative) to regularly report back to Congress on the progress of the negotiations. This was necessary because the final requirement of TPA has been that Congress agrees to vote the entire agreement up or down in the end without amendment. When the original authorization was given for TPA in 1974, Congress argued they could only agree to such a law if members believed that they had been sufficiently consulted and their input was sought along the way in the negotiations. Congress retains the right and responsibility to implement any negotiated trade agreement. The fight over the reauthorization of TPA resurfaced later in the negotiations. At the time of Kirk’s notification of entry into the TPP bargaining, however, Congressional comment was muted (Camp and Brady 2009).9

Launching with New Templates It was not until March 2010, after the ninety-day period had concluded, that the first round of negotiations started in Melbourne, Australia. Although the original intention of the P4 countries was to lay a foundation for future expansion in the agreement by way of the accession clause, when delegates met in Melbourne, officials fairly quickly discarded the P4 as a negotiating template. Instead, they decided to start again with a new agreement and spent the first half dozen rounds discussing different approaches to the negotiations (Elms 2013a). What remained in place between the P4 and TPP was a commitment to crafting a high quality, ambitious trade agreement. Deciding what this meant in practice was difficult. Each country delegation — and perhaps even each individual negotiator — may have chosen to define the terms differently. Despite endless hours spent holed up in hotel and conference rooms around the world, officials never really tried to define either

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“high-quality” or “ambitious” and instead left each team to decide what sort of outcomes in each sector might fit the bill. The P4 itself contained many similarities to the U.S. FTA agreements. This was because Singapore and Chile had gone through the (sometimes painful) process of negotiating with the United States in their respective bilateral agreements. These deals represented some of the most comprehensive agreements that either country had signed. For Singapore, for example, all subsequent, post-2004 FTAs contain language drawn from the United States–Singapore FTA (USSFTA). Using overlapping Figure 2.1 Trans-Pacific Partnership Countries (Trade Data in Billions U.S. Dollars, 2010) U.S. FTA 1 Australia

Population

GDP

✓

2 Brunei 3 Chile

✓

4 Malaysia 5 New Zealand 6 Peru

✓

7 Singapore

✓

8 Vietnam

9 United States Data from 2010

Source: Analysis by the Congressional Research Service (CRS), FTA data from the United States Trade Representative (USTR), Population and GDP data from IMF, World Economic Outlook, September 2011. Trade data from the U.S. International Trade Commission (ITC), in Brock R. Williams, “Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis”, CRS7-5700, 8 February 2012.

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language and provisions across multiple trade agreements can minimize the difficulties faced by firms in using the deals in the end. Thus, when the countries sat down to craft the original P4 agreement, some of the text was similar to the USSFTA as well as the United States–Chile FTA. Once the United States was at the table, however, their influence in drafting new language for the TPP increased. Partly this was a matter of size and weight of the economic partners. The United States was simply the gorilla in the negotiations on nearly every economic measure. The U.S. team also faced domestic challenges related to the final passage of the agreement that were particularly daunting. If the text of the TPP ran contrary to the desires of the U.S. Congress, it would not have been possible to get the final deal ratified. Although, of course, the final TPP agreement needed to satisfy domestic constituents in every member country, the specific voting requirements of the United States were different. Other members could more easily count on party control of the legislature, for instance, to ensure agreement at the domestic level in the end, or were not required to submit the final deal to any review body before implementation. Finally, on a practical level, many TPP member officials outside the United States recognized that their U.S. partner was likely to rewrite draft texts in its own image anyway, thus dramatically reducing the incentives to prepare early drafts.10 This meant that, as the TPP negotiations proceeded, the final deal continued to closely resemble existing U.S. FTAs (and especially the United States–Korea FTA or KORUS, since it was the most recent and most advanced agreement).

Aspirational Goals Some early elements of the high quality nature of the deal remained unchanged. The TPP was always intended to be both broader and deeper than other FTAs. This meant the agreement would include significant commitments in what are often called “behind-the-border” issues, and focus attention on trying to harmonize regulations (or at least minimize divergence). The depth of the deal meant that nearly all issues were on the table. Officially, “all” issues were on the table. By this, officials generally meant that market liberalization for goods was to include zero tariffs for all products. But some issues that might plausibly have been considered as part of the agenda were never opened for discussion at all. For instance, the United States refused to discuss changes to a domestic law called

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the “Jones Act” that prevents foreign-built or foreign-flagged vessels from moving cargo or people within U.S. borders. The law was originally passed in 1920 to encourage the maintenance of a U.S. merchant marine fleet. Many now view the Act as an impediment to trade, since it prevents trans-shipment of cargo, or cabotage, through U.S. ports by foreigners (Slattery, Riley and Loris 2014). Such exceptions to market opening from the beginning, however, were quite modest. Instead, members were expected to fully open their markets for goods, services, and investments to one another. Also on the agenda were items like the opening of government procurement markets or the expansion of intellectual property (IP) rights rules. These areas had been covered before in some agreements, but many existing FTAs either skipped over the topics (like procurement) or did not go beyond commitments in other arenas (like IP promises made at the WTO). Finally, the early talks included hopeful conversations about “twentyfirst century new issues”. This included the idea that regulations could be coordinated between members — not with the goal of writing one set of standards or rules, but with minimizing divergence or slowly bringing about convergence or coherence. Another new issue was the idea of trying to foster the involvement of small and medium enterprises (SMEs), since SMEs formed the backbone of enterprise in nearly all TPP member countries. The TPP member countries at the outset, as noted above, were well-linked by existing FTAs. However, these agreements were mostly bilateral. In a world of supply chains, such connections are less helpful to business than deals that hook together members across a wider set of countries. Companies participating in supply chains want the ability to ship goods and services freely across borders with no impediments. Firms hoped to remove not just tariffs, but also various non-tariff barriers like incompatible standards or regulatory testing. They also wanted to be able to count on similar rules for competition, customs procedures, logistics and delivery company guidelines, or e-commerce. Many of these issues, however, fall in between traditional FTA chapters (and government ministry mandates). Therefore, the TPP originally tried to tackle supply chains in a comprehensive manner without splitting the topic into constituent parts.11 Finally, the TPP was a unique agreement that brought together members at differing levels of economic development. Often, in deals that include such a disparity of country participants, the agreement includes something called “special and differential treatment” (S&D). This concept,

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drawn from the General Agreement on Tariffs and Trade (GATT)/WTO, gives developing country members additional flexibility. Provisions may have different, often less ambitious, commitments or longer timelines for implementation. S&D may include capacity building funding and training for the hard and soft infrastructure needed to enact the provisions of the agreement. From the earliest days, the members ruled out S&D for the TPP. Every member would be subject to the same rules and regulations as every other member.12 Developing country participants would have additional time (and even this concession was limited in scope) and a very modest amount of external support for capacity building.

Getting Down to Business After the initial meeting in March 2010, members held three additional rounds of negotiations in the first year: in San Francisco in June, Brunei in October, and Auckland in December. Members mostly spent time trying to think through how to add value by creating a larger agreement rather than beginning the arduous task of drafting texts. Of particular note, however, was the addition of Malaysia to the TPP in the fall during the Brunei meetings. Although the original P4 included a clause to add new members, it did not stipulate how such members were to be added. When Malaysia expressed an interest in joining, members crafted an informal set of procedures that remained in place ever since. First, the prospective member had to indicate to the collective grouping their desire to join. The group could decide to let the discussions proceed (or not). Then, the potential member had to start scheduling bilateral consultations with existing members. This allowed the two sides to discuss long-standing bilateral irritants that were likely to interfere with the smooth integration of the new member into the larger setting. The extent to which the new member was required to resolve these issues varied — it is possible to argue that unilateral moves to address issues were not appropriate, since many problems might reasonably be expected to have been part of the larger negotiation and the give-and-take of bargaining. By taking them off the table ahead of joining, prospective members were removing their own bargaining chips. In any case, each existing member had the ability to decide whether the new entrant had made a reasonable case for admission and had been sufficiently persuasive in arguing that it will fulfil the high quality aspirations of the group as a whole. If the new applicant survived this

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set of challenges, the issue of membership had to be taken up again by the group. Finally, if the TPP membership agreed, domestic procedures in the member countries had to be completed before the new country could sit at the table.13 The nine TPP members first exchanged market access offers in January 2011. Six sessions were held afterwards: in Santiago, Chile in February; Singapore in April; Hanoi, Vietnam in June; Chicago in September; Lima, Peru in October; and round ten in Kuala Lumpur, Malaysia in December. TPP gatherings of one sort or another were also always held on the sidelines of APEC meetings (trade ministers and often chief negotiators met at senior officials meetings and TPP leaders met at the end-of-the-year summits). In addition, many chapter teams held intercessional meetings, separate from full negotiating rounds. Finally, various officials held discussions of the TPP as a whole, as well as specific issues during bilateral visits of one kind or another throughout the negotiations. The 2011 meetings were heavily focused on substance, driven by the first important self-imposed deadline for completion of the APEC Leader’s Meeting in November in Honolulu, Hawaii. Despite the gruelling negotiating calendar that saw thousands of officials flying around the world, it was not possible to reach a complete agreement by November. Instead, officials were left to issue the “broad outlines” of the agreement.14 The outlines noted the sweeping nature of the TPP agreement. In addition to market access for goods and services, the FTA would cover telecommunications, sanitary and phytosanitary (SPS) rules, technical barriers to trade (TBT), government procurement, labour rights, legal issues, environment, e-commerce, customs, and competition. This short document was carefully crafted to explain what was under negotiation and to give some hint about the content of the agreement in certain areas. The outlines were shaped, in part, by something innovative about the TPP negotiations. Starting in round six in Singapore, officials began to schedule parallel “stakeholder” meetings. Informal outreach and communication with the business and NGO (non-governmental organization) community had been held earlier, but this was formalized and extended through subsequent rounds. Registered stakeholders were given the opportunity to make presentations to officials at each meeting. In later rounds, stakeholders were encouraged to stand beside tables to facilitate more intimate discussions with negotiators. Some delegations

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also met privately with stakeholders to discuss specific issues and possible solutions. The stakeholder input process was especially important for briefing officials on issues that cut across multiple chapters or for allowing business leaders, NGOs and some academics to meet with country officials where the regular process of soliciting feedback on proposed trade agreements was weak. For example, one firm discussed the different regulations in the Americas and in Asia for measuring truck length. Given quite different procedures for meeting length standards, semi-tractor truck cabs certified for use in one market could not be used in other markets. In another meeting, a developing-country company highlighted mobile connectivity and asked for specific changes in regulatory policy in some of the TPP members to bring down the cost of mobile roaming rates for members. Some stakeholders participated in every round and others attended only one. The stakeholder process was especially critical in the TPP given the paucity of information leaking in and out of the negotiations. From the beginning, officials opted to keep tight control over information. In a large, complex, multiparty negotiation, keeping specific negotiating positions from being leaked is important. If a country were to have its high or low offers revealed prematurely, for example, it could dramatically squeeze the range of options on the table for resolving any given issue because it could lock officials into taking such positions. The “core” contents of trade negotiations in the past have nearly always been conducted in secret, without public comment on offers or draft texts. In addition, officials were initially working towards having the entire agreement concluded within the first two years. This — ambitious and unrealistic goal — may have made it easier to keep information tightly circumscribed, as everyone would know all about the details in relatively short order. However, as the agreement stretched into the third, and then fourth, years, keeping tight rein over information became more problematic. Rather than respond by relaxing the rules on letting (at least some) knowledge flow out, officials seemed to get less talkative.15 The five-page “broad outlines” agreement issued in November 2011 represented the most comprehensive release of details on the talks in nearly two years. The stakeholder process was even discontinued at the end of 2013 when members stopped holding “rounds” and began hosting “informal” rounds or “check in sessions” instead.16

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The Long Middle Slog After the first “deadline” passed without completion, a bit of the air went out of the TPP balloon. Officials had been working at a breakneck pace in an attempt to conclude the agreement. As the end of 2011 loomed, most delegates were exhausted. The only chapter that was “closed” covered SMEs. Since this was basically a commitment to open a website to encourage SME participation in member countries, this was not a significant accomplishment. The rest of the deal was still subject to deep disagreements. The TPP followed the “single undertaking” rules drawn from the WTO that also largely prevented countries from closing any chapter until everything in the entire agreement was completed.17 Countries were not eager to host negotiating rounds. It was an expensive proposition and time consuming. It meant finding a venue not just for all the officials from each of the negotiating chapters from nine participants, but all their extra officials. For instance, embassy officials often turned up to join their colleagues in specific rounds. Plus, the stakeholders had to be accommodated. In 2012, many of the rounds were held in the United States: Dallas in May; San Diego in July; Leesburg, Virginia in September; and Auckland, New Zealand in December. One of the most notable changes in 2012 was the addition of two new members: Canada and Mexico. Canada had expressed interest in joining the agreement much earlier, but was rebuffed, largely out of concerns about whether it would open its dairy and poultry supply management systems to greater competition. In June, however, the TPP members reversed course and agreed to consider Canadian membership. Mexico immediately argued that admitting Canada, but not Mexico, would be problematic given the tight integration of the North American markets under the North American Free Trade Agreement (NAFTA). The ninety-day comment period in the United States meant that the two countries did not join the talks until the fifteenth round of negotiations in New Zealand in December 2012. The addition of two new members complicated the resolution of the agreement. Although Mexico, for example, had signed many FTAs with other parties, not all TPP members had past experience working with Mexico. Because Mexico (and Canada) had preferential access to the U.S. market under NAFTA, some of the issues under discussion in the TPP became more sensitive. Granting preferences to TPP members could undermine existing NAFTA preferences. As one example, textile market access became considerably more fraught, and resolution of remaining issues slowed.

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Japan had been widely expected to join the TPP at the same time as Canada and Mexico. Multiple Japanese prime ministers had announced plans to enter into the talks. But as 2012 transitioned to 2013, Japan remained on the sidelines.

Heading for Another Missed Deadline The Obama administration announced its intentions to wrap up talks by the end of year. This put pressure back on the negotiating teams to quickly absorb the two new entrants while working through the more controversial issues on the agenda (Elms 2013b). The last three official rounds for the agreement were held in Singapore in March; in Lima, Peru in May; and in Kota Kinabalu, Malaysia in July. After this, “formal” negotiating rounds were discontinued. In part, it was because many chapters, like telecommunications, had either been finished or had reached the limits of what the country delegations could accomplish. Any remaining sticking points could only be resolved at a higher level of authority. As previously noted, the end of formal rounds also meant the end of stakeholder meetings. Finally, it was getting difficult to explain how the agreement was not yet finished, as the round count rapidly headed past twenty. Also seriously complicating the ability of officials to complete the negotiations was the accession of Japan for the last few hours of the last round in Malaysia in July 2013. Japanese delegates were not able to participate in the negotiations, but were instead briefed extensively on the status of various chapters in the agreement. As the USTR Press Briefing noted, with Japan’s entry, TPP countries accounted for nearly 40 per cent of global GDP and about one-third of all world trade (USTR 2013). Nevertheless, the Unites States continued to press for a concluding date of end 2013. Although formal rounds of negotiations were discontinued, “informal” rounds went ahead. Two were held under the title of TPP Chief Negotiator’s Meetings in Washington, D.C. in September and in Salt Lake City, Utah in November. All these activities culminated in the first lengthy meeting of TPP Trade Ministers in Singapore in December 2013. Despite locking ministers in a series of rooms for two days, in sets of bilateral and plenary sessions designed to break through the remaining sensitive issues, at the conclusion of the meeting, officials could only report progress on defining “landing zones” for the agreement overall (New Zealand MFAT 2013).

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Ramping Up Political Engagement The TPP Ministers urged their negotiating delegates to redouble their efforts to resolve outstanding issues, particularly those relating to the rules and texts. In conjunction with increased political scrutiny, trade ministers held two additional meetings in Singapore in February and May 2014. Neither resulted in the breakthrough necessary to close the agreement (Rahil and Mimizuka 2014; Inside US Trade 2014). The U.S. political calendar, however, was rapidly closing the window for potential closure of the TPP agreement. If the leaders hoped to finish the deal in time for a Congressional vote in the United States before Barack Obama left office in January 2017, the timing to conclude was very tight. Congress members could not be expected to vote on a trade bill during a presidential election cycle, as there are no upsides for individual members from voting on trade deals. The potential to lose an election based in part on a trade vote, by contrast, is high. With elections in November 2016, the TPP vote might have been easiest to obtain if done prior to mid-year 2015.18 This would put a vote after the midterm elections on 4 November 2014, but early enough in the electoral cycle before the next election to make members more comfortable with voting on potentially controversial bills. Working backwards from this calendar, the “informal” rounds in Ho Chi Minh City, Vietnam in May, Ottawa, Canada in July, and Hanoi, Vietnam in September 2014 assumed greater importance. In order to properly tee up the agreement for political decisions, the remaining negotiating teams and chief negotiators needed to be able to deliver a comprehensive set of options to political leaders. Leaders were scheduled to meet at the APEC summit in Beijing, China on 10–11 November 2014. This “decision forcing event” became the backdrop of ongoing negotiations. In Hanoi, officials worked to conclude the last textual issues, putting together various options and policy packages for the remaining sensitive issues. Chief negotiators tried to whittle down the list of problematic areas for ministerial intervention by settling on as many outcomes as possible across the entire agreement as directed by leaders.

Landing Zones and Final Packages The TPP agreement contains thirty chapters. Trying to get closure was a bit like attempting to solve a twelve-sided Rubik’s cube. The agreement

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was interlocking, with provisional acceptance in one area often dependent on receiving a set of benefits elsewhere. Multiplied by twelve participating countries, getting a deal done was difficult. Chapters were never “closed”.19 Instead, everything remained in play until the final agreement was done. This meant that officials trying to craft the deal were left with the language of “narrowing landing zones” and creating “final packages” for review by ministers and leaders. What this meant in practice was that chief negotiators had to write up sets of options for consideration by leaders and let them make political decisions for outstanding sensitive issues. The most problematic issues as the agreement headed towards the end of year were mostly items that were called out as sensitive from the earliest days of the deal (Lim, Elms and Low 2012). One of the most difficult areas remained market access for goods. Because the TPP was intended to cover all goods without exception at a high level of ambition, it meant that countries could not shield sensitive items like dairy, rice, beef, or sugar from markets opening in some way to other TPP partners. For most of 2014, the United States and Japan were negotiating regularly around tariff reductions on a limited number of agricultural products (the five so-called “sacred” items: dairy, rice, beef/ pork, wheat, and sugar) as well as tariffs and rules around autos (Elms 2013a).20 Until the other TPP members could see what Japan was willing to do (or allowed to do) on these items, they were also reluctant to put their own sensitive market access issues on the table in a meaningful way. If Japan, for example, were allowed minimal market opening on beef, other members could ask for similar treatment on their issues. The rules of origin (ROO) negotiations continued to take significant time. These rules are designed to allow the goods from only TPP member countries from taking advantage of the preferences granted by the agreement. If non-member goods could sneak in, somehow, it would undermine the market access provisions of the deal. Therefore, ROOs are quite important. They also interact with tariff concessions. It is theoretically possible to create a completely open, zero tariff world but craft such difficult ROOs that no products actually qualify for the zero tariff benefits. In other words, a product might be eligible for paying no tariffs on the product, but to meet the ROO criteria, a company might have to include, say, 60 per cent of the content in the item from member countries only. Worse yet, the procedures necessary to prove that the product meets 60 per cent originating criteria might be so onerous and challenging that most firms

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would just give up and use the most-favoured nation (MFN) tariff rates that are available to all WTO member companies instead (even if the MFN tariff is higher than zero). Alternatively, easier ROOs (specifying lower content, for example) can make even relatively higher tariffs less of a problem for firms. The TPP negotiations on ROOs dragged on for the entire duration of the overall negotiations. Because officials opted for product-specific rules, it meant that every single tariff line of the schedules had to be checked for matching ROOs.21 With product-specific ROOs in place, developing cumulation rules was even more problematic (Elms 2013a). Under cumulation, firms are encouraged to “add up” the member content in goods products towards meeting the overall content required by ROO provisions. In a world of value or supply chains, companies rarely source all the materials and inputs they need from one country alone. Instead, they may source from a large variety of regional or global suppliers. Agreements like the TPP are intended, in part, to provide additional benefits to firms that buy inputs from other TPP member countries. But the specific provisions of the TPP may make using this process challenging, since a firm manufacturing a complex item will potentially need to check the specific ROO in place for each and every component in the final product before satisfying the overall ROO across TPP originating goods. This was especially problematic for items like textiles or footwear which can combine many input items — each with different rules to determine whether the item can “count” towards TPP content and get lower tariff rates on the final product into TPP member countries. Other sensitive issues still unresolved as late as the Hanoi meetings in September were the extent and reach of IP rights provisions, scheduling of exceptions for state-owned enterprises, scheduling of exceptions to services and investment liberalization, concluding the environment chapter, and discussing the reach of dispute settlement. Many items in these chapters and others had to be narrowed down to a small number of options for political intervention, as officials simply could not close out many topics on their own.

Getting It Done at Last As summer turned into fall 2014, many officials insisted that their focus remained on getting the agreement concluded at the highest possible levels of quality without worrying about the specific timelines or process

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of ratification and implementation. While admirable, the quest for a perfect agreement was likely to prove quixotic. Getting an excellent deal finished that would never see the light of day, because members would be unable or uninterested in implementing the provisions, was also clearly not helpful. Unfortunately, in any negotiation and especially in multiparty talks, specific members have an individual incentive to stall as long as possible on making final concessions in the hope that a race to the finish line will encourage some members to relax their standards and accept the deal on the table rather than risk the collapse of the entire agreement. But such a strategy is difficult and perilous to effectively implement. If every member opts to hold the most sensitive issues and refuses to compromise, clearly the deal will never get done. If concessions are granted too late, there may literally not be enough time to pull together the final deal (when, for example, the TPP leaders are scheduled for a press conference). Last minute deal-making is common in trade agreements, but can be very tricky to implement in a large, complicated negotiation rather than in smaller bilateral arrangements or less complex regional deals. A shaving of quality at the last minute to get the TPP past the finish line is inevitable. This will be problematic for officials who have made much of the “high quality, twenty-first century” aspects of the agreement from the very beginning. After everyone has been led to expect the ideal agreement, any deviation from perfection will be disappointing to many. However, the messy reality of politics means that every member country will have to accept compromises in order to slot all twelve rows of the Rubik’s cube into alignment at the end. In the end, the TPP will not reach the 100 per cent, no exceptions allowed, aspirational goal set from the beginning. But it is likely to remain the most ambitious, deepest, and broadest trade agreement signed to date and become the benchmark for similar deals elsewhere.22 Such an outcome will be worthy of the tortured and lengthy negotiating path that it would have taken to reach the finish line.

Notes   1. Technically, it was three countries, as Brunei joined very late in the process.  2. Susan Schwab reportedly said, “Participation could provide a pathway to broader Asia-Pacific regional economic integration with like minded countries committed to high-standard agreements” (Business Day 2008).

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 3. Given some domestic issues, Vietnam is often described as being an “observer” at the outset while it sorted out the details at home. However, from the beginning, Vietnamese officials participated as full members (and the TPP has never had an “observer” or “associate” category of membership). Thus, from the earliest days of the agreement, potential member countries had to decide whether or not to participate without the option of observing the proceedings. This point became important later in the negotiations since countries like Japan and South Korea who were hesitant about getting in were not able to transit from observer to full member (something that is possible in many other international negotiating forums).   4. Of course, if the incoming team had really found participation objectionable, they could have found some way to get out of it or kept the U.S. role limited to observing the missing two chapters only rather than expand the entire agreement.  5. At the time, the Japanese were promoting a plan to integrate Asian trade (the grouping later became the ASEAN+6 and is now known as the Regional Comprehensive Economic Partnership ([RCEP)])). Australia’s leader Kevin Rudd was pushing for an Asia-wide agreement as well, the Asia-Pacific Community, which had an economic or trade component (although the first articulation of this plan included the United States in June 2008).   6. The Administration was also facing an uphill battle getting the existing FTA agreements with South Korea, Colombia, and Peru through Congress.  7. Remarks by President Barack Obama at Suntory Hall, Tokyo, Japan, 14 November 2009.  8. TPA was passed in 2002 and a revised version was approved in Summer 2015.   9. Ways and Means Ranking Member Dave Camp (R-MI) and Trade Subcommittee Ranking Member Kevin Brady (R-TX) made a statement in June 2009 noting the lack of TPA authority overall, on the second anniversary of the expiry of the agreement. Both men asked the administration to renew the bill. Camp wrote, “It is past time for Congress to give the President TPA and put back in play one of our best weapons to create economic opportunity for American workers. Just as I supported TPA for Presidents Clinton and Bush, I support TPA for President Obama.” 10. Interviews with TPP officials by the author over the course of the negotiations. 11. In the end, officials with experience negotiating other agreements won out and most of the TPP follows “traditional” chapters. 12. The TPP, after all, is a voluntary agreement. Potential members that were uncomfortable with such a requirement could stay out of the deal.

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13. In practice, this largely meant waiting for the ninety-day “window” to close for the United States to complete the “as if ” conditions of TPA. However, for Malaysian entry into the TPP, the time period was not necessary. Instead, USTR argued that Congress had already granted permission for trade negotiations with Kuala Lumpur under a dormant bilateral FTA authorization. 14. See . 15. The lack of transparency and knowledge of the TPP could come back to haunt officials in the run-up to ratification and implementation in many countries as it has limited public and business support for the deal. In the knowledge vacuum, opponents of the agreement have had near free-rein to set the narratives. 16. Stakeholders and media continued to travel to TPP “informal” rounds anyway, but in fewer numbers. If anyone had kept track, the record would likely show that the later meetings were mostly attended by the largest multinational firms with deep enough pockets to justify the expense even without a formal presentation. Officials said they discontinued stakeholder meetings because they had “learned everything they needed” by the end of more than a dozen such meetings. 17. This “rule” was reinforced by another convention that prevented newly admitted members from discussing any text that had been “closed” or taken out of brackets (where the use of brackets indicated continuing disagreement among delegates about the exact wording of the text). 18. This is a testament to the length of the U.S. presidential race. During every election, the entire U.S. House of Representatives is also running for office as well as one-third of the Senate members. For these members of Congress, a trade vote too close to the election decision could be very problematic. 19. Except for the SME chapter, as noted earlier. This made it difficult for many people to judge how close or how far away the TPP might be from completion and complicated life for reporters who wanted a simple metric to assess progress with each round. 20. The agreement was largely conducted plurilaterally (i.e., among all twelve members), except for the market access provisions for goods that used a mix of bilateral and plurilateral negotiating approaches. For details, see Deborah Elms,. “The Trans-Pacific Partnership: The Challenges of Unraveling the Noodle Bowl”, International Negotiation, no. 18 (2013): 25–47. 21. An alternative (and more market opening) approach would have been to specify rules for all classes of goods or to allow very minimal sets of rules (for all chemicals or all textiles or all electronic items). 22. Outside, of course, of the European Union which remains unique.

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References Business Day. “NZ Welcomes US Entering P4 Trade Talks”, 5 February 2008. (accessed 29 August 2014). Camp, Dave and Kevin Brady. “Camp, Brady Statement on the Second Anniversary of the Expiration of Trade Promotion Authority”, 30 June 2009. (accessed 1 September 2014). Campbell, Kurt and Brian Andrews. “Explaining the U.S. ‘Pivot’ to Asia”. Americas 2013/01. London: Chatham House, August 2013. (accessed 29 August 2014). Capling, Ann and John Ravenhill. “The Trans-Pacific Partnership: The Australian Perspective”, November 2012. . Clinton, Hillary. “America’s Pacific Century”. Foreign Policy, 11 October 2011, . Destler, I.M. American Trade Politics, 4th ed. Washington, D.C.: Institute for International Economics, 2005. Elms, Deborah. “The Trans-Pacific Partnership: The Challenges of Unraveling the Noodle Bowl”. International Negotiation, no. 18 (2013a): 25–47. ———. “The Trans-Pacific Partnership Negotiations: Some Outstanding Issues for the Final Stretch”. Asian Journal of WTO and International Health Law and Policy (AJWH) 8, no. 371 (2013b). Elms, Deborah and C.L. Lim. “An Overview and Snapshot of the TPP Negotiations”. In The Trans-Pacific Partnership: A Quest for a Twenty-first Century Trade Agreement, edited by C.L. Lim, Deborah Elms and Patrick Low. Cambridge: Cambridge University Press, 2012. Fergusson, Ian F. and Bruce Vaughn. “The Trans-Pacific Partnership Agreement”. Congressional Research Service R40502, 12 December 2011. . Inside US Trade. “TPP Ministers Chart ‘Pathway’ Forward, But Show Few Signs Of Progress”, 23 May 2014. Lim, C.L., Deborah Elms, and Patrick Low, eds. The Trans-Pacific Partnership: A Quest for a Twenty-first Century Trade Agreement. Cambridge: Cambridge University Press, 2012. New Zealand Ministry of Foreign Affairs and Trade (MFAT). “Statement of the Ministers and Heads of Delegation for the Trans-Pacific Partnership Countries”, 10 December 2013. . Rahil, Siti and Kayo Mimizuka. “Singapore TPP Talks Fail to Reach a Deal”. The Japan Times, 25 February 2014. Schwab, Susan. Remarks at the Lee Kwan Yew School of Public Policy, Singapore, 10 November 2009. Slattery, Brian, Bryan Riley, and Nicolas Loris. “Sink the Jones Act: Restoring America’s Competitive Advantage in Maritime-Related Industries”. Backgrounder #2886. Heritage Foundation, 22 May 2014. United States Trade Representative (USTR). “Statement on the 18th Round of Trans-Pacific Partnership Negotiations in Kota Kinabalu, Malaysia”, 2013.. ———. “Text of USTR Letters to Congressional Leaders”, 14 December 2009. (accessed 29 August 2014).

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3 The Political Economy of Joining TPP: The Case of Malaysia1 Cassey Lee Introduction The 2014 public debates and protests on the Trans-Pacific Partnership Agreement (TPP) are unique in Malaysian history. They are unique for at least three reasons. First, little was known about the actual content of the proposed agreements because the TPP negotiations have been shrouded in secrecy. Second, there was significant opposition against the TPP outside the government. Third, various parties that often take opposite sides on many economic and political issues were united in objecting to the TPP. These developments have put the Malaysian government on the defensive. This leads to the question of why the Malaysian government is so committed to signing the TPP despite its lack of popularity amongst various quarters in Malaysian society. Are there potential economic benefits that accrue from the TPP that are not apparent to parties opposed to the TPP? Who are the winners and losers from the TPP? In this chapter, an attempt is made to provide an understanding of some possible reasons underlying the Malaysian government’s intention to sign the TPP. It explores the economic and political factors underlying

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the government’s decision as well as the objections coming from outside the government. The structure of the chapter is as follows. Section 2 provides some basic facts on Malaysia’s participation in the TPP. This is followed by a discussion on how the TPP fits into Malaysia’s economic strategy in Section 3. The economic benefits from joining TPP are discussed in Section 4, while its cost and distributive effects are covered in Section 5. The political economy of the TPP is discussed in Section 6. Section 7 concludes.

Malaysia’s Participation in TPP — Some Basic Facts Malaysia’s interest in the TPP is related to the failure to conclude a Free Trade Agreement (FTA) between Malaysia and the United States. Malaysia started negotiating the Malaysia–United States FTA in March 2006. A key reason for Malaysia’s interest in the FTA was to reverse the decline in the share of Malaysia–United States trade and Foreign Direct Investment (FDI) — a trend that continues until today. Table 3.1 shows

Table 3.1 Malaysia’s Major Trading Partners, 2009–13 (% of total trade) Country

2009

2010

2011

2012

2013

China Singapore Japan United States Hong Kong South Korea Taiwan TH+IN+PH AU+NZ Others Total

13.0 12.8 10.9 11.1  4.0  4.1  3.3 10.9  3.4 26.5 100

12.5 12.5 11.4 10.0  3.9  4.5  3.8 11.6  3.4 26.4 100

13.2 12.7 11.5  8.9  3.5  3.9  4.0 11.2  3.5 27.7 100

13.8 13.4 11.1  8.4  3.3  3.8  3.6 11.3  3.8 27.5 100

14.5 13.5 10.1  8.1  2.9  4.1  3.7 11.3  3.7 28.1 100

AU = Australia; IN = India; NZ = New Zealand; PH = the Philippines; TH = Thailand Source: Compiled by the author based on data from the Ministry of Finance, Malaysia.

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that the U.S. share of Malaysia’s exports has declined from 11.1 per cent in 2009 to 8.1 per cent in 2013. Similarly, the U.S. share of FDI in Malaysia has dropped from 24.8 per cent in 2005 to 8.6 per cent in 2013. The seventh and last round of negotiation for the Malaysia–United States FTA took place in July 2008 — this despite the fact that the U.S. Trade Promotion Authority (TPA) had lapsed a year earlier on 30 June 2007. Negotiations were suspended in January 2009. The United States Trade Representative (USTR) subsequently notified the U.S. Congress in October 2010 that bilateral trade negotiations between the United States and Malaysia would continue in the TPP negotiations (Rinehart 2014).2 A number of factors were responsible for the failure to conclude the Malaysia–United States FTA. Chief amongst these were obstacles in the form of issues that were regarded to be “sensitive”, such as government procurement, intellectual property rights protection, and market access to the services sector (Rinehart 2014). In the United States, the decision to enter into TPP negotiations was approved by the outgoing Bush administration in September 2008. Barack Obama officially revived interest in November 2009 after he took office in January 2009. In Malaysia, a new prime minister (Najib Razak) took office in April 2009 following a dismal electoral performance by the ruling coalition. Malaysia’s participation in the TPP negotiations began in October 2010. These political changes are likely to have affected the Malaysia–United States FTA negotiations and the subsequent shift to the TPP negotiations. However, there could be other reasons for Malaysia’s participation in the TPP.

How the TPP Fits into Malaysia’s Economic Strategy In 2009, the change in Malaysia’s political leadership took place amidst a severe economic contraction caused by the 2008 Global Financial Crisis (GFC), as shown in Figure 3.1. Even though the Malaysian economy recovered quickly from the GFC subsequently, its annual economic growth has been moderate at slightly less than 6 per cent per annum. It was within such an economic climate that the Najib administration initiated a set of medium- to long-term economic policies to enhance economic growth and achieve developed country status by the year 2020.

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Figure 3.1 Malaysia: Real GDP Growth Rate, 1990–2013

12.0 10.0 8.0 6.0 4.0 2.0 0.0

–2.0 –4.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

%

–6.0 –8.0

–10.0

Source: Author’s compilation based on data from the Economic Planning Unit (EPU).

The national economic strategy during the Najib administration period is encapsulated in three major policy initiatives, namely:3 • 1Malaysia (launched in April 2009): a broad welfare-oriented development programme that includes a diverse set of projects such as 1Malaysia Clinics, Kedai Rakyat 1Malaysia, and 1Malaysia Development Berhad. • Government Transformation Programme (GTP) (launched in January 2010): a programme aimed at enhancing civil service performance by focusing on National Key Result Areas.4 • Economic Transformation Programme (ETP) (launched in 2010): a private-sector driven economic growth programme that focuses on thirteen “National Key Economic Areas” (NKEAs) comprised of eleven industry sectors and one geographical area (Greater Kuala Lumpur/ Klang Valley).5 These eleven sectors are expected to contribute 74 per cent of economic growth during the 2011–20 period.6 These policies have been incorporated in the Tenth Malaysia Plan on June 2010, the country’s five-year development plan covering the 2011–15 period. Even though the ETP is mainly a sectoral-focused plan and the TPP does not feature prominently in it, trade is an important component

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of the government’s economic strategy. This is explicitly stated in the Tenth Malaysia Plan, in which trade will continue to be a key driver in economic growth. More specifically, the government plans to strengthen exports to traditional markets such as the United States by pursuing FTAs such as the TPP (Government of Malaysia 2010, pp. 12 and 103). Beyond these broad development policy initiatives, it might be useful to analyse how the TPP might impact the Malaysian economy in greater detail. This entails an analysis of the economic benefits and costs from the TPP.

Economic Benefits from Joining the TPP Market access — not just to the U.S. market — is a key economic rationale for Malaysia to join the TPP. This is evidenced by statements from the Ministry of International Trade and Industry (MITI) on the reasons for joining the TPP: The Government views the TPP as an important initiative as Malaysia seeks to expand market access opportunities, enhance our competitive advantage, build investor confidence in the country which draws foreign investments, and build capacity through FTAs. (Ministry of International Trade and Industry, Malaysia, 2014, p. 3)

As it is expected to improve market access, the major beneficiaries of the TPP would be Malaysian exporters to markets in TPP countries. This effect would have been much larger given the steady decline in the TPP countries’ share in Malaysia’s trade. In 1990, TPP countries accounted for 60.2 per cent of Malaysia’s merchandise trade (coverage ratio) but this declined to 38.6 per cent in 2013, as illustrated in Figure 3.2. Currently, Malaysia has signed FTAs with a number of TPP countries such as Australia, Chile, New Zealand, and Japan, as shown in Appendix 1. Taking into account the ASEAN (Association of Southeast Asian Nations) countries that are part of TPP (such as Brunei, Vietnam, and Singapore), the FTA coverage ratio with all these countries is 29.8 per cent in 2013. This suggests that the marginal coverage ratio for merchandise trade associated with the TPP is only 8.8 per cent, most of which (8 per cent) is accounted for by the United States. The question of whether the TPP can improve Malaysia’s exports to TPP countries is an important one. A preliminary econometric analysis suggests that the TPP is likely to be associated with higher level of exports, as indicated in Appendix 2. It should be noted that the quantum of increase in exports is likely to be different for each of Malaysia’s trading

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The Political Economy of Joining TPP: The Case of Malaysia

Figure 3.2 TPP Countries’ Share in Malaysia’s Merchandise Trade, 1990–2013

70.0 60.0 50.0 40.0 30.0 20.0

0.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

10.0

TPP Countries

China

US

Singapore

Source: Based on data from EPU.

Table 3.2 Malaysia’s FTA Merchandise Trade Coverage Ratios FTA Coverage Ratio Malaysia–EU Malaysia–Turkey Malaysia–Pakistan Malaysia–New Zealand Malaysia–Chile Malaysia–India Malaysia–Australia Malaysia–Japan

2013

FTA Coverage Ratio

2013

9.9 0.3 0.4 0.5 0.1 3.1 3.3 9.9

AFTA ASEAN–EU ASEAN–Japan ASEAN–Aus/NZ ASEAN–Korea ASEAN–China ASEAN–India TPP

27.4  9.9  9.9  3.8  4.1 14.8  3.1 38.6

Source: Compiled by the author based on data from EPU.

partners. The TPP may also increase imports by allowing greater market access to Malaysian markets. The heightened competition from imports is likely to result in lower prices in the domestic markets. Aside from merchandise trade, the TPP could also affect the trade in services. The volume of trade in services is about 20 per cent that of

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merchandise trade. This is not surprising as services are primarily nontradables. Malaysia’s services trade balance has been relatively healthy in recent years (see Figure 3.3). Data from the USTR indicate that Malaysia had a services trade deficit of US$1.1 billion with the United States in 2012. The sector’s role in the Malaysian economy has been increasing over time while that of the manufacturing sector has been declining. The services sector’s share of gross domestic product (GDP) has increased from 50 per cent in 2000 to 60 per cent in 2013 (see Figure 3.4). This occurred alongside a decline in the manufacturing sector’s share of GDP from 31 per cent in 2000 to 24 per cent in 2013. The other reasons for joining the TPP include competitiveness (competitive advantage) and FDI. Historically, FDI has played an important role in the Malaysian economy and continues to do so. FDI’s role has become even more crucial in the post-Asian Financial Crisis (AFC) period because of the decline in domestic investment. Total domestic investment (private and public) as a percentage of GDP has dropped from around 40 per cent in the few years prior to the AFC to around 22 per cent in the post-AFC period (Menon 2014). Domestic investment has recovered slightly, especially in the past three years. Today, about 50 per cent of private investment takes place in the services sector while the manufacturing sector’s share is only 25 per cent (see Figure 3.5). The importance of

Figure 3.3 Malaysia’s Trade in Services, 2005–10

120,000 100,000 80,000 60,000 40,000 20,000 0 (20,000)

2005

2006 Exports/Credit

2007

2008

Imports/Debit

2009

2010

Balance

Source: Based on data from Bank Negara Malaysia.

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Figure 3.4 Malaysia: Sectoral Composition of GDP, 2000–13

70.0 60.0 50.0 %

40.0 30.0 20.0 10.0 0.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Agriculture

Mining and Quarrying

Manufacturing

Services

Source: Based on data from EPU.

Figure 3.5 Malaysia: Sectoral Composition of Private Investment, 2005–13

60 50 40 % 30 20 10 0

2005

2006

2007

2008

2009

2010

Agriculture

Mining and quarrying

Construction

Services

2011

2012

2013

Manufacturing

Source: Based on data from Bank Negara Malaysia.

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services is also reflected in FDI — some 42 per cent of FDI inflows during the 2008–10 period went to the sector (OECD 2013). Thus, in considering the potential impact of the TPP on FDI, the services sector is likely to be important. Will the TPP significantly increase FDI for Malaysia? At present, TPP countries that are major sources of FDI for Malaysia include Japan and Singapore — Table 3.3 shows that they respectively account for 14.7 per cent and 18.1 per cent of total FDI in 2013. The U.S. share of FDI in Malaysia at 8.6 per cent is much smaller. These three countries alone account for about 40 per cent of Malaysia’s FDI. Although the U.S. share is relatively low, its share of FDI stock is slightly higher at 11 per cent (OECD 2013). Are the overall economic benefits accrued to Malaysia from joining the TPP large? There appears to be no consensus among existing studies on this question. For example, Petri et al. (2011) provides a more optimistic assessment compared to Cheong and Tongzon (2013). One reason for Table 3.3 Malaysia: Major Sources of FDI Inflows, 2005–13 (%, total FDI) 2005 US* Japan* Singapore* Netherlands Hong Kong Germany Australia* Switzerland United Kingdom Bermuda Virgin Islands (B) China Others Total TPP-4

2006

2007

2008

2009

2010

2011

2012

2013

24.8 22.9 18.8 14.2 11.5 10.9 10.5 8.9 8.6 18.8 15.4 17.4 12.4 12.0 12.0 13.0 13.9 14.7 15.4 15.8 31.6 17.8 17.7 16.9 18.4 17.9 18.1 12.8 10.2 9.5 9.3 9.3 8.8 8.2 7.7 7.9 1.5 1.6 0.3 2.5 3.3 3.7 3.2 3.6 4.3 3.0 5.2 5.2 4.8 4.6 4.0 4.4 4.4 4.3 0.3 0.2 1.3 0.9 2.2 2.9 2.9 3.0 3.0 6.4 7.6 4.6 4.9 3.1 3.6 4.2 4.5 4.8 7.4 9.0 10.1 6.1 6.8 5.8 4.8 4.7 4.3 0.0 0.6 1.5 2.0 2.0 2.1 2.4 2.6 3.2 0.6 0.4 5.2 5.4 5.6 5.3 4.7 4.5 3.7 0.3 0.2 0.4 0.4 0.3 0.3 0.3 0.2 0.2 8.8 10.8 20.0 19.4 21.7 23.8 23.0 24.1 22.8 100.0 100.0 126.0 100.0 100.0 100.0 100.0 100.0 100.0 59.3 54.3 69.2 45.2 43.4 42.6 44.8 43.7 44.4

Note: * Member of TPP negotiations. Source: Compiled by the author based on data from Bank Negara Malaysia.

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this ambiguity lies in the difficulty of forecasting the long-term impact of the TPP on FDI. Clearly, there are economic benefits from TPP associated with improved market access and FDI. This optimism is shared by industry associations in Malaysia such as the Federation of Malaysian Manufacturers (FMM). Whether these benefits are sufficient to offset the costs of the TPP is an important question. The political decision to implement the TPP is likely to depend on the cost-benefit calculus and how these are distributed in society. The next section will examine its cost and distributive effects.

Costs and Distributive Effects of TPP Trade liberalization has distributive effects. While the TPP is likely to have some positive benefits via increased trade and FDI, there are costs associated with it. For some parties, these costs can be perceived to be greater than the benefits. It is for this reason that the TPP has been very unpopular among various associations, non-governmental organizations (NGOs), and opposition parties in Malaysia. On 14 August 2013, sixtyone NGOs and ten coalitions jointly endorsed an open letter of protest against the TPP, called the “Bantah TPPA” (Oppose TPPA) letter. The Bantah TPPA open letter provided a number of key concerns that highlight the expected distributive impacts of the TPP. These concerns include: • Restriction of the country’s sovereignty and its government policy space such as capital controls and public health (for example, tobacco control); • Increased competition from imports following tariff reductions and non-tariff barriers, which would have an especially adverse impact on Small and Medium-sized Enterprises (SMEs); • Less room for preferential policies in government policies such as procurement, employment, and government support for state-owned enterprises (SOEs) and government-linked corporations (GLCs); • Environmental degradation; • Ineffective protection of labour rights, lower wages, and unemployment; • Reduced access to generic medicines (in terms of availability and prices) and knowledge through intellectual property right protection measures. The signatories to this protest letter include established and active NGOs such as:

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• Malaysian Trades Union Congress (established 1949) — a trade union federation with around 800,000 members; • National Union of Bank Employees (established 1958); • Sahabat Alam Malaysia (established 1977) — an environmental NGO; Consumer Association of Penang (established 1970). A reading of the list of issues and signatories to the Bantah TPPA open letter suggests that there are concerns that the TPP could adversely affect the welfare of workers, groups of consumers (health), and specific groups currently benefiting from affirmative action policies (for example, bumiputra rights groups). Some of these concerns are not new and were also articulated during the Malaysia–United States FTA negotiations. On the part of the government, perhaps the most difficult items in the TPP negotiations are issues relating to government procurement, as well as support for SOEs and GLCs. These issues are related to the interventionist role that the Malaysian state has played in bringing about growth and redistribution. In the area of government procurement, this entails the allocation of contracts to the bumiputra business community — a practice that dates back to the implementation of the New Economic Policy (NEP, 1970–90) but has continued since. The state involvement in the economy also took the form of regulatory requirements on corporations that are above the designated size thresholds to allocate a given percentage (30 per cent) of their equity and employment to the bumiputra community (Jesudason 1989). The implementation of NEP also saw the creation of stateowned corporations in the private sector in the late 1960s to 1970s, which served the redistributive goal of NEP through equity holdings (trusteeship, on behalf of the bumiputra community) and employment. This strategy has evolved further from the 1980s to include corporations established for heavy industrialization (for example, Proton) and privatized state enterprises (for example, GLCs such as Tenaga Nasional and Telekom Malaysia). As Tham (2014) has noted, it has become increasingly difficult for Malaysian trade policies to accommodate the dual economic-race paradigm that underpins state intervention in the Malaysian economy. The difficulties encountered in the TPP negotiations in the area are manifestations of this phenomenon. The Malaysian government has been seeking to deal with these issues in the TPP negotiations through either a carve-out (exclusion), appropriate threshold levels, and/or a transition period (delayed application). It is difficult to

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assess how the government’s bumiputra policies are likely to change in response to the TPP. What is certain is that some bumiputra policies are likely to continue at least for a certain period even after the TPP is signed. While the costs of participating in the TPP are usually associated with the issues discussed above, there is also a need to consider the potential costs of not participating in the TPP. These could be the forgone economic benefits discussed earlier. Such forgone benefits could be larger if trade and investment diversionary effects arise from the competing countries that join the TPP.

The Political Economy of TPP In a democratic country, trade policies are the outcomes of interactions between the policy’s demand side and supply side factors (Rodrik 1995). The demand for trade policy such as the TPP is derived from the aggregation of the individual preferences in society, as illustrated in Figure 3.6. The aggregation process can be complex, involving various interest groups Figure 3.6 Political Economy of Trade Policy

Individual Preferences

Interest Groups Preferences

Demand Side of Trade Policy

Trade Policy Outcomes

Policymaker Preferences

Institutional Structure

Supply Side of Trade Policy

Source: Rodrik (1995).

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such as NGOs, political lobbies, and trade associations. On the supply side for trade policy, the preferences and goals of policymakers/politicians matter, for example, re-election and rent-seeking. However, what politicians can do is constrained by the institutional set-up for crafting trade policy (for example, legal rules).

Demand side From the perspective of the demand side, there are clearly some interest groups that are not in favour of the TPP for various reasons discussed earlier. These include trade unions, consumer groups, environmental groups, and groups representing various ethnic communities. It is not entirely certain that these interest groups represent consumer interests in Malaysia in a comprehensive manner. On the other hand, business associations representing larger firms are most likely to be in favour of the TPP for the prospects of improved market access.7 The net effect of these various opposing groups is difficult to ascertain. Following Naoi and Urata (2013), one way to gauge public interest in TPP is to use Google Search Trend data. Applying the search term “TPP” will show that interest in the TPP has fluctuated over time in Malaysia (see Figure 3.7). However, interests Figure 3.7 Salience of TPP in Google Trends, 2011–14 120 100 80 60 40

Nov-14

Jul-14

Sep-14

May-14

Jan-14

Mar-14

Nov-13

Sep-13

Jul-13

May-13

Jan-13

Mar-13

Nov-12

Jul-12

Sep-12

Mar-12

May-12

Jan-12

Nov-11

0

Sep-11

20

Note: Relative search interest is search volume numbers for a given term(s). Relative to the total number of searches on Google normalized on a scale of 0–100. Source: Google Trends, .

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in the TPP is relatively low in comparison with other topics such as the GST (Goods and Services Tax). Between September 2011 and December 2014, the search volume for the term “GST” was eighteen times the search volume for “TPP” in Malaysia. Reflective of this is the observation that even though the TPP negotiations began in October 2010, it was not an issue that was heavily politicized in the 13th General Elections in May 2013.

Supply side Two dimensions are important on the supply side of trade policy in the context of the TPP. In the case of the first dimension, the TPP was not an issue that affected the re-election motives of the ruling coalition, Barisan Nasional, in the 13th General Elections even though economic issues were important. However, as negotiations resumed after the election, protests against the TPP began to intensify. The second dimension relates to motivations related to the diversion of resources to favoured groups. There has been some academic discussion highlighting links between government procurement and rent-seeking (Gomez and Jomo 1997). This would imply that the ruling political coalition would not be interested in pursuing any trade policy that would weaken its ability to divert resources, via government procurement, under the guise of achieving socio-economic objectives. However, given the importance of economic performance even in the post-election period, the ruling political leaders are likely to be interested in trade policies that may help revitalize the Malaysian economy. This could be related to internal party survival or longer term political survival (next elections). The potential benefits of trade and FDI could help counter the lethargic domestic sources of growth. This focus on growth strategy can be consistent with resource diversion — in a way that policymakers regard redistributive and growth complementarily. Finally, another important feature of trade policy supply in Malaysia is how trade agreements such as the TPP do not require parliamentary ratification. Only cabinet-level approval is required. This insulates the ruling coalition party from political opposition to the TPP in the parliament in which it currently lacks a majority vote due to its poor performance in the previous election. It also implies that politicians have full flexibility in choosing when to ratify the TPP if they choose to do so.

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Uncertainties and Other Factors Two problems complicate any analysis of the political economy of the TPP during the pre-ratification period. The first relates to the uncertainties surrounding the terms being negotiated and the second problem lies in the anticipated difficulties of getting the U.S. Congress to ratify the trade agreement. The complex negotiations involving twelve countries also further complicates the timing of the TPP’s ratification. The uncertainties related to electoral cycles are important as it can affect the ratification of the TPP. In addition, strategic factors could be another important consideration. Malaysia maintains close cooperation with the United States on a number of issues. In the case of the TPP, its strategic value to the United States goes beyond the “pivot to Asia” to counterbalancing the rising influence of China (Fergusson et al. 2013). The United States sees Malaysia as a moderate and democratic Muslim nation that shares a common interest in areas such as counterterrorism and counternarcotics (Martin 2009). These aside, Malaysia continues to maintain considerable independence in other issues such as the Israel– Palestine conflict and in its diplomatic ties with China. These issues have disrupted the Malaysia–United States FTA negotiations in the past. Thus, the negotiations with the United States within a broader trade agreement such as TPP has the effect of neutralizing the impact of the Israel–Palestine conflict on trade agreements involving the Unites States.

The Dynamics of the TPP’s Political Economy Calculus Based on the above discussions, the narrative underlying the Najib administration’s interest in the TPP can be stated as follows: (a) 2009–12 The initial impetus for participation in the TPP was likely to have emerged from Malaysia’s interests in the Malaysia–United States FTA. The transition from this FTA that faltered to the TPP was probably facilitated by the fact that Najib Razak became prime minister in April 2009 — eighteen months before Malaysia began the TPP

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negotiations. This meant that the new government did not have to face electoral pressures. The TPP also fitted the new Prime Minister’s economic transformation agenda, which was aimed at revitalizing economic growth. The potential benefits from the TPP are not only larger than those from the Malaysia–United States FTA but also include the revitalization of FDI in the country, especially in the manufacturing and services sector. It is unclear whether redistributive government policies would be affected. An appropriate threshold (based on size of the Malaysian economy) and a negotiated medium-term transition period will make the TPP more attractive from a political perspective. (b) 2013–14 As the TPP negotiations progressed towards a more advanced stage, the cost of the TPP in terms of its impact on government policies became more evident, resulting in the mobilization of protests against it by NGOs and opposition political parties especially after mid-2013.8 This was also the period immediately after the 13th General Elections in May 2013 during which the ruling coalition performed poorly. The weakening fiscal situation also prompted the government to finally introduce the GST, which was implemented in April 2015. Both the GST and TPP have become major focal points of protests by NGOs and opposition political parties.

Conclusions The TPP is undoubtedly one of the most important trade agreements the Malaysian government has ever considered. There are clear economic benefits from the TPP but its exact quantum cannot be determined and will only materialize in the medium- to long-run. The impact on the government’s redistributive policies could be substantial but can be reduced and made more politically palatable if appropriate threshold and delayed implementation are incorporated. The TPP is also more politically acceptable if some room for resource diversions to ruling political elites are maintained.

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Appendix 1 Malaysia’s Trade Agreements, 2014 Bilateral FTA

ASEAN FTA

Malaysia–Turkey (4/2014) Malaysia–Pakistan (1/2008) Malaysia–New Zealand (8/2010) Malaysia–Chile (2/2012) Malaysia–India (7/2011) Malaysia–Australia (1/2013) Malaysia–Japan (7/2006)

AFTA ASEAN–Japan ASEAN–Aust./NZ ASEAN–Korea ASEAN–China ASEAN–India

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Others (including those under negotiation) •  Trans-Pacific Partnership Agreement:  Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam • Regional Comprehensive Economic Partnership: ASEAN Plus (China, Japan, South Korea) Plus (India, Australia, New Zealand) • The Framework Agreement on Trade Preferential System among the Member States of the Organisation of the Islamic Conference (TPS-OIC) • Developing Eight (D-8) Preferential Tariff Agreement (PTA)

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Appendix 2 Preliminary Econometric Analysis of Exports and FTA for Malaysia Some preliminary evidence can be obtained by estimating the following equation based on the FTAs that Malaysia has signed: EXit = β0 = β1Yit + β2ERit + β3 FTAit + εit where EXit is Malaysia’s export to its trading partner country i at time t, Yit is trading partner’s GDP i at time t, ERit is the exchange rate ratio of trading partner at time t and t-1, FTAit is a dummy variable representing FTA between Malaysia and its trading partner, and εit is a random error term. Two versions of the above equation are estimated (with one and two lags) using data from Australia, Japan, India, New Zealand, and Pakistan from 1990–2013. FTA appears to have a significant and positive correlation to trade. Box Table 1 Malaysia: Exports and FTA Relationship Variables

Ln Export

Ln Export

Ln GDP (t-1)

0.674***

0.847***

–0.0883

–0.144

Ln GDP (t-2)

–0.0744 –0.144

ER (t-1)

0.115

0.214

–0.0998

–0.191

ER (t-2)

–0.151 –0.192

FTA Constant Observations

0.686***

0.593***

–0.187

–0.184

–9.668***

–12.22***

–2.358

–1.304

119

118

Note: S  tandard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1

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Notes 1. The author thanks Tham Siew Yean for her insights on many of the issues discussed in this chapter. In addition, comments from the editors have also helped improve this chapter. The usual caveat applies. 2. The origins of the Trans-Pacific Partnership Agreement (TPP) can be traced back to the four-country negotiations of the Trans-Pacific Strategic Partnership Agreement (TPSEP or P4) in 2005. 3. The Government Transformation Programme (GTP) and Economic Transformation Programme (ETP) are both part of the National Transformation Programme which represents the Malaysian government’s strategy to achieve developed country status. 4. When the GTP was initially launched in 2009, it had six National Key Result Areas (NKRAs), namely: (1) reducing crime; (2) fighting corruption; (3) improving student outcomes; (4) raising living standards of low-income households; (5) improving rural basic infrastructure; and (6) improving urban public transport. In 2011, a seventh NKRA was added, namely, (7) to minimize the high cost of living for citizens. 5. The eleven sectors include: (1) oil, gas, and energy; (2) financial services; (3) wholesale and retail; (4) palm oil; (5) tourism; (6) electronics and electrical; (7) business services; (8) communications content and infra­structure; (9) education; (10) agriculture; and (11) healthcare. 6. Source: . 7. Aside from the statements from the FMM, further evidence comes from findings of the ASEAN Business Outlook Survey 2014 in which 41 per cent of the firms interviewed in Malaysia responded in the affirmative (yes) to the question, “Will the TPP Impact Where Your Company Plans Future Investments in the Region?”. The sample size is, however, too small to make this finding definitive. 8. There is a stark contrast, in terms of political opposition, between TPP and the Regional Comprehensive Economic Partnership (RCEP). There is almost no political opposition to RCEP in Malaysia. This could be due to several reasons. First, TPP is often seen as a U.S.-led initiative and earlier opposition to the Malaysia–United States FTA could have been “transferred” to TPP. Second, RCEP is seen as an ASEAN-led initiative — there has been virtually no political objection to any ASEAN-led initiatives. Third, RCEP is regarded as less ambitious than TPP in scope and depth, thus providing more room for flexibility and the safeguard of national interests.

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References Cheong, Inkyo and Jose Tongzon. “Comparing the Economic Impact of the TransPacific Partnership and the Regional Comprehensive Economic Partnership”. Asian Economic Papers 12, no. 2 (2013): 144–64. Elms, Deborah and C.L. Lim. “The Trans-Pacific Partnership Agreement (TPP) Negotiations: Overview and Prospects”. RSIS Working Paper no. 232. Singapore: S. Rajaratnam School of International Studies, 2012. Fergusson, Ian F., William H. Cooper, Remy Jurenas, and Brock R. Williams. “The Trans-Pacific Partnership (TPP) Negotiations and Issues for Congress”. Congressional Research Service Report, R42694. Washington, D.C.: Congressional Research Service, 13 December 2013. Gomez, Edmund Terence and Jomo K.S.. Malaysia’s Political Economy: Politics, Patronage and Profits. Cambridge: Cambridge University Press, 1997. Government of Malaysia. Tenth Malaysia Plan, 2011–2015. Putrajaya: Economic Planning Unit, 2010. Jesudason, James V. Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia. Singapore, Oxford and New York: Oxford University Press, 1989. Martin, Michael F. “The Proposed U.S.–Malaysia Free Trade Agreement”. Congressional Research Service Report, RL 33445. Washington, D.C.: Congressional Research Service, 26 January 2009. Menon, Jayant. “Malaysia’s Investment Malaise: What Happened and Can It Be Fixed?”. In Malaysia’s Socio-Economic Transformation: Ideas for the Next Decade, edited by Sanchita Basu Das and Lee Poh Onn. Singapore: Institute of Southeast Asian Studies, 2014. Ministry of International Trade and Industry, Malaysia. “Brief on the Trans Pacific Partnership (TPP)”, 2014. . Naoi, Megumi and Shujiro Urata. “Free Trade Agreements and Domestic Politics: The Case of the Trans-Pacific Partnership Agreement”. Asian Economic Policy Review 8, no. 2 (2013): 326–49. Organization for Economic Cooperation and Development (OECD). OECD Investment Policy Reviews: Malaysia 2013. Paris: OECD Publishing, 2013. Petri, Peter A., Michael G. Plummer, and Fan Zhai. The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. East-West Center Working Papers, Economics Series, no. 119. Honolulu: East-West Center, 24 October 2011. Rinehart, Ian E. “Malaysia: Background and U.S. Relations”. Congressional Research Service Report, R43505. Washington, D.C.: Congressional Research Service, 21 April 2014.

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Rodrik, Dani. “Political Economy of Trade Policy”. In Handbook of International Economics vol. III, edited by Gene M. Grossman and Kenneth Rogoff. Amsterdam: Elsevier, 1995. Tham Siew Yean. “Trade Policy Formulation in Malaysia: Navigating between the Economic and Race Paradigms”. In Transforming Malaysia: Dominant and Competing Paradigms, edited by Anthony Milner, Abdul Rahman Embong, and Tham Siew Yean. Bangi, Selangor and Singapore: Institute of Malaysian & International Studies and Institute of Southeast Asian Studies, 2014.

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4 China and the TPP: Reflections and Responses Wang Yuzhu Introduction During the post-Cold War era, China engaged the Asia-Pacific economies through regional cooperation arrangements. These arrangements include the Asia-Pacific Economic Cooperation (APEC) forum, ASEAN (Association of Southeast Asian Nations) Plus Three (APT) forum, and other bilateral or plurilateral Free Trade Agreements (FTAs). APEC — one of East Asia’s few regional arrangements when the Cold War ended — was the first one China joined. After the 1997 Asian Financial Crisis, the regional architecture of East Asia was reshaped, with the APT emerging as East Asia’s main economic framework (this included ten ASEAN countries plus China, Japan, and South Korea). Later, the APT evolved into a parallel framework in East Asia with APEC as a trans-pacific platform. This dual-framework architecture in the Asia-Pacific worked well for China until Japan proposed the “10+6” (Australia, New Zealand, and India were included) in 2006. Since the 1997 crisis, China became active in regional cooperation and subsequently launched bilateral FTAs with ASEAN nations. By insisting on using APT as the main channel of East Asian cooperation, China has shown its preference for the smaller framework for economic cooperation. To some observers, this was because China was trying to maintain its dominant position in East Asian cooperation. Since then, China and Japan had been locked in competition for leadership of regional 71

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cooperation (Wang 2010) until the Trans-Pacific Partnership (TPP) was launched in 2008. Some have argued that an FTA strategy was formed in China during this period (Zhu 2009). During this period, China experienced persistently high GDP growth rate, partly because of its successful cooperation with its regional economies. As a result, economic interdependence was acknowledged. However, this economic rise unfortunately led to “strategic tension” (Zhu 2013) between China and the United States, especially when the former was seen as a potential challenger of the latter.1 When the United States launched the TPP with other APEC members, China was wary of the new initiative that focused on making “next generation trading rules”. Known as a latecomer in regional cooperation, China currently faces many challenges to further liberalization. Research interests generated among research institutes over these issues include the TPP’s impact on China and recommendations on how China should respond to the agreement. How has the TPP been evaluated in China? How will China respond to the TPP? By summarizing and reviewing the present academic research on these issues, this chapter provides some useful points to understand China’s TPP policy.

The Evolution of China’s FTA Strategy China has been working with the Asia-Pacific economies since it joined APEC in 1992. Closer relationships with its neighbouring nations were established later through the APT and bilateral arrangements. For China, this was a process in which it learned how to compromise some of its sovereignty to play win-win games with others. An FTA strategy emerged when China realized that its economy was rapidly integrating with the world economy.

China–ASEAN FTA: A Successful Start In 2001, China initiated a China–ASEAN FTA (CAFTA) as a response to the ASEAN countries’ concern over the increasing competitiveness in attracting FDI and expanding international trade. The agreement was quickly negotiated and implemented and the FTA began to benefit both sides, spurring more “ASEAN+1” FTAs. On the Chinese side, the success of CAFTA provided enough confidence to build bilateral FTAs with other economies. The success of CAFTA as

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well as the increasing demand on both the export of manufactured products and the import of energy and resources — with China becoming “the world’s factory” — were key factors that pushed China to initiate more FTAs. Gradually, an FTA strategy emerged and evolved into a way of bridging China with international markets and resources (Qu 2009). China negotiated bilateral FTAs with countries and regional groupings such as Australia, Chile, and the Gulf Cooperation Council (GCC). By the end of 2015, China has signed FTAs with fourteen countries and regional groups, among which are newly signed Korea and Australia. More bilateral and plurilateral FTAs are currently being negotiated. What is China’s FTA strategy that seems to be emerging? In December 2015, China published the document to accelerate FTA strategy, we may briefly summarize it as follows. China’s FTA strategy is to keep regional arrangements, such as the Regional Comprehensive Economic Partnership (RCEP) as the main channel of regional cooperation, supported by more bilateral FTAs, especially FTAs with belt and road countries, in order to make sure that China has both a regional platform and an effective channel to link with key markets.

Competition between China and Japan leading to the RCEP When Japan proposed an “ASEAN+6” framework for East Asia in 2006, China believed that Japan aspired to take the dominant position in the East Asian cooperation. However, China preferred the APT cooperation to other arrangements because the former was believed to be a deeper mechanism, and the objectives of the APT FTA was believed to be more easily fulfilled than an ASEAN+6 FTA. Obviously, China was very keen to have a regional arrangement at that time and for some Chinese think-tanks, the China–Japan–Korea (CJK) cooperation was supposed to be the core of any East Asian framework. For Japan, this preference was understood to be China’s wish to maintain its dominant position within the APT framework. While both sides believed that the other was trying to lead regional cooperation, the process of East Asian cooperation stagnated and the central role of ASEAN got threatened as a result. The RCEP was initiated and promoted as an attempt to break this deadlock.

A Changing FTA Strategy? Because the RCEP is an ASEAN+6 cooperation framework, China’s proactive attitude towards the RCEP raises a question: does this mean that China has changed its FTA policy? For some Chinese observers, China

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did give up the APT as the main channel and became more pragmatic on regional cooperation. To others, this change was a response to the challenge of the TPP. However, both sides are uncertain about how much damage the TPP will cause China. The following sections will summarize the analyses of Chinese scholars on the TPP and their recommendations on how China should respond to it. Hopefully this will help one to understand China’s FTA policy in this new context.

The TPP: A Challenge or Opportunity? When the TPP was announced, China placed much attention on it despite knowing little about its contents because it was promoted by the United States. The first research analysis was launched by China’s central government with the recommendation that China should keep a close eye on the TPP because it might cause problems for China if its negotiation finishes quickly. The report also touched upon whether China should join the TPP negotiations. It seems that the initial recommendation was that China should not join the TPP because it was believed, at that time, to be a potential challenge to China. Additionally, as a regional economic arrangement, the TPP needed China more than China needed the TPP if it was really aimed at integrating regional economies. Thereafter, China chose to do more research to determine the TPP’s impact on China instead of taking any real action. When more APEC members became involved in the TPP negotiations, more academic resources were mobilized to study the TPP. This was so especially after the 2011 APEC Summit, during which the TPP was a main topic of discussion and was linked to the United States’ “rebalance towards the Asia-Pacific” strategy of containing China. Once the TPP became a popular topic, more diversified opinions started to appear.

The TPP Rule-Making for the Asia-Pacific — A Challenge for China Why did the United States promote the TPP when APEC was still functioning as a trans-Pacific economic arrangement in the region? Linking this initiative to the Obama administration’s “pivot” to Asia,

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some Chinese scholars argued that the TPP was aimed at containing China by making new trading rules for the region. Li Xiangyang made this argument clearly by stating that the TPP would be an immediate challenge to the rise of China (Li 2012). Being the director of the Chinese Academy of Social Sciences (CASS), Li’s argument was broadly acknowledged. Many Chinese scholars accepted that the TPP was one aspect of the containment strategy partly due to subtle changes in the Sino–American relationship after the U.S. retreat from Iraq.2 For these scholars, the TPP was an important pillar of the United States’ Asia-Pacific interests; the promotion of the TPP meant that the United States had changed its East Asian policy to shape a new U.S.-centred Asia-Pacific order (Xu 2014). Additionally, the TPP may be even more adversarial to China than previously suggested, because it left the impression that it was an “anyone but China” cooperation. Indeed, the unsaid rule that TPP negotiators were not allowed to contact China before negotiations completely showed that the TPP was an anti-China arrangement (Li 2014). The TPP agreement’s challenge for China seems to emerge from the following aspects. First, the TPP has very high preconditions for membership, which China would find difficult to fulfil (Cai 2013). At the same time, the TPP undermines economic cooperation in the AsiaPacific because APEC is divided into non-TPP and TPP members, with the latter group incentivized to give more focus to the progress on the TPP instead of integration among all APEC members. Second, the TPP will cause trade diversion. TPP members, especially the United States and Japan, are among China’s most important trading partners. Research indicates that China’s trade in the textile and garment industries would be negatively affected after the implementation of the TPP because of trade diversion (Zou and Ji 2014). Some even argue that the United States is trying to use the TPP to “de-chinalize” itself and reduce bilateral trade with China. The United States–China trade figures support this argument: in 2002, China’s exports to the United States was 22.8 per cent of its total export but this number has decreased to about 15 per cent in 2014. Third, the TPP may challenge China’s use of state-owned enterprises (SOEs). SOEs are said to be the foundation of China’s socialist market economy (Li 2014). China’s central government recently tried to reform the SOEs by inviting the private sector to participate in the operation of SOEs.

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The TPP as an Opportunity Although most observers believe that the high standards the TPP promotes will bring challenges to China, some scholars argue that the TPP would also provide opportunities for China. First, in light of the lack of progress of the WTO’s Doha Round, a successful TPP may be a model for the next generation of FTAs and has contributed to world economic integration. For scholars supporting this point, it is irrational to discount the importance of the process of international integration because the success of China’s economy was based on its integration into the world economy. Therefore, any regional liberalization efforts should contribute to world economic liberalization. Second, although meeting the TPP’s high standards will be a tough challenge for China, this does not mean that China does not need the TPP. China should therefore keep an open mind towards the TPP. For example, Wang Haifeng of the Institute of Macro-Economy Studies argued that China needs to deepen its economic reforms and follow the TPP’s requirements as the next step (Wang 2014). He even argued that 2014 would be a good time for China to join the TPP. The reality behind this argument is that the twelve members of the TPP — especially the United States and Japan — are among China’s major trading partners. This economic interdependence indicates that China cannot afford to ignore the progress of the TPP. Third, the TPP can provide some external pressure on China’s internal reform. Some Chinese observers have realized that the success of China’s economy in the past three decades was the result of reform and opening up. However, new interest groups were formed when the reform destroyed the old interest groups. These new interest groups created hurdles for further domestic reforms and hence towards an even more prosperous future. According to the two-level game theory (Putnam 1986), international negotiations can provide leverage for national governments to push forward internal reforms. He and Yang (2013) focused on this point by highlighting that joining the TPP would bring about deepened internal reforms. They argued that this would prove to be another successful story after China’s WTO accession. But this argument failed to gain full support because the internal situation had changed so much compared with the time when China joined WTO. As Zhang (2014) argued, although China needs to push economic reforms forward, it should happen as a result of an independent thought-out process instead of under international pressure.

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China’s Participation in the TPP? Generally speaking, the challenges and benefits of China joining the TPP depend on whether the TPP can be implemented on time. To the Chinese observers, the TPP negotiation process is very difficult. On the one hand, the developing members — who joined the TPP negotiations due to considerations beyond economic interests — cannot fully meet the TPP’s requirements. For example, as a socialist country, it is doubtful if Vietnam can meet the TPP’s requirements for regulating SOEs and government procurement. On the other hand, Japan’s involvement in the TPP is a double-edged sword. Although Japan’s presence benefits the TPP’s membership tremendously — allowing the TPP to represent 40 per cent of the world’s GDP — the TPP negotiations would inevitably be made more difficult for the United States as Japan faces a political dilemma in opening up its agricultural sector. The failure to finalize negotiations in 2013 made nearly all Chinese observers believe that the TPP might become a drawn-out process. However, there is another perspective. Although the TPP currently faces challenges in closing the negotiation gaps, some believe that the United States will soon succeed. For these scholars, the TPP is so important for the Obama administration that no matter how difficult it is, the United States will try their best to finalize negotiations. With these diverse perspectives on the TPP, scholars have provided different recommendations to China’s central government. For those who believe that the TPP is an immediate challenge, the Chinese government should consider how to cope with the TPP and work out some useful measures to minimize its negative effects. For example, China may instead choose to promote the RCEP,3 accelerate the China–Korea FTA (CK FTA), or upgrade CAFTA and other bilateral FTAs. For those who believe that the TPP means an opportunity, China should prepare to join the TPP and gain a new round of trade bonuses (Li 2014). This means that China needs to make immediate changes to cater to the TPP’s requirements. Nevertheless, China still needs to prepare for a “TPPized” world. For example, Zhang (2014) recently argued that China should not be too eager to join the TPP because of its high standards but instead try to implement all of the TPP’s rules in the RCEP, CJK FTA, CAFTA, and other bilateral FTAs separately. Obviously, all the scholars have agreed on the point that China should prepare for the TPP regardless of how it is viewed, as a challenge, threat, or opportunity. From their perspectives, the TPP heralds the arrival of a

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new framework of rules: it makes no difference whether it is perceived as a challenge or a benefit; the most important thing is that every economy should prepare for it. For China, further reforms of its internal institutions should be a top priority.

China’s Responses to the TPP Since Japan joined TPP negotiations in July 2013 and the agreement gained traction, it seems like China has changed its attitude towards the TPP. Sun Yuanjiang of the Ministry of Commerce said in December 2013 that “China holds an open attitude to TPP”,4 and “We have kept doing research about TPP, but joining TPP is a big deal, so we need to evaluate all the potential risks of the TPP participation. For that purpose, China has kept information communication with all TPP members including America.” This statement shows a different attitude to the TPP compared to three years ago. Based on its first round of research, China initially defined the TPP as a threat and was not eager to join the negotiation within five years. This outcome can be rationalized in the following manner: on the one hand, China cannot meet the entry requirements of the TPP and has to wait a long time to prepare its internal institutions to meet these requirements. On the other hand, as the biggest economy in Asia, China is confident that the TPP needs China in order for it to be a real trade bloc.

Deepening Internal Reform: The Basic Response to the TPP The study on the TPP’s influences shows that the agreement focuses on remaking the Asia-Pacific’s trading rules. Thus, regardless of whether China will eventually join the TPP, it will be affected by these rules. The recent change in attitude towards the TPP may be the result of the various think-tanks’ recommendations. The implication of this change is that China will prepare for TPP entry even if it has not participated in the TPP negotiations. Although no one can be sure that China is currently preparing for the TPP, there is evidence to show that China is serious about dealing with its challenges. For example, China launched the Shanghai Free-Trade Zone (SFTZ) in 2013. In this special internal free trade zone, a “PreEstablishment National Treatment to Foreign Investment” and a negative list approach to trade began to be practised. These two issues are key

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concerns of the liberalization of foreign trade in services. Incorporating these two issues in the SFTZ may be an indication that China is preparing for the TPP, at least in the fields of services trade and investments. The purpose of the SFTZ is to accumulate enough experience and know-how in order to prepare for the opening to the whole economy — just like how the four Special Economic Zones of Shenzhen, Zhuhai, Xiamen, and Ningbo were intended to integrate China into the international economy when it began to open up in the late 1970s.

Strengthening Regional Cooperation The TPP is partially an effort towards creating a more liberalized world. China’s response of deepening internal reforms shows that it is serious about the TPP. However, it has not been possible for China to join the TPP negotiations, not only because China cannot meet its stringent preconditions but also because the United States does not want China to be involved.5 As an already globalized economy, China has instead chosen to strengthen bilateral and regional cooperation arrangements to fuel its economic engine. Another reason for this is because China needs to keep its markets stable during its difficult transition from the “world’s factory” to the “world’s market”. The latter is a reasonable role and a welcoming way for the world’s largest country to contribute to the world economy. First, China needs to upgrade CAFTA. This 2001 initiative has proved to be an economic success, although many argue that the CAFTA was a politically driven arrangement. Since its inception, the CAFTA has worked smoothly and led to a rapid interdependence between China and the ASEAN countries, expanding bilateral trade to more than US$400 billion in 2013. Additionally, China is the top trading partner of ASEAN and most of the individual ASEAN countries, while ASEAN is China’s third largest trading partner. Defining the success of CAFTA as “the gold decade”, China’s new government is trying to create a “diamond decade” by upgrading CAFTA. This FTA’s medium-term goal is for bilateral trade to reach US$1,000 billion by 2020,6 with China importing more from the ASEAN countries. Second, China will promote the CJK FTA and the CK FTA. In the first decade of the twenty-first century, China played an active role in the APT cooperation and insisted on using the APT as the main channel of East Asian cooperation. At that time, cooperation between China, Japan, and Korea was considered to be the core of the APT. These

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three countries tasked their think-tanks to carry out research about the possibility of a CJK FTA. In 2012, a negotiation for the CJK FTA was launched but stagnated due to the rapid deterioration of Sino–Japanese relations. Recently, it seems that China is beginning to work with Japan and Korea on the CJK FTA again. At the same time, China has pushed very hard for the CK FTA since 2013, in an attempt to conclude it as quickly as possible. When Chinese President Xi Jinping visited Seoul in July 2014, the CK FTA was one of the topics he talked about with South Korean President Park Geun-hye. It is said that the two leaders urged for the closing of the CK FTA at the end of 2014 during this meeting. The agreement was finally signed in June 2015. Some observers believe that eventually the implementation of the CK FTA will be used to leverage the completion of the CJK FTA, explaining why China is eager to compromise with Korea on the bilateral FTA. It is unclear whether the CK FTA can help to push forward the CJK FTA, but the success of the former is important because that way, China would have also established a bilateral FTA with a potential TPP member.

Support to Restructure the Regional Architecture In the post-Cold War era, a dual framework has emerged in the AsiaPacific: APEC as the mechanism for trans-Pacific cooperation and the APT as its East Asian counterpart. China is a member of both frameworks and has played an important role in the APT cooperation. But since the launch of the TPP, APEC has been undermined and the APT has stopped working as an active regional platform. In order to maintain its regional role, China has proactively promoted the RCEP, and taken the initiative to push forward the Free Trade Area of the Asia-Pacific (FTAAP). The RCEP was first proposed by ASEAN as a means of maintaining its central role in East Asian cooperation (Wang 2013). By binding all the five bilateral FTAs that ASEAN has already signed with its dialogue partners — CAFTA, ASEAN–Japan Comprehensive Economic Partnership (AJCEP), ASEAN–Korea (AKFTA), ASEAN–India (AIFTA), and ASEAN– Australia–New Zealand FTA (AANZFTA) — the RCEP hopes to establish a modern and high standard FTA for East Asia. However, the RCEP faces some challenges in fulfilling its stated goal and few Chinese observers hold positive opinions about the arrangement. Nevertheless, China has

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chosen to respond quickly to the RCEP and played an active role in it, thereby discouraging Japan’s East Asian Community (EAC) initiative and Australia’s Asia-Pacific Community (APC) initiative. China’s attitude towards the RCEP may have been affected by two secondary considerations. First, the RCEP is ASEAN’s initiative. According to its basic policy towards ASEAN, China should endorse the RCEP to show its support of ASEAN’s central role in East Asian cooperation. Second and more importantly, China’s positive response to the RCEP is a very strategic option because it is unable to join the TPP and cannot afford to be marginalized by it. Moreover, China is a founding member of the RCEP and thus has the potential to influence the RCEP process. For some observers, the RCEP might be able to act as an umbrella for China to minimize the negative effect of the TPP. China’s attitude toward the FTAAP has changed since the 2013 APEC Summit when it proposed to promote the FTAAP within APEC. Years ago, when the FTAAP was first proposed by the United States, China was not as positive towards this huge FTA. But since the Bali APEC Summit in 2013, China has begun to push the FTAAP. After the Qingdao meeting of APEC Ministers of Trade held in May 2014, a document was released, stating that the ministers agreed that a road map for the FTAAP should be worked out. Why has China been proactive in promoting the FTAAP? The answer lies directly in the performance of APEC in recent years. As can be seen, the APEC’s Bogor Goal is a work in progress.7 Additionally, APEC was likely to be divided into TPP and non-TPP members after the establishment of the TPP agreement. Therefore, it was important that APEC revitalized itself as a trans-Pacific platform and kept the forum open as an active arrangement for integration in the Asia-Pacific. China’s current positive attitude toward the FTAAP is thus understandable. First of all, the FTAAP covers all APEC members — unlike the TPP, which is an exclusive group — and is actually what the TPP aspires to be, i.e., to evolve into an FTAAP. This will help all APEC members to take part in the creation of an Asia-Pacific FTA within APEC. Secondly, the establishment of the FTAAP would require a relatively longer period, whether through the TPP, RCEP, or APEC itself, and should thus be considered as another concord goal for APEC cooperation. China might also want to play a more active role in APEC through the promotion of the FTAAP. After all, the United States seems to be busy with the TPP agreement and reluctant to do more for APEC.

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Conclusion By summarizing the conclusions of the various Chinese studies on the TPP, this chapter found diverse opinions on the TPP and its impact on China. Some arguments, especially those done by international relations scholars, perceived the TPP as part of an anti-China strategy by the United States, highlighting the rule-making function of the TPP and its potential threat to China. Other scholars saw the challenge of the TPP as putting further pressure on domestic liberalization, as they argued that the TPP and its “next generation rules” would benefit the region and the world economy eventually. Up to the present moment, we cannot be sure which argument has been accepted by the Chinese government. But because the two groups shared some recommendations in responding to the TPP — such as the need to study how the TPP will change the world’s trading rules and how China should prepare for an eventual “TPPized” world — the Chinese government has likely changed its approach towards the TPP. Therefore, we found that China has done much to respond to the TPP, especially in internal reforms and regional cooperation. China is not eager to join the TPP which could present risk to the Chinese economy without its participation. However, China has accepted the TPP as an inevitable and begun to prepare for it. The officials in charge of regional cooperation affairs have made new comments on the TPP but it is still unclear whether China is prepared to join the TPP in the near future or if it is merely preparing for a world dominated by the TPP. Personally, I think that China may focus on capacity building first because many of China’s industries will face huge challenges in meeting the TPP requirement. As for China’s FTA strategy, it is under adjustment since the launch of the Belt and Road Initiative. China’s insistence on using the APT as a main channel for managing East Asia cooperation was partly driven by the considerations of regional leadership. And now, facing the impending challenge of the TPP, China has chosen to sideline the APT as its main channel for East Asian cooperation and has instead been actively promoting RCEP, but does not care so much about the regional leadership anymore. This change means that China’s FTA strategy will become more pragmatic — serving economic interests but not pursuing the leading role in regional cooperation.

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Notes 1. Barry Buzan argued that the United States pivot to Asia was just because a rising China is arrogant to its Asian neighbours. See Buzan and Hansen (2012). 2. Some scholars argued that since then, U.S. policy to the rising China moved towards the end of containment. See Zhang (2013). 3. Many scholars recommended that China promote the RCEP and they believe RCEP can be used as a platform to cope with TPP challenges. Some also argue that CJK cooperation can be a competing framework. 4. GBTimes Beijing, “China to Establish FTA Network”, 5 December 2013 (accessed 20 August 2015). 5. Matthew Goodman, a senior research fellow of the Center for Strategic and International Studies (CSIS) and former official in the Obama administration said, during a seminar held in Beijing in December 2013, that China was not welcomed by the TPP while South Korea may be the next candidate. 6. Zhao Yinan and Zhong Nan, “China, ASEAN Set 2015 as Goal for Upgrading Free Trade Agreement”, China Daily, 14 November 2014 (accessed 20 August 2015). 7. The Bogor Goal was made during the 1994 APEC summit, which declared that advanced APEC members will realize trade and investment liberalization and facilitation in 2010, while APEC developing members can finish this ten years later than advanced members.

References Buzan, Barry and Lene Hansen. “The Evolution of International Security Studies: Introspection and Lessons for China”. The Journal of International Studies, no. 1 (2012). Cai Penghong. “An Inopportune Time for China to Join the TPP”. ChinaUS Focus, 19 June 2013. . He Fan and Yang Panpan. “China Shouldn’t Absent from TPP Negotiation”. IPER Working Paper, no. 13034 (2013). Li Luosha. “Impacts of TPP and China’s Strategic Option”. Globalization, no. 3 (2014). Li Xiangyang. “TPP, Zhongguo Jueqi Guocheng Zhong De Zhongda Tiaozhan” [TPP: A Serious Challenge to China’s Rise]. Guoji Jingji Pinglun [International Economic Review], no. 2 (2012): 17–27.

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Putnam, Robert D. “Diplomacy and Domestic Politics: The Logic of Two-Level Games”. International Organization 42, no. 3 (1986): 427–60. Qu Fengjie. “China’s Asian Regional Cooperation Strategy”. International Trade, no. 8 (2009). Wang Haifeng. “TPP and China’s Strategic Choices”. Contemporary World, no. 2 (2014). Wang Yuzhu. “The RCEP Initiative and ASEAN Centrality”. China International Studies 42, no. 5 (September/October 2013): 119–32. ———. “Competing Frameworks for Asian Regional Cooperation and Options for Chinese Strategy”. Journal of Contemporary Asia-Pacific Studies, no. 4 (2010). Xu Xiujun. “The Interests Concern in TPP Negotiations and China’s Responses”. IPER Working Paper no. 1404, 14 August 2014. Zhang Ruizhuang. “The Changing International Order and China’s Position”. Contemporary International Relations, no. 4 (2013). Zhang Yunling. “Institutional Fragmentation of Regional Architectures: China’s FTA Strategy and Renewed APEC”. CNKI Journal: Asia-Pacific Economic Reviewy, no. 23 (2014). Zhu Feng. “The Strategic Competition between China and U.S. and the Future of East Asia Security Order”. World Economy and Politics, no. 3 (2013). Zhu, Hong 朱洪. “Ziyou Maoyi Xieding — Zhongguo yu Fazhan Zhongguojia Nannan Hezuo de Xinqiaoliang” 自由贸易协定 — 中国与发展中国家南南 合作的新桥梁 “[Free Trade Agreements — New Bridge for South — South Cooperation between China and Other Developing Countries]. Guoji Maoyi 国际贸易 [International Trade], no. 9 (2009). Zou Qi and Ji Shuaixian. “The Impact of the TPP on World Trade Structure: Based on Data Analysis of China and ASEAN’s Textile and Apparel Exports to the U.S.”. CNKI Journal: Finance and Economics, no. 1 (2014).

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5 Japan and Entanglement of Regional Integration in the Asia-Pacific: Combining Cutting-Edge and Traditional Agendas Takashi Terada Introduction As Figure 5.1 illustrates, only Japan thus far has participated in all of the regional economic integration schemes in East Asia and the Pacific: an FTA among China, Japan, and South Korea (hereafter CJK FTA), the Regional Comprehensive Economic Partnership (RCEP) comprising the ten countries of the Association of Southeast Asian Nations (ASEAN) and six of its FTA partners, and the U.S.-led Trans-Pacific Partnership (TPP). Japan has also been engaged in FTA negotiations with the EU, which has also progressed FTA negotiations with the United States, named the Transatlantic Trade and Investment Partnership (TTIP). If all of these agreements were concluded, the coverage ratio of Japan’s overall trade by regional integration partners, including the EU, would increase from approximately 20 to 85 per cent, possibly making Japan one of the most advanced FTA countries in the region and presenting a “golden opportunity” for the Japanese economy.

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Figure 5.1 Entanglement of Regional Integration in Asia and the Pacific, May 2015

APEC FTAAP

RCEP ASEAN+3

Russia Taiwan HK

CJK Korea

ASEAN

Cambodia Laos Myanmar

China Indonesia Philippines Thailand Brunei Malaysia Singapore Vietnam

ASEAN+6

India

NAFTA

Japan NZ Australia

Mexico Canada US Peru Chile

TPP

Papua New Guinea

Source: Author’s compilation.

This chapter aims to explore Japan’s approach in the era of regional integration entanglement and attribute it to its strong interest in assisting Japanese corporations by making use of various benefits the TPP, RCEP, and CJK FTA would offer to Japan. Additionally, this chapter will identify what Japan hopes to achieve in each regional integration framework. Japan’s differing interests in the three frameworks can be summarized as follows: TPP is likely to help the country in more advanced economic rule-making that includes cutting-edge agendas, such as the regulations of state-owned enterprises (SOEs), while strengthening the relations with its ally, the United States; RCEP is expected to increase market expansion, which encompasses big emerging economies, like China, India, and Indonesia; and finally, the CJK FTA framework is likely to promote investment protection in China and is also expected to function as a confidence-building mechanism at times when Japan’s political relations with its two neighbours come under strain. Regional stability is a prime condition for sound business operations and investment, and this is especially true with China–Japan relations, as expressed by

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Sadayuki Sakakibara, Chairman of Nippon Keidanren, in his meeting with Wang Yang, China’s Vice Premier in Beijing in September 2014.1 The chapter finally focuses on Japan’s domestic politics and argues that the recent development of Japan’s agricultural reforms under the Abe administration is expected to accelerate its fuller commitment towards regional integration negotiations.

Japan’s Strategic Interest in the TPP Japan’s political interest in the TPP was encapsulated in Prime Minister Shinzo Abe’s statement in March 2013, which stressed that the potential benefits of participating in the TPP was not limited to the economy. While underscoring the significance of creating an economic zone with new economic rules through forging a partnership with its key ally, the United States, Prime Minister Abe highlighted the universal values of freedom, democracy, human rights, and the rule of law as a political foundation for the economic rule-making approach (Abe 2013). His statement implies that TPP members will take collective action not just economically but politically against countries that do not share those values, especially China, an approach which may subsequently evolve into political and security cooperation based on that shared stance. This view is symbolically echoed by U.S. leaders such as United States Trade Representative (USTR) Michael Froman, who also declared that the TPP was essential not only for its economic benefits, but also its geopolitical viewpoint,2 stressing United States’ economic engagement as the foundation for regional security. One of the chief features behind China’s aggressive East Asian diplomacy in the 2000s was an attempt to increase its influences on non-economic sectors — including regional security fields — through the exercise of economic power that would provide access to its huge market. In fact, the trade dependence on China among U.S. allies in East Asia has skyrocketed. While Japan’s trade with the United States decreased from 27.1 per cent to 13.7 per cent between 1999 and 2009, the trade with China rapidly surged from 9.1 per cent to 20.5 per cent. Likewise, China’s trade proportions in South Korea increased from 8.6 per cent to 20.2 per cent, and in Australia from 5.7 per cent to 19.7 per cent, while the U.S. presence in South Korea declined from 20.7 per cent to 9.6 per cent, and in Australia from 15.8 per cent to 8.1 per cent.3 In other words, the trade situation of major U.S. allies in the region reversed

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between China and the United States in ten years in the 2000s; according to Michael Wesley, “the allure of China’s economic dynamism makes countries increasingly attentive to Beijing’s wishes and sensitivities” (Wesley 2007). In mid-2000s, U.S. policymakers, for their part, were frustrated by criticism that the United States was disengaged from the proliferation of East Asian FTAs, while China enjoyed credit for promoting so-called low-quality FTAs in the region that included numerous exceptions to tariff elimination. Eventually, the United States began to use the TPP to change expectations regarding where the politics of regional trade would be headed in the future (Searight 2011, pp. 59–60). The aforementioned statements by Prime Minister Abe and USTR Froman support the view that the TPP is expected to serve as an effective means to reduce the member states’ heavy reliance on the Chinese market, as long as China remains an outsider, while enabling TPP member states to maintain its voice against China’s political and military problems. Japan, which has its own dispute with China over the Senkaku Islands, also considers its participation in the TPP from a strategic viewpoint. Japan’s initial expression of interest in the TPP was announced by Prime Minister Naoto Kan during a policy speech on 1 October 2010, just a few weeks after the Senkaku dispute with China flared up again. Adding to Japan’s security concerns, of course, are North Korea’s satellite rocket launch and nuclear test in December 2012 and February 2013, respectively. A line of argument has emerged stressing the need to strengthen the Japan–United States alliance by signing the TPP, which would be a de facto United States–Japan FTA. Two-and-a-half years after Kan expressed Japan’s initial interest in the TPP, Prime Minister Abe made the final decision to officially participate soon after a Chinese frigate locked its weapons-targeting radar on Japanese Self-Defense Force vessels in January 2013. This implies that the escalation of territorial disputes with China is one of the motives behind Japan’s participation in the TPP, especially for Prime Minister Abe, who stated, “the TPP … is also about our security. Long-term, its strategic value is awesome” in his historic address at the U.S. Congress in April 2015 (Abe 2015). If the Philippines, one of the least FTA-oriented nations in East Asia, were to join the TPP, all claimants to the Spratly and Paracel Islands from ASEAN would be TPP members, illustrating the significance of United States’ commitment to Northeast and Southeast Asian stability and highlighting the effectiveness of the TPP as a coalition-building mechanism to put collective pressure on China. This view was expressed

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by Deputy Prime Minister and Finance Minister Taro Aso, who thought the TPP would catalyse the United States–Japan partnership, which can act as “a mega stabilizer across the Pacific” (Aso 2013).

Japan’s Interest in Cutting-Edge Agendas Given that regional integration, including the TPP, constitutes an important component of its economic growth strategy, Japan has also developed an interest in it from an economic and business viewpoint. This point was articulated by the Ministry of Economy, Trade and Industry (METI) when it stated that the promotion of FTAs or regional integration beyond trade liberalization is “significant due to the fact that it provides an environment in which business can easily expand overseas”, such as “protecting investment asset, maintaining freedom for transferring profits obtained through foreign business to Japan, restricting or prohibiting for regulations such as obligations to hire local workers, regulating government intervention into technology transfer agreements among private companies” (METI 2013, p. 2). As a matter of fact, the investment chapter, which all fourteen of Japan’s bilateral FTAs include, prohibits preference for local contents and certain investment restrictions and protects intellectual property. This measure is meant for the government to provide full support to Japanese overseas business activities. While Prime Minister Abe seemed to view the exclusion of China as a major feature in the TPP, Japan has expected the TPP to serve as a regional platform from which to pursue economic rules that could be neither negotiated in China’s framework nor satisfactorily fulfilled due to China’s promised opposition. Given the TPP achieves substantial liberalization with fewer exemptions through high-standard rules in trade and investment, it can lead to deeper economic interdependence among like-minded states, reducing their trade dependence on China. For example, if Vietnam — another socialist state whose trade is heavily dependent on China — abided by such rules under the TPP, the attractiveness of Vietnam as a destination for Japan’s outgoing investments could be much enhanced within the Japanese business community. This could lay the foundation for Japan’s stronger economic ties with Vietnam, which also welcomes the move given its escalating disputes with China in the South China Sea that has urged Vietnamese political and business leaders to hasten the diversification of its trade.4

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Because Japanese companies have continued to pay extra costs due to the prevailing habits of counterfeit and piracy in China, for instance, the Japanese government has aimed to enhance regulations regarding infringements of intellectual property rights (IPR). In 2010, when Japan captured a Chinese fishing boat captain who had encroached on the Senkaku Islands, China issued an export ban on rare earth metals, which are important components of mobile phones. This event emphasized the need to prohibit export controls related to resources and food, as well as regulations on SOEs, as seen in the case of U.S. interest in the TPP. President Obama, for instance, articulated this point by claiming that “if we do not help to shape the rules so that our businesses and our workers can compete in those markets, then China will set up rules that advantage Chinese workers and Chinese businesses”.5 According to a survey regarding Japanese companies’ concerns about conducting business in China, the “fierce competition with competitors (62.0 per cent)” and “opaque application of laws (55.3 per cent)” were listed as the most significant risk issues (JBIC 2013, p. 28). These results demonstrate that the underdeveloped rules of economic and commercial laws, such as regulations on SOEs in China, are serious concerns for Japanese companies and that the promotion of this agenda in any regional integration framework would be in Japan’s great interest. Given China’s participation, the RCEP and CJK FTA are, however, not viewed as promoting such an agenda, as discussed later, and Japan expects the TPP to perform this function. For instance, the United States has been a vanguard in promoting the enhanced protection of corporate rights within the TPP, and the fast track Trade Promotion Authority (TPA) bill included two specific provisions with regard to competition policy and IPR. One demands protection for IPR as rigorous as that offered in U.S. domestic laws, and the other requires foreign governments to prevent an unevenly competitive business environment caused by indigenous SOEs. 6 The United States would less likely make compromises in these sectors. What Japan seeks to achieve in investment-related rules is threefold: (1) rigorous national treatment and the prohibition of specific performance requirements to ameliorate investment barriers present in certain countries, including restrictions on foreign investment, demands for technological transfer, and requirements for employing local people; (2) the Investor–State Dispute Settlement (ISDS) provisions, which secure

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the full implementation of national treatment and, more concretely, enable Japanese companies operating in TPP countries to deal with cases of sudden change in government policy and expropriation; and (3) engaging in discussions among TPP members for creating multilateral rules on investment — like WTO agreements for international trade — amid a lack of multilateral agreement pertaining to investment (MOFA 2011). In this context, the CJK FTA, at a glance, could be deemed successful for Japan, since these rules are on the FTA’s negotiation table and are included in the investment treaty among China, Japan, and South Korea. However, as the trilateral investment treaty — which became effective in May 2014 — obligates each party to protect IPR in accordance with “its laws and regulations”,7 the treaty’s effectiveness for the protection of IPR remains unclear. Moreover, while the treaty’s function of investment protection can go forward, investment liberalization would be limited since the treaty could only apply to future investments. As for pre-establishment national treatment, which eliminates barriers for newly arriving businesses, it cannot resolve Japanese enterprises’ long-standing problems in China, including discriminatory requirements for foreign investors on the need to establish a joint venture with their Chinese counterparts, whose shareholding ratio must be more than 50 per cent.8 This passage remains in the treaty as a result of China’s strong insistence. In addition, there exist negative views regarding the inclusion of the competition policy which would restrict SOEs’ activities to regional integration and FTAs in China.9 In terms of IPR, even though IPR protection is already set in the CJK FTA negotiation as a result of the third round of negotiations in November 2013,10 achieving high standard regulation might be difficult to attain since China continues to adhere to its obstinate stance, as demonstrated by China’s refusal to upgrade the treatment of IPR through the replacement of an existing expert group with an intergovernmental working group in the second round of CJK FTA negotiation.11 With regard to the provisions of the ISDS, METI’s brief on the trilateral investment agreement elucidates that Article 9 (paragraph 2) covers exemptions from ISDS (METI 2012b), while Yasushi Masaki, then Deputy Director-General of the Economic Affairs Bureau of MOFA, states that any breach of duty qualifies for arbitration (Yasushi 2013). Moreover, this agreement did not establish common rules for IPR among the three countries, as written in Article 9 (paragraph 2). In short, though provisions for IPR should be seen as a success for Japan

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due to her efforts, it is still unclear whether they effectively protect the IPR of Japanese companies. In summary, what Japan sought to achieve in the trilateral investment treaty can be summarized as an effort to bind China to the rule of law and increase legal stability and predictability for Japanese investors as seen in the cases of national treatment, IPR, and ISDS.12 However, China was hesitant to promote an investment treaty because of its content, such as those regarding “national treatment”, in which foreign companies receive equal treatment to domestic companies in terms of taxation and bidding procedures, thereby, the contents of the treaty reveal that Japan made compromises with China. This is a factor that makes Japan more enthusiastic about the TPP.

Japan and Traditional Market Access Agendas in Regional Integration As discussed earlier, Japan views the TPP as a key rule-making trade and investment mechanism together with the United States — dealing with cutting-edge issues such as regulatory convergence, SOEs, and IPR. Yet, a traditional market access agenda is still generally viewed as “the heart and soul of the trade agreement”, as New Zealand’s Trade Minister Tim Groser states.13 A few drawbacks in terms of the TPP’s market access approach are associated with strong bilateralism and separated rules of origin (ROOs). One of the expectations Japan has had from its participation in the TPP is the expansion of countries that are the subject of cumulative ROOs, which have the benefit of increasing the number of goods for which no tariff is applied, simplifying the rules for that purpose, and ultimately contributing to an expansion in exports. The 2012 White Paper on International Trade emphasizes this merit for companies which have expanded their supply chain networks in the region (METI 2012a).14 The different product coverage and distinctive time framework of liberalization in a number of bilateral FTAs would make it difficult for those multinational companies as potential FTA users to identify which FTAs or regional integration frameworks could be most effective in cost-saving for their businesses. Thus, a “spaghetti bowl” effect, meaning a large number of ROOs with specific standards and involving specific procedures, would follow, and different rules applied to a single commodity would emerge as one of the most significant concerns. As one of the major global

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automobile producers with wide-ranging supply chain networks in East Asia, Japan strongly wished to sell vehicles tariff-free in the TPP zone, even if a majority of their auto components originated from lower-wage East Asian countries such as Thailand and China, which are not TPP signatories. The proportion of auto components produced in TPP member countries — the local content ratio — needs to be met in completed vehicles to receive tariff elimination privileges from the final exporting country. The United States and Japan through their bilateral talks had agreed to lower the domestic content requirement to 30 per cent for auto parts and 45 per cent for vehicles. However, since NAFTA (North American Free Trade Agreement) stipulates the local content ratio for auto parts and vehicles at 62.5 per cent, Canada and Mexico, keen to maintain their exports of automobiles to the American market, proposed sticking to the NAFTA ratio. As a compromise, Canada and Mexico accepted a rule proposed by Japan to regard automobiles that use components procured outside the TPP zone as ones made in the zone, provided that essential parts are made within the zone. Japan sees the acceptance of this rule as equivalent to a local content rate of 30 per cent, even if the agreed ratio was 45 per cent. Further potentially good news for Japan in terms of the rules of origin for automobiles and auto parts is that the Philippines is currently considering TPP participation. Trade and Industry Undersecretary, Adrian Cristobal Jr., admitted that being excluded is disadvantageous for trade. His ministry has been advocating the “One Country, One Voice” strategy to build capacity to help undertake more FTA negotiations.15 One factor pushing the Philippines to consider TPP participation is evident in a sixyear Comprehensive Automotive Resurgence Strategy (CARS) programme, designed as a way to attract greater foreign direct investment (FDI) to the nation’s automobile manufacturing sector. This programme’s goal is eventually to make the Philippines’ automobile manufacturing sector the most competitive in Southeast Asia, where Thailand has currently established itself as the regional hub. One benefit CARS would provide automakers is that, as long as they produce 200,000 units of locally assembled car models over a six-year period, they would receive incentives in tax subsidies totalling US$1,000 per car. The most popular car brands in the Philippines are Toyota, Nissan, and Mitsubishi, all Japanese makers that have already demonstrated their intention to join the programme in light of the potential Philippines participation in TPP,16 as this would make it possible to export to the North American market without tariffs.

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The TPP is generally considered to be a high-standard trade arrangement aligned with the U.S. template for its own FTAs, which, for instance, aims to allow virtually no exceptions to tariff elimination, while the RCEP and CJK FTA are not expected to be so ambitious. Within the RCEP, Japan suggested eliminating tariffs in more than 90 per cent of products within ten years, and setting three stages on tariff eliminations (immediate, within ten years, and over ten years), with the intrinsic motive of protecting its domestic agricultural sectors from liberalization. However, this agenda was received negatively by both advanced and emerging countries. Australia and New Zealand, with their intense motivation to increase agricultural exports, insisted on the no-exemption principle, whereas India, Myanmar, and Cambodia disapproved of the condition of “more than 90 per cent”, as they still maintain higher tariffs.17 As such, the complexity of building consensus in multilateral negotiations continues to exist due to the complex entanglement of interests among the many participating states. This situation differs from that of the bilateral FTAs, in which it is relatively easy to come to conclusion via two-way “give-and-take” negotiations. This difficulty is also true with the trilateral FTA. While Japan is inclined to pursue a trilateral FTA in the face of the progressing negotiations of the China–South Korea bilateral FTA, the trilateral FTA negotiations have hitherto made little progress due to remaining discrepancies. For example, with regard to the goal of liberalization, Japan has insisted that liberalization covers more than 90 per cent of products, whereas China and South Korea adhere to the 40 per cent level. Although Japan subsequently compromised by lowering its initial claim to 60 per cent, the three parties have not reached a consensus.18 The RCEP, unlike the TPP, places a higher priority on development, technical cooperation, and flexibility on liberalization because it is based on the ASEAN+1 FTAs. Japan’s interest in the RCEP stems partly from its desire to be involved in the growth of the ASEAN economy, one of the most promising markets in the world. Prime Minister Abe sees it as “a growth centre of the world” and stressed that Japan has two major goals for its Official Development Assistance (ODA) to the region: ASEAN’s economic development and Japan’s renewed economic growth.19 This interest has also been demonstrated by its private sector. According to a survey by the Japan External Trade Organization (JETRO), 17 per cent of Japanese multinational companies’ overseas deals in 2013, by value, have been made in ASEAN member economies, compared with 3 per cent in 2012.20 Their Foreign Direct Investment (FDI) in

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ASEAN has also been rapidly growing, reaching US$13 billion in the first nine months of 2013, more than the US$10.6 billion for the whole 2012 period. Assisting in ASEAN’s integration projects is relevant to Japan’s own interests. In sum, Japan does not see ASEAN as a regional integration project similar to the EU or NAFTA, and thus it is not interested in developing the RCEP, based on ASEAN’s flexibility approach, into a cutting-edge rule-making framework like the TPP. Yet, Japan is well aware that the RCEP cannot be an attractive regional integration framework without ASEAN’s sound development. This is a rationale behind Japan’s commitment in assisting ASEAN’s effort to promote regional integration or the formation of a single market to attain higher economic growth.

Regional Integration and Japan’s Agricultural Liberalization Challenge Agricultural liberalization was Japan’s unresolved issue that prevented further commitment to any regional integration framework. For instance, Japan has established FTAs with ASEAN and seven individual ASEAN member nations, but given its dominant trade and economic position, it has an overwhelming advantage over partner countries in terms of bargaining power. As a result, in the majority of cases, Japan has been able to shelve the consideration of the elimination of its agricultural tariffs and it has, in return, utilized its economic power to offer benefits in the form of economic cooperation. This strategy enabled Japan to conclude a series of bilateral FTAs that have avoided any promise of agricultural liberalization (Terada 2009). Moreover, in the FTAs concluded between Japan and ASEAN member nations, Japan has an overall lower percentage of items for which tariffs have been eliminated despite the other party being a developing country. There is strong resistance from Japan’s agricultural producers, their pressure groups, the Central Union of Agricultural Cooperatives (JA Zenchu), and politicians who rely on farmers’ votes for their elections and oppose the liberalization of key agricultural sectors, such as rice, beef, wheat, and sugar. There are products that Japan has never touched in FTAs — and most of them are agricultural products. Of the 930 items for which tariffs were not eliminated in the FTAs Japan has so far concluded, 850 were agricultural, forestry, or fisheries products, including rice. Farmers and JA Zenchu, which have worked against FTAs in the past, have been particularly vehement in their stance against the TPP as, in principle, it would eliminate all tariffs.21

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Although Japan and the United States were portrayed by the media, at least in Japan, as struggling to conclude their bilateral market access negotiations due to powerful domestic opposition to farm and auto liberalization in Japan and the United States, respectively, growing urgency to implement TPP based on shared strategic and economic interests led to a successful outcome. Abe made the final decision on Japan’s participation in TPP soon after his meeting with Obama in February 2013. A key factor behind Abe’s decision was Obama’s assurance of no preconditions for tariff elimination, interpreted in Japan as approval for the maintenance of tariffs on sensitive agricultural products such as rice to be shielded from TPP’s free trade package. Abe was determined to promote farm reform, partly depriving JA Zenchu of its legal authority to control and manage local agricultural organizations. This helped Japanese negotiators reach a compromise at the negotiating table provided they were able to meet what the Abe administration calls the “national interest”, which meant the protection of five “sanctuary” agricultural products, including rice, sugar, beef, pork, and dairy products. Japan’s concessions on pork and beef tariffs in response to US demands are a case in point. The nation’s beef tariff will be lowered from the current 38.5 per cent to just 9 per cent over sixteen years, while up to JPY 615 per kilogramme on low-priced pork products such as ham and bacon, and an 8.5 per cent tariff on high-priced pork products will be eliminated in the eleventh year. In return for its tariff concessions, Japan wanted to gain a safeguard clause from the United States that allows Japan to raise tariff rates on US beef and pork back to their original levels if imports of these products increase excessively. Although the United States, especially its Republican-dominated Congress, was not comfortable with this Japanese request, both nations eventually compromised to conclude the negotiations: the safeguard measure can be maintained during the first eleven years, but abandoned in the twelfth year. These concessions preferentially offered to the United States catalyzed Japan’s overall commitment to the agricultural liberalization promised with all TPP members. The immediate tariff elimination ratio on agricultural products is 51 per cent of 2,328 farm products, and imports of 81 per cent of those products are to become tariff-free in the end, the greatest agricultural concessions Japan has made in the history of trade negotiations. A major agricultural reform the Abe government seeks to implement in preparation for its commitment to the conclusion of TPP and other

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regional integration concerns the gentan policy, curtailing rice production through a reduction in the acreage of rice paddies in exchange for subsidy payments. This system has been in place for more than forty years and maintains a higher price of rice through crop limitation. It sacrifices consumer interests, while stabilizing rice farmers’ income, especially for small-scale, part-time farmers who usually work in factories, retail shops, or local governments during the regular workweek. This means that the portion contributed by agriculture in their total income is rather small, and that agricultural liberalization, especially in rice, would not deprive them of a primary source of income. In fact, their annual income is slightly but consistently higher than that of average non-agricultural workers (Yamashita 2009). Gentan can thus be regarded as a political tool for politicians to stably receive votes and funds from those part-time farmers during times of local and national elections. Prime Minister Abe expressed his determination to carry out this agricultural reform in his keynote speech at the Davos Forum, stating that “no vested interests will remain immune from my drill” (Abe 2014). The abolishment of gentan, which has served to assist agricultural protection over the last forty years, would deprive JA Zenchu of a massive political influence as it would lead to an increase in the production cost of rice, urging small-scale and part-time rice farmers to discontinue farming, and JA Zenchu, as a result, would lose not only a number of its membership but also its funding. In addition, the abolishment of gentan is supposed to raise large-scale rice farmers’ incentive to increase the acreage under rice cultivation and make it easier for corporates to participate in rice production business, according to Yasuaki Fukunaga, President of Aeon Agri Create Corporation.22 Abe’s frequent references to radical change concerning JA Zenchu during the past year have seemed to indicate his intention to cease the organization’s function as a political pressure group. JA Zenchu has collected ¥8 billion annually in burden charges from local agricultural cooperatives, which has been used as a primary source of funds to organize opposition campaigns against TPP and corporate participation in the farming industry. Since its potential status as a general incorporated association would bar it from legally gathering such funding, JA Zenchu’s function as a political pressure group would no longer be maintained, thereby eliminating a substantial degree of intervention by farmers into future Japanese trade negotiations. This is the first and foremost step in allowing Japan to play a key role in the era of regional integration entanglement. .

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Conclusion This chapter argues that as Japan participates across multiple frameworks in regional integration in the Asia-Pacific, it enjoys an advantageous position engaging in rules and standard-setting with the United States through the TPP and expanding export markets in cooperation with gigantic economies such as China and India through the RCEP. It is true that the different agendas involved in the TPP, RCEP, and CJK FTA make predicting its future direction inherently difficult, but the existing “spaghetti bowl” of numerous bilateral FTAs in East Asia is believed to complicate trade for multinational companies from Japan and other regional states. This signifies the desirability of larger regional integration frameworks for their businesses. Nevertheless, the TPP and RCEP are too different to be merged into one order. The differences between them include, among other factors, notable variations regarding competition policy related to SOEs. The TPP is also more open to newcomers, where inclusion in the RCEP first requires making a bilateral FTA with ASEAN. This openness provides the TPP political leverage over the other agreements, as seen in Thailand, the Philipines, and Indonesia expressing interest in joining the TPP by observing the TPP’s basic agreement in October 2015. Depending on developments related to the Shanghai Free Trade Zone, the ongoing United States–China bilateral investment treaty talks with an advanced countries-oriented negative list approach, and the outcome of the TPP negotiations, China could become more inclined to join the TPP in the future. In spite of the political and historical tensions that are not easily resolved, negotiations on the CJK FTA between senior officials have continued. Japan’s expectations for trilateral cooperation remain positive because it continues to maintain dialogues with its nearest neighbours over their shared economic interests, which acts as a way of improving relations. In fact, in the midst of China and South Korea’s vehement criticism of Prime Minister Abe’s visit to the Yasukuni Shrine in December 2013, the three countries’ negotiators met to discuss the trilateral FTA in Malaysia on the occasion of the RCEP negotiations just one month after the visit. They agreed that trade negotiations and political issues should be kept separate, adding that trilateral FTA negotiations would keep advancing.23 This reflects Japan’s approach of separating politics from economics. Yet, as Japan has been strongly pressured to lower or eventually eliminate its long-term protection of

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some key agricultural products not only in the TPP but also other regional integration frameworks such as the RCEP and CJK FTA, Japan’s commitment to the farm reform, which aims at making its agricultural sectors internationally competitive, is necessary. Otherwise, it would fail to achieve important objectives that Japan under Abe envisages, including reversing the waning regional influence of Japan while China has been assuming a more prominent role in forging the regional economic order, especially through the establishment of the China-led Asian Infrastructure Investment Bank (AIIB) which attracted fifty-seven countries as founding members. With China as a member, however, TPP could serve as a practical platform, nurturing shared interests economies, facilitating expanded political dialogue toward reducing differences and further increasing commonalities regarding economic rules. This is a pragmatic way for realizing the Free Trade Area of the Asia-Pacific (FTAAP) concept, which China, Japan and the United States are commonly pursuing as a long-term objective of their trade strategy.

Notes  1. Nihon Keizai Shimbun, “Nicchu Yukidoke Tesaguri” [Japan and China Groping for Détente], 25 September 2014.  2. Nihon Keizai Shimbun, “TPP kakuryo Kaigo-ga heiwamu” [TPP Ministerial Meeting was Closed], 21 May 2014.  3. ITC (International Trade Centre) calculations based on the United Nations Commodity Trade Statistics Database (UN Comtrade) statistics.  4. Bloomberg, “China Aggression Sounds Wake-Up Call for Vietnam Makers”, 17 June 2014.  5. Bloomberg, “Obama Warns TPP Failure Would Let China Write Trade Rules”, 18 April 2015.  6. Nihon Keizai Shimbun, “TPP Kocho Daitouryo-ni Ichinin” [TPP Negotiations were Left to the President], 10 January 2014.  7. See the following provisions: Intellectual Property Rights (Article 9), 1. (a) Each Contracting Party shall, in accordance with its laws and regulations, protect intellectual property rights, also Transparency (Article 10).  8. Nihon Keizai Shimbun, “Kakushinbubu-wo Sakiokurishita Nicchukan Toshikyotei” [CJK Investment Treaty, Putting Off the Core Issues], 27 March 2012.  9. People’s Daily, “Chunichikan FTA to TPP” [CJK FTA and TPP], 28 March 2013. 10. Asahi Shimbun, “Nicchukan FTA Kocho Hajimaru” [CJK FTA Negotiations Began], 26 November 2013.

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11. Nihon Keizai Shimbun, “FTA Senmonka Kaigo Shinsetsu. Nicchukan Sanbunyade” [Experts’ Groups to be Established over Three Fields], 3 August 2013. 12. Japan’s interest in an investment treaty rather than an FTA involving China was already revealed in 2004 when Prime Minister Junichiro Koizumi proposed, at the Trilateral Summit in Bali in October 2004, that research on a trilateral investment arrangement be conducted through an industry– government–academia collaboration. 13. New York Times, “Pacific Trade Talks End Inconclusively”, 25 February 2014. 14. Vietnam is importing almost all of its raw silk, which is the starting material for textiles, from China, but, for example, this was not able to satisfy the ROO of the ASEAN–India FTA. However, if RCEP comes into force, this problem would likely be solvable. 15. Manila Bulletin, “PH Campaigns for More Bilateral FTAs: For Being Left Out in TPP”, 28 May 2015. 16. Business Mirror, “DTI to Set Hurdles for CARS Perks”, 14 June 2015. 17. Nihon Keizai Shimbun, “Kanzei Sandankaide Teppai Teian” [Tariffs to be Proposed to be Reduced at Three Stages], 28 September 2013. 18. Nihon Keizai Shimbun, “Rainenmatsu-no Goimezasu: Nicchukan FTA Kanzei Oriaezu Koshokaigo Syuryo” [CJK FTA Aiming at the End of the Next Year: Negotiations Ended Without Any Compromise on Tariffs], 30 November 2013. 19. Nikkei Asia Review, “Japan Refocusing ASEAN Aid on Infrastructure”, 19 December 2013. 20. Nihon Keizai Shimbun, “M&A Tonanajia-de Saikoni: Nihonkigyo Seichosijyoni” [M&A Peaked in Southeast Asia: Japanese Companies saw as a Growth Region], 17 December 2013. 21. JA Zenchu demonstrated its political clout on the issue just before the 2011 APEC meeting by gathering as many as 11.7 million signatures for a petition opposing Japan’s participation in TPP. 22. Nihon Keizai Shimbun, “Gentan Haishi, Nochi Banku: Kigyo-no Komesannyu-ni Oikaze” [Abolishment of Gentan and the Approval for Agricultural Banks’ Establishment Encourage Corporates to Enter Rice Farming Business], 20 October 2014. 23. Nihon Keizai Shimbun, 30 October 2014.

References Abe, Shinzo. “Toward an Alliance of Hope”. Address to a Joint Meeting of the U.S. Congress, 29 April 2015. ———. “A New Vision from a New Japan”. Speech, World Economic Forum 2014 Annual Meeting, 22 January 2014.

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———. “Press Conference by Prime Minister Shinzo Abe”, 15 March 2013. . Aso, Taro. “What is Abenomics? Current and Future Steps of Japanese Economic Revival”. Speech, Center for Strategic and International Studies, Washington, D.C., 19 April 2013. Japan Bank of International Cooperation (JBIC). Waga-kuni Seizou-gyou Kigyou no Jigyou-tenkai ni kansuru Chouya Houkoku [Report on Overseas Business Operations of Japanese Manufacturers FY 2013]. Tokyo: JBIC, 2013. Ministry of Economy, Trade and Industry (METI). White Paper on International Trade. Tokyo: METI, 2013. ———. White Paper on International Trade. Tokyo: METI, 2012a. ———. Nicchukan toshikyote-no gaiyo 2012b [Brief Introduction of the China–Japan–Korea Investment Treaty], 2012b. . Ministry of Foreign Affairs (MOFA). TPP kyoutei ni yori Waga-kuni ga Kakuho shitai Ru-ru [Rules Japan Hopes to Attain Through the Implementation of the TPP]. Tokyo: MOFA, 2011. Searight, Amy. “The United States and Asian Economic Regionalism: On the Outside Looking In?”. In A Pacific Nation: Perspectives on the U.S. Role in an East Asia Community, edited by Mark Borthwick and Tadashi Yamamoto. Japan: Center for International Exchange, 2011. Terada, Takashi. “Competitive Regionalism in Southeast Asia and Beyond: Role of Singapore and ASEAN’s”. In Competitive Regionalism: FTA Diffusion in the Pacific Rim, edited by Mireya Solis, Barbara Stallings, and Saori N. Katada. Basingstoke: Palgrave Macmillan, 2009. Wesley, Michael. “Howard’s North Asian Dilemma”. Brisbane Courier Mail, 14 March 2007. Yamashita, Kazuhito. Nokyo-no Taizai [Grave Sins of Japanese Agricultural Corporates]. Tokyo: Takarajima-sha, 2009. Yasushi, Masaki. Statement in House of Representatives, 24 June 2013. .

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Section

II

The regional comprehensive economic Partnership (RCEP) Agreement

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6 RCEP Prospect and Challenges: Political Economy of East Asian Integration Yose Rizal Damuri

Introduction Over the last twenty years, regional integration initiatives have been significantly developed: not only in terms of number, which has tripled since early 1990s, but also in terms of integration topics discussed and the number of countries involved in the agreements. Significant development can be observed in East Asia and the Pacific, where countries have been actively forming trade agreements within and outside the region. Recently, the process of integration in East Asia has been conducted under the ASEAN-initiated Regional Comprehensive Economic Partnership (RCEP). At the same time, there is also another regional initiative involving some East Asian countries together with countries across the Pacific, called the Trans-Pacific Partnership (TPP) agreement which is led by the United States. These two proposals are expected to advance the regional trade architecture through the consolidation of various existing agreements

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among countries in the region. Many questions, however, have been raised in the wake of these recent initiatives: What drives countries in the region to pursue greater integration? How effective are current proposals to tackle the various issues related to international trade and investment? How do those initiatives affect each other and what is the likelihood that they would be compatible with each other? What are some possible directions for these mega-integrations? This chapter is an attempt to address these questions. It draws upon lessons from the current state of the RCEP negotiations, taking into account other initiatives in the region such as the TPP and the ASEAN Economic Community (AEC). In order to put these discussions into context, we will briefly take a look at the evolution of economic integration in the region and discuss the drivers behind its current progress. We will then talk about challenges surrounding region-wide integration, as well as some suggestions to move the process forward.

A Glance at the Integration Process in East Asia and the Pacific Formal regional integration, in the form of trade agreements, is relatively new among East Asian countries. A similar situation can also be observed, to some extent, across the Pacific Ocean. The ASEAN (Association of Southeast Asian Nations) Free Trade Area (AFTA) and North American Free Trade Agreement (NAFTA) were the only visible trade arrangements in the region in the early 1990s. Countries in the northern part of East Asia, where most economic activities took place, were largely immune to regionalism, notwithstanding the attempt at open regionalism of economic cooperation under the Asia-Pacific Economic Cooperation (APEC). While APEC envisaged greater integration in East Asia and the Pacific, its more voluntary and less binding approach made slow progress. It was not until the early decade of the twenty-first century that countries in East Asia actively pursued East Asia regionalism. However, market-driven economic integration began in the 1970s, where multinational companies — mostly Japanese and later from other newly industrialized economies — started to open production

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units in Southeast Asia and generated greater trade and investment in the region. Intraregional trade dominated the trade pattern of those countries even in the early 1980s, reaching more than 32 per cent of the countries involved with global trade. It has become more important over time, with recent statistics showing that more than 40 per cent of East Asia’s trade is intraregional, mostly in fast-growing manufactured goods. Networks of international production have emerged, creating an integrated region, which some label as “Factory Asia”, where thousands of firms operating in countries across the region are connected by “conveyor belts” of trade and investments (Baldwin 2006). Factory Asia is mostly dedicated to serve the global market and is highly dependent on demand in the United States and European Union (EU). In order to support this development, countries in East Asia pursued unilateral liberalization by reducing their applied mostfavoured nation (MFN) tariffs and by facilitating imports of necessary intermediate goods, while at the same time attracting foreign direct investment. However, unilateral liberalization provides little assurance that these countries would embrace an open trade regime all the time. As the need for formal arrangements increased, it also prompted East Asian countries to proceed with more legally binding and reciprocal commitments normally endorsed in Free Trade Agreements (FTAs).1 ASEAN countries, which started their integration process in the early 1990s, reduced the number of excluded products in their existing AFTA scheme, leading toward a faster and broader coverage of preferential treatment. Bilateral FTAs, especially between individual ASEAN members with other countries in the region, started to emerge.2 ASEAN as an entity also pursued trade agreements with its trading partners in the region. By 2010, this group of Southeast Asian countries managed to form five trade agreements with six important countries in East Asia known as ASEAN+1 FTAs: China, Japan, South Korea, Australia, and New Zealand (together known as CER — Closer Economic Relation), and India. Figure 6.1 presents the current situation of overlapping bilateral and regional trade agreements in East Asia.

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Figure 6.1 Bilateral and Regional FTAs in East Asia

China

New Zealand

South Korea India

ASEA Singapore Vietnam

Australia

Thailand

Lao

Myanmar

Philippines Indonesia

Malaysia Brunei Darussalam Cambodia

Japan

East Asian Arrangements and the Need for RCEP A region-wide arrangement is in line with the economic and political interests of countries in East Asia. From an economic perspective, the proliferation of regional trade agreements in the region has raised some long-standing issues related to preferential trade liberalization. While FTAs provide assurance on the progress of liberalization, the benefits are far from optimal. The huge variety of tariff concessions in different and often overlapping trade agreements increases transaction costs in using the facilities available in FTAs. The fact that different FTAs adopt different rules of origin (ROO) complicates matters — contributing to the socalled “noodle bowl” effect. These have resulted in low utilization of FTAs in East Asia.3 A region-wide arrangement is expected to consolidate and lower the number of rules and concessions, while offering greater trade facilitation for business. At the same time, there is also an increasing need for deeper integration that goes beyond the elimination of traditional trade barriers. The development of Factory Asia shows that international business activities require more than just economical and efficient international trade, but also the availability of high quality services, a competitive

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business environment, security from political risks, and greater protection for technology and knowledge exchange. Many of these issues are better addressed at the multilateral or regional level vis-à-vis the bilateral one. Since the World Trade Organization (WTO) cannot be expected to deal with these issues shortly, a regional arrangement is the only feasible option to deepen integration. Politically, a deeper and wider regional cooperation is also expected to ease political tension among countries in the region and, in particular, to reconcile past differences among the Northeast Asian nations (i.e., China, Japan, and South Korea). Countries in the region — especially the big ones like China and Japan — see FTAs as important instruments of commercial diplomacy to realize their vision of geopolitics and global strategy. Both the Asian Financial Crisis of 1997–98 and the Global Financial Crisis of 2007–9 revealed that the economic dependence of the region towards global demand may not be compatible with the strategic objectives of the region. A coherent integration initiative is needed to create a more self-developed, resilient, and less externally dependent region. In addition, this kind of integration would also increase the awareness and identity of an Asian community (Katada 2009). The growing economic and social transformation in virtually all East Asian countries has resulted in more intensive communication and exchange that creates greater support for regional cooperation. However, political obstacles to such initiatives are also abundant. Domestic political pressure against liberalization has made regional agreements less popular than bilateral ones. In order to balance gains and losses, economic integration should also lead to cooperation and assistance instead of merely focusing on commercial issues. Geopolitical issues, especially among countries in Northeast Asia, have undermined the trust required for successful regional integration (Aggarwal and Koo 2008). This is especially because China is involved in disputes and border disagreements with several ASEAN countries regarding the South China Sea. These issues have weakened confidence levels among countries in the region and have hampered efforts at greater regional integration. Realizing that a region-wide FTA can serve as an instrument to gain regional influence, big powers in East Asia — such as China and Japan — have been tempted to play a greater role in shaping the proposed trade agreement. There were two proposals that were subject to detailed assessments and serious discussions in the mid-2000s, namely

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the China-promoted East Asia Free Trade Area (EAFTA) and the Japaninitiated Comprehensive Economic Partnership of East Asia (CEPEA).4 China’s proposal of EAFTA or ASEAN+3 (plus 3 denotes China, Japan, and South Korea) was seen to be more feasible, especially after the signing of the relatively shallow ASEAN–India FTA in 2009 that might have made CEPEA or ASEAN+6 (includes all ASEAN+3 members and Australia, New Zealand, and India) integration difficult. However, Japan’s proposal provided greater potential benefits as it included more countries with greater complementary trade possibilities. Competition for an arrangement between China and Japan was obvious, while other countries in the region were divided between supporting the two proposals. The rivalry continued and delayed the process of integration until 2011, when Indonesia — as the chair of ASEAN then — proposed a new initiative for regional cooperation as a middle way. In November 2011, ASEAN leaders agreed to establish an ASEAN-led process and proposed the ASEAN Framework for the RCEP. Then, the proposal aimed for a comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN member states and ASEAN FTA partners. The proposal was agreed upon by all ASEAN FTA partners and, during the 21st ASEAN Summit on 20 November 2012, the leaders of the sixteen East Asian countries declared the start of RCEP negotiations.5 At the same time, these countries also agreed upon the “Guiding Principles and Objectives for Negotiating the RCEP”, which state all the necessary matters required for the negotiation such as the scope and the ambitions for issues to be covered in the integration process. The “Guiding Principles and Objectives” also state that the RCEP would be more than just a trade agreement by emphasizing the creation of equitable economic development and strengthening economic cooperation and technical assistance. By proposing the RCEP, ASEAN wanted to maintain its centrality and become the primary driving force for a regional integration process in the Asia-Pacific. It was then emphasized that the RCEP framework is based on the existing ASEAN+1 FTAs rather than a fresh start. This is compared to other proposals available around that time. The RCEP is expected to consolidate the existing FTAs to address issues such as the “noodle-bowl” syndrome of the East Asian FTAs. Additionally, the centrality of ASEAN is in line with the current integration process of ASEAN itself that aims for an AEC by 2015 and beyond. The RCEP is expected to incorporate and expand some elements described in the AEC Blueprint.

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The RCEP and the TPP It is clear that the launch of the RCEP was driven partly by another process taking place in the region — the TPP. The TPP is intended to be a “high quality” and “21st century” agreement by venturing into relatively new areas of integration, in terms of scope and depth. The agreement is expected to provide comprehensive market access for almost all products by eliminating tariffs and non-tariff barriers to trade and investment and keeping exclusion to a minimal among member countries.6 Some cross-cutting issues have been identified to promote such integration, such as regulatory coherence and business facilitation, including support for small and medium-sized enterprises (SMEs) to use trade agreement facilities (USTR 2013). The question is how the RCEP and TPP will influence each other since many countries are active members of both processes. As a newer and less established initiative, the RCEP is likely to be more affected by the TPP rather than vice versa. From a political economy perspective, the RCEP can even be seen as ASEAN’s and China’s response to the U.S.-led TPP initiative. China is worried that the TPP is part of a U.S. strategy to contain China.7 Although this might be untrue, China’s view that FTAs contain strategic economic, political, and diplomatic significance has encouraged them to push forward several integration initiatives that would put the country in a more strategic position. Furthermore, China has also been actively pursuing greater cooperation with its neighbours to form a China, Japan, and South Korea (CJK) FTA. ASEAN was also worried that the TPP would damage economic and political relations among countries in Southeast Asia, since four of its ten members are involved in the TPP negotiations, while at the same time, it might take away its leadership role from the Asian economic integration process.8 The concern over marginalization is quite apparent for major countries in Southeast Asia such as Indonesia and Thailand. While those countries have the option to join the TPP negotiations, its high level of commitment and requirement for liberalization have deterred them, reflecting their potentially weak domestic political support. Japan’s inclination towards the TPP in early 2011 instead of CEPEA also prompted ASEAN — with China’s support — to accelerate the announcement of the RCEP. There are three possible scenarios in which the result of the TPP might influence the RCEP’s level of ambition among its members. The

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first scenario is one where members of the RCEP would try to replicate the commitments of TPP members and in the process achieve high-quality commitments. A successful TPP would put pressure on non-TPP members to raise their commitments and come up with more constructive results to make the RCEP a worthy alternative to the TPP. In the second scenario, the TPP may provide an external stimulus for members of the RCEP to reach considerable but less advanced commitments than the TPP. The ASEAN+6 countries do indeed have sufficient elements to produce substantial commitments for East Asian integration. While the TPP is regarded as a high-quality trade agreement, its various issues currently being discussed could also potentially be covered in the RCEP. Table 6.1 provides a comparison between the TPP and other existing trade agreements in East Asia, including the proposed coverage of the RCEP. Some FTAs between ASEAN and its trading partners have already made substantial commitments to greater integration. Moreover, ASEAN countries have been developing the AEC, in which deeper integration is expected by 2015 and beyond. What they need now is the political will and stimulus to pursue commitments that are at least comparable to the most advanced ASEAN+1 FTAs or even the aspirations of the AEC. The two scenarios are based on the assumption that the TPP can act as an external stimulus for region-wide integration in East Asia. There is, however, a third scenario in which the TPP might hold back the progress of the RCEP and turn it into a shallow agreement. The East Asian TPP members may see the RCEP negotiation process as a distraction, instead of a complement, for the current progress in the TPP. As such, they might prefer to focus on the TPP negotiations to obtain its benefits first, before paying more attention to the RCEP. There is also concern over the potential confusion in implementing both agreements, especially in dealing with behind-the-border commitments and achieving greater regulatory coherence. Having shallow commitments in the RCEP would free those TPP members from the difficulties of implementing different commitments in the future. In addition, the non-TPP members of East Asian countries may not really see the TPP as a threat. The cost of not joining TPP to the non-members of ASEAN, i.e., the possible trade and investment diversion effect from the TPP, may not be too high. Only two members of this proposed partnership — Vietnam and Peru — belong to a similar level

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Table 6.1 Areas of Negotiation in the TPP and East Asian Agreements TPP • • • • •

RCEP

ASEAN+1

AEC

• •

• • • • •

Trade in Goods   — Market Access to Goods   — Textile and Apparel   — Rules of Origin   — Customs   — Trade Facilitation   — TBT   — SPS   — Trade Remedies

• • •

° ° °

• • •

• • • • • • • • •

Trade in Services   — Cross-border Services   — Financial Services   — Telecommunications   — Temporary Entry

• • • • •

• •

• • • • •

• • • • •

Investment   — Protection   — Liberalization   — Facilitation   — Promotion

• • •

• • • • •

• • • • •

• • • • •

Economic and Technical Cooperation Intellectual Property Competition Dispute Settlement Others   — E-commerce   — Environment   — Government Procurement   — Labour

•* • • •** • • • • •

• • • • • •

• • • •

° ° ° •

° °

• • • • •

TBT = Technical Barriers to Trade; SPS = Sanitary and Phytosanitary Note: “•” means the issue is covered. For ASEAN+1, “•” means at least one ASEAN+1 FTA covers the issue. “°” for RCEP means that the issue is likely covered judging from ASEAN+1 FTAs and AEC. * “Cooperation and Capacity Building”. ** “Legal issues” for administration of the Agreement including dispute settlement. Source: Intal et al. (2014).

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of economic development with developing countries of ASEAN, such as Indonesia and Thailand. Trade and investment diversion of TPP might be perceived to be less significant to harm the trade performance of other East Asian countries to the TPP market, for example the U.S. and Japan market.9 Hence, it is questionable whether the TPP, once completed, would act as a stimulus for the RCEP negotiating countries to increase the quality of the trade agreement.

How Should the RCEP Deal with Issues in the Region? Let us now turn to a discussion on how the RCEP deals with substantial issues that appear to be the key objectives of this initiative. These include simplifying existing arrangements to minimize the “noodle-bowl” issue, dealing with deeper integration that goes beyond the elimination of traditional trade barriers, and narrowing the development gap. The RCEP is proposed to be a high-quality FTA based on the existing ASEAN+1 FTAs, but with greater trade liberalization and harmonization of rules and practices. However, this is not an easy task for the negotiating countries. In terms of tariff liberalization, for example, the five ASEAN+1 FTAs maintain different tariff elimination schedules. Currently, fifty-five tariff elimination coverages exist under the five ASEAN+1 FTAs as each ASEAN member maintains five sets of tariff elimination schemes with its trading partners (Fukunaga and Kuno 2012). In terms of sensitive and excluded products, ASEAN countries also tend to maintain different product exclusions for different partners. In order to address these issues successfully, the RCEP negotiating countries need to increase their trade liberalization commitments to levels higher than the existing commitments in the most advanced ASEAN+1 FTA, i.e., ASEAN–Australia–New Zealand FTA (AANZFTA). With this, not only will the “noodle-bowl” be minimized, but the RCEP will also bring significant improvements to existing arrangements in East Asia. However, many negotiating parties, including the ASEAN countries themselves, seem to be reluctant to commit beyond their current concessions due to the delicate domestic political support in those countries and geopolitical tensions between several countries.10 Behind-the-border issues, including regulatory coherence, should become an integral part of the RCEP negotiations, in order for it to

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contribute more to economic development in East Asia. Such issues include consistent implementation of various disciplines and rules related to commercial and economic activities, competitive regulatory frameworks, services regulation, and government procurement. Commitments in behind-the-border issues and greater regulatory coherence would enhance the development of production networks in East Asia and prepare the region for knowledge-intensive commercial activities. However, ASEAN and its trading partners would also face significant difficulties in pursuing greater domestic regulatory coherence. The aim of regulatory coherence is to develop a set of elements and disciplines that increase the harmonization of regulations in those countries. This includes the consistent implementation of various disciplines and rules related to commercial and economic activities. Many countries in the region, particularly ASEAN’s less developed countries, would find it difficult to raise their regulatory framework up to the standard and practice of more developed countries. The RCEP’s “Guiding Principles” also mention development issues as a key feature to achieve more “equitable economic development” aimed at narrowing the region’s developmental gap. There is currently little detailed explanation on how this issue will be approached. But the RCEP seems to be promoted as an economic cooperation initiative towards the development of East Asian community, rather than just a trade agreement. Also, some proposals have mentioned that this should be done through the simplification of trade procedures and facilitation, economic and technical assistance that emphasizes capacity development for less developed countries, and through improving connectivity. Considering that a very wide developmental gap persists among its member countries, the RCEP members should pay more attention to this issue. In general, regional trade agreements and trade liberalization have been criticized for only benefiting certain countries as the benefits accrue mostly to parties better prepared to utilize trade concessions, leaving behind those without sufficient capacity. Domestically, facilities under preferential agreements are also largely utilized by larger businesses or multinational companies. SMEs continue to be excluded from the benefits of greater market access due to the high transaction costs of using preferential facilities and their inability to comply with traderelated regulations.

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Conclusion: A Successful RCEP Negotiation and ASEAN’s Role It is difficult to see how East Asian countries will be able to reach a substantial conclusion over the RCEP’s issues and objectives. The agreement is expected to be launched together with the full implementation of AEC at the end of 2015. Since its inception in 2011 and with only a short time left to its deadline, little progress has been made on many contentious issues. It seems that some negotiating parties are losing interest in the process due either to a lack of domestic political support or the lack of substantial gains over possible outcomes — preferring instead to focus on other bilateral and regional initiatives, such as the TPP and the CJK FTA. A successful RCEP is dependent on ASEAN’s leadership. The association has played a central role in initiating and facilitating the RCEP by providing opportunities for negotiations and meetings. ASEAN’s key meetings — such as the ASEAN+1 Summits and the East Asia Summit — allow leaders from negotiating parties to discuss key policy issues related to the RCEP’s agenda to complement the technical issues discussed during the negotiation. As the initiator of the RCEP, ASEAN has been successfully facilitating the negotiation process (Fukunaga 2015). Currently, all the three RCEP Working Groups — on Trade in Goods, Trade in Services, and Investment — are chaired by ASEAN member countries. Indonesia, as the biggest economy in ASEAN, plays an even more important role in the RCEP negotiations. Indeed, the RCEP was initially proposed by Indonesia, which remains the chair of the RCEP Trade Negotiating Committee. However, the country seems to be losing interest in leading the RCEP towards achieving high-quality regional integration, due mostly to the lack of domestic political support. There is a common perception among Indonesian policymakers and government officials that what Indonesia needs at the moment is to improve its economic competitiveness, not to open the economy or expand market access. According to this line of argument, Indonesia should deal with its challenges and problems — such as inadequate infrastructure and high costs — before trying to maintain a more open trade regime and engaging in trade agreements, especially those involving large economies as trading partners.11 Indonesia’s existing trade agreements are also considered to be unsuccessful in delivering their

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promised benefits. The agreement between ASEAN and China is blamed for increasing Indonesia’s imports while only serving China’s hunger for raw materials and energy. Additionally, the agreement with Japan has not increased market access for Indonesian products, as they often fail to meet Japan’s regulatory requirements. Given this attitude, it is not surprising that Indonesia seems not to be aggressive enough in pushing for the RCEP’s agenda, although it stands to gain large benefits from East Asian integration as the biggest economy in ASEAN. A commitment towards supporting the RCEP will have the effect of instilling discipline at home for implementing the necessary domestic reforms to increase economic competitiveness. The key to increasing support for the RCEP in Indonesia is to provide a better understanding of how the agreement can also help the country with its domestic challenges. However, this problem is not unique to Indonesia. China, as one main supporter of the initiative, is still interested in the process but mostly treats it as part of a wider strategic move. India remains the least motivated member in the RCEP as it also faces strong resistance from its domestic situation.12 Hence, it is important for the RCEP negotiating parties to increase their ambition and come up with innovative modalities and negotiation strategies to deal with sensitive issues, while aspiring to reach agreements on more acceptable issues. In this case, ASEAN member countries have a very critical role to play in driving the RCEP to a higher level. Indonesia, as the unofficial leader of the group, should renew its effort towards pursuing the East Asian integration. To address issues in trade liberalization, countries in East Asia need to change their perspectives. Rather than trying to consolidate the different tariff schedules of ASEAN+1 FTAs, all of the RCEP negotiating parties could use the AEC scheme as a starting point and extend the schedule of tariff liberalization under the ASEAN Trade in Goods Agreement (ATIGA) to countries outside ASEAN. This would reduce technical difficulties in dealing with the fifty-five tariff elimination coverages, which currently exist under the five ASEAN+1 FTAs. ATIGA also sets some provisions in dealing with non-tariff measures (NTM), although only a few initiatives seem to be successful at the moment. Nevertheless, those NTM-related provisions in ATIGA can be adopted in the RCEP. Hopefully, these provisions will have a better chance for success with the support of other East Asian countries and knowledge from ASEAN’s experience. Additionally, the RCEP negotiation process might also benefit from ASEAN’s experience thus far in economic liberalization.

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There are several ways to bridge the diverse interests of the RCEP negotiating parties. First is to simplify preferential concessions, including the implementation of simpler ROOs. As discussed previously, this will boost the benefits of having a more deeply integrated region and extend its benefits to wider participants, like SMEs. The second way is to improve trade facilitation by simplifying trade procedures and increasing traderelated institutional connectivity. Some trade facilitation initiatives under ASEAN — such as the ASEAN Single Window and the harmonization of trade nomenclature — can be extended to other RCEP members with better implementation. The third way is to provide technical assistance for less developed members to build their capacity in complying with trade-related standards and regulations. This may include developing the facilities and capacity to conduct testing and assessments in less developed member countries. In conclusion, a region-wide arrangement of economic and trade integration seems to be the next logical step for the current complex arrangement in East Asia and the Pacific. However, the political feasibility of such an agreement may not be adequate at the present moment. The negotiating parties need to develop innovative modalities and new perspectives in dealing with the issues at hand. While the East Asian countries missed the given timeline of end 2015 to conclude the negotiation, they need to keep the momentum and produce something substantial in the near future. The experience in implementing the AEC should be a good starting point for the advancement of the RCEP.

Notes  1. Many observers also argue that the Asian Financial Crisis created the need for countries in the region to work more closely together as they could no longer depend on the EU and U.S. market, therefore regionalism in East Asia flourished (see for example Baldwin (2006) or Pomfret (2011)).  2. The New Zealand–Singapore Close Economic Partnership in 2001 marked the proliferation of bilateral FTAs in East Asia. Currently there are around twenty bilateral trade agreements in force among countries in the region.  3. Utilization of FTAs in selected East Asian countries ranges from 17 per cent (Singapore) to 45 per cent (China), according to a survey done by the Asian Development Bank Institute or ADBI (Kawai and Wignaraja 2011). Several other surveys also report similar results; see, for example,

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the case of utilization of FTAs in Indonesia which is only 43 per cent (CSIS 2014).  4. The EAFTA proposed a smaller integration among ASEAN countries and three countries of Northeast Asia (Japan, South Korea, and China), while CEPEA aimed for an ASEAN+6 integration (with Australia, New Zealand, and India in addition to the three Northeast Asian countries).  5. The sixteen RCEP negotiating countries are: ten ASEAN members, China, Japan, South Korea, India, Australia, and New Zealand.   6. In addition to the original signatories (Brunei Darussalam, Chile, New Zealand, and Singapore), Australia, Japan, Malaysia, Vietnam, Canada, Mexico, Peru, and the United States are involved in the current negotiation round. The last member state joining the process is Japan.  7. See, for example, the discussion on China’s view on RCEP in Mulgan (2013).  8. The concept of “ASEAN centrality” influences economic, political, and other aspects of East Asia regionalism. In addition to TPP negotiations that involve four members of ASEAN, the beginning of negotiations for a CJK FTA in 2012 had the potential to undermine ASEAN’s position in East Asian integration. An initiative for East Asian integration with ASEAN in the driver’s seat like the RCEP is expected to strengthen the ASEAN position again.   9. See, for example, Kawasaki (2014). Using a Computable General Equilibrium (CGE) model, the author predicts that non-TPP countries, mostly middle and low income, on average only suffer a reduction of 0.3 per cent of GDP (gross domestic product) by not joining the U.S.-led TPP. The gain from RCEP, however, is much bigger to compensate such loss, reaching 3 per cent on average. The loss is potentially much bigger for non-TPP members if more developing countries join the initiative and pose significant risk of trade diversion. 10. China and Japan have been involved in serious geopolitical tension due to historical accounts. China also has potential disputes and border disagreements with several ASEAN countries regarding the South China Sea. Those issues have weakened confidence levels among countries in the region and created unfavourable situations for greater integration initiatives. 11. Some Indonesia’s officials are not really enthusiastic in looking at the potential benefits of RCEP and question the ability of Indonesia’s industry. See, for example, Amin, Khoirul, “New govt told to determine Indonesia’s position on RCEP”, Jakarta Post, 21 August 2014, on RCEP or Jakarta Globe, “Indonesia Must Undertake Major Changes and Take Risks, Gita Wirjawan Says”, on general trade liberalization. 12. India is not really satisfied with the trade agreements with ASEAN and is perceived as not being able to use these agreements to increase its presence in the regional markets. See, for example, Biswajit Dhar, “Are Free Trade Agreements a Dead End for India?”, East Asia Forum, 10 October 2014, .

References Aggarwal, Vinod K. and Min Gyo Koo. “Economic and Security Institution Building in Northeast Asia: An Analytical Overview”. In Northeast Asia: Ripe for Integration?, edited by Vinod K. Aggarwal, Min Gyo Koo, Seungjoo Lee, and Chung-in Moon. Berlin: Springer, 2008. Baldwin, Richard E. “Managing the Noodle Bowl: The Fragility of East Asian Regionalism”. CEPR Discussion Paper No. 5561. London: Centre for Economic Policy Research, 2006. Centre for Strategic and International Studies (CSIS). Impacts of FTAs in Indonesia: Study and Business Perspective Survey Results 2013, 2014. . Fukunaga, Yoshifumi. “ASEAN’s Leadership in the Regional Comprehensive Economic Partnership”. Asia & The Pacific Policy Studies 2, no. 1 (2015): 103–15. Fukunaga, Yoshifumi and Arata Kuno. “Toward a Consolidated Preferential Tariff Structure in East Asia: Going Beyond ASEAN+1 FTAs”. ERIA Policy Brief 2012–03. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), May 2012. Intal, Jr., Ponciano, Yoshifumi Fukunaga, Fukunari Kimura, Phoumin Han, Philippa Dee, Dionisius Narjoko, and Sothea Oum. ASEAN Rising: ASEAN and AEC Beyond 2015. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), 2014. Katada, Saori N. “Political Economy of East Asian Regional Integration and Cooperation”. ADBI Working Paper Series No. 170. Tokyo: Asian Development Bank Institute, 2009. Kawai, Masahiro and Ganeshan Wignaraja. “Asian FTAs: Trends, Prospects and Challenges”. Journal of Asian Economics 22, no. 1 (2011): 1–22. Kawasaki, Kenichi. “The Relative Significance of EPAs in Asia-Pacific”. RIETI Discussion Paper Series 14-E-009. Tokyo: Research Institute of Economy, Trade and Industry, 2014.

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Mulgan, Aurelia George. “Japan, US and the TPP: The View from China”. East Asia Forum, 5 May 2013. . Pomfret, Richard. Regionalism in East Asia: Why Has It Flourished Since 2000 and How Far Will It Go? World Scientific Books no. 7715. Singapore: World Scientific Publishing Co. Pte. Ltd., 2011. United States Trade Representative (USTR). “Trans-Pacific Partnership: Trade Ministers’ Report to Leaders”, 8 October 2013. .

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7 Challenges Facing the RCEP Negotiations Sanchita Basu Das1 Introduction The Association of Southeast Asian Nations (ASEAN) adopted the Regional Comprehensive Economic Partnership (RCEP) framework at the 19th ASEAN summit in Bali in November 2011. The objective of the RCEP agreement is to consolidate ASEAN’s respective “+1” Free Trade Agreements (FTAs) with Australia, China, India, Japan, South Korea, and New Zealand into a region-wide free trade arrangement that is consistent with the World Trade Organization (WTO). The RCEP has embraced seven areas for negotiation: trade in goods, services, and investment; economic and technical cooperation; dispute settlement; intellectual property rights; and competition policy. This is a significant improvement over the existing “ASEAN Plus” FTAs, which have focused on the more traditional tenets of trade liberalization, i.e., increasing market access for goods, services, and investment. Furthermore, its Guiding Principles state that the partnership is open to “including other issues covered by FTAs among RCEP participating countries … in the course of negotiations”,2 and has an open accession clause to facilitate the participation of external economic partners. The broader economic ends of the RCEP are to widen its members’ participation in regional and global production networks and reduce transaction costs and inefficiencies created by multiple overlapping Asian trade agreements (Basu Das 2013a). 122

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Although the RCEP negotiations were off to a good start since May 2013, it is evident that the negotiation process is going to face several economic and political obstacles. As an economic integration arrangement predominantly among developing countries, the RCEP is the first of its kind and has no predecessor to emulate. It involves three different dynamics, both among and between its sixteen participating members: (i) the ten ASEAN members; (ii) ASEAN and its FTA partners; and (iii) the six FTA partners. The ten members of ASEAN have pledged to work on economic integration since the 1990s and the ASEAN member countries have been working with their FTA partners since 2000. However, the six FTA partners do not all have existing comprehensive trade agreements with one another (see Table 7.1). Moreover, political factors such as historical conflicts and unsettled territorial disputes will continue to underline the difficulties of negotiations among, for example, the three North-eastern states. In addition, although India has been viewed as a rising economic power, its position in multiparty trade negotiations remains rather conservative. It has been branded a hardliner with a “defensive strategy” (Ramdasi 2010). The difficulties were felt recently, when the participating countries missed the deadline of December 2015 to conclude negotiations. There is no new deadline provided since then. It is widely felt that even if the RCEP countries conclude negotiations, the agreement is likely to face several procedural hurdles that will need to be addressed before the member countries can carry on with its domestic implementation. Table 7.1 Status of FTAs Between RCEP Members ASEAN

Australia

New Zealand

China

India

Japan

Korea

Australia

S/E

—

S/E

S

N

N

N

New Zealand

S/E

S/E

—

S/E

N

P

S

China

S/E

S

S/E

—

P

N

N

India

S/E

N

N

P

—

S/E

S/E

Japan

S/E

N

P

N

S/E

—

P

Korea, Rep.

S/E

N

S

N

S/E

P

—

Notes: S = Signed; S/E = Signed and in Effect; N = Negotiation Launched; P = Proposed and Under Study Source: Author’s compilation; ARIC and ADB.

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This chapter, therefore, sets out some of the challenges to the RCEP negotiation process and developments thereafter. It first discusses two sticking points — agriculture and the services sector — that have always been difficult to negotiate in a trade agreement. This is followed by a discussion on: (i) the development gaps between the partnership’s member economies; and (ii) a plausible foundation for the RCEP agreement, i.e., what could be a base or template from which negotiations on the granting of additional market access can be discussed by member economies.

Sticky Issues for Negotiation As is the case with most FTA negotiations, issues related to coverage pose a substantive challenge. While all participating members agree with the benefits of market access liberalization measures, they also face pressures to limit competition in their domestic markets (Chandra 2008; Milner 1997). The RCEP is no exception: it comprises a country like Singapore, which is relatively unique and is generally the least concerned with liberalization, but it also includes countries like Indonesia and India that are likely to make market access negotiations difficult. Accordingly, a number of issues may surface as sticking points during the negotiations. This subsection briefly discusses two such issues: agriculture and services sector liberalization.

Agriculture Sector Agriculture has always been a protected sector in most developing economies for various reasons, and promoting a comprehensive coverage of agricultural trade has been a key challenge, especially for an East Asian FTA (Kawai and Wignaraja 2013). Because the sector employs more than a third of the workforce in several ASEAN countries, protecting agricultural employment is key (see Table 7.2). More particularly, in the case of less developed economies such as Cambodia, Laos, and Myanmar, the agriculture sector makes substantial contributions to their gross domestic product (GDP) — in 2012, shares of agriculture in GDP in Cambodia and Laos were 35.6 per cent and 28 per cent respectively.3 While ASEAN countries initially excluded unprocessed agricultural products from trade liberalization, a majority of agricultural commodities are now included in ASEAN’s own liberalization measures.

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19.7 47.4

2.4 2.9

Aus

14.5 35

Indon

7.2 (a) 6.8

NZ

28 n.a.

Lao

Note: a — data in 2010; b — data in 2011 Source: World Development Indicators (World Bank); ILOSTAT Database (ILO).

12.3 39.6

Viet

Th

% Share in GDP % Share in total employment

35.6 51

0.7 n.a.

% Share in GDP % Share in total employment

Cam

Bru

 

10.1 34.8 (b)

China

10.1 12.6

Mal

17.5 47.2

India

n.a. n.a.

Mya

Table 7.2 Share of Agriculture Sector in RCEP Member Economies, 2012

1.2 3.8

Japan

11.8 32.2

Php

2.5 6.2

Korea

0 0

Sing

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In the case of Japan — although it recognizes FTAs as one of its key trade policy options, it is unwilling to liberalize agricultural products due to its domestic farm policies. The country has always remained sensitive and firmly committed to protecting five “sacred” farm products — rice, wheat, beef and poultry, dairy products, and sugar4 (Banno 2014), and has one of the world’s highest tariffs of 777.7 per cent on imported polished rice. Although Japan signed bilateral FTAs with Singapore in 2002 and Mexico in 2005, it did not open up much on agriculture trade liberalization (Urata 2005). In addition, its FTA negotiations with Korea, which commenced in 2003, could not be concluded due to concerns over trade in agricultural products and fisheries. The agriculture sector is also protected in Korea with low market orientation. According to a WTO trade policy study in 2004, Korea’s net agricultural support exceeded the sector’s GDP contribution of 3.6 per cent in 2003 and was among the highest in the Organization for Economic Cooperation and Development (OECD). Its average producer support estimate (PSE)5 for agriculture was 60 per cent in 2003, and was the highest for rice and oilseeds at 74 per cent and 89 per cent respectively. The protectionist nature of the Korean agriculture sector is also reflected in its bilateral FTAs. With the ASEAN–Korea FTA, Korea managed to exempt forty-five highly sensitive agricultural and marine products (rice, beef, poultry, garlic, onion, red pepper, most fruits, and certain frozen and live fish items) from liberalization. India also has a “defensive” stance on agriculture (Ramdasi 2010) and it remains a marginal player in terms of international trade.6 Agriculture is an important sector for the economy mainly in terms of employment, GDP, and food security. It employs more than 40 per cent of the workforce and contributes approximately 18 per cent of the country’s GDP. India has one of the most protected markets for agricultural products in the developing world, with final bound duties going up to 300 per cent for oilseeds, fats and oil, and 150 per cent for several unprocessed agricultural products. India’s trade position with regard to the agriculture sector emanates from its need to safeguard the incomes and livelihoods of a large number of poor farmers. It took seven long years for the ASEAN–India FTA (AIFTA) to conclude negotiations on trade in goods, mostly due to a fear of competition among Indian producers of oilseeds and plantation crops. Therefore, sensitivities relating to the agriculture sector among key RCEP members cast doubts on how much of the agriculture sector will be committed for liberalization.

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Services Sector A second issue that may prove difficult to negotiate is services trade liberalization. This sector accounts for a significant share of both a country’s output and employment (see Table 7.3), and this demonstrates its importance in growth rates and employment creation. That aside, its unique multifaceted and intangible nature makes its cross-border movements very difficult to track and measure. This places services trade in direct contrast to trade in goods, which is easy to define, track and measure. The 1994 General Agreement on Trade in Services (GATS) has identified four modes of supply: cross-border trade; 7 consumption abroad;8 commercial presence;9 and the movement of suppliers.10 While the first two modes are quite close to the conventional notion of “trade” and flows of services can be measured to a certain extent in balance of payment statistics, the last two modes tend to create complications. Trade statistics in the provision of services are difficult to capture with respect to commercial presence and the movement of suppliers, and these modes account for a large part of the services trade. Nevertheless, trade agreements, including the ones in Asia, have broadly followed the definitions and terminology of GATS. The negotiations take into account all of the modes of supply and schedules of commitments usually list restrictions according to all modes. ASEAN has emphasized services sector liberalization through the 1995 ASEAN Framework Agreement of Services (AFAS). Thereafter, under the ASEAN Economic Community (AEC) initiative, and in addition to AFAS, ASEAN identified five services sectors (air travel, e-ASEAN, healthcare, tourism, and logistics) that are likely to achieve full integration by 2015. Moreover, ASEAN members have undertaken separate negotiations on financial services and air transport. Services have also been included in the FTAs with ASEAN’s dialogue partners — all of which have been concluded, except for Japan. However, after more than fifteen years, negotiations under AFAS resulted only in marginal liberalization (Nikomborirak and Jitdumrong 2013). As Corbett (2008) notes: The broad conclusion here is that AFAS is not particularly liberalizing compared with GATS commitments and that most regional FTAs do not add significant new liberalizing elements over GATS. Since AFAS does not go much beyond the GATS it is, therefore, not providing much impetus to liberalizing services trade within ASEAN.

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41.7 31.5

69.4 75.5

Aus

38.7 43.2

Indon

69 (b) 72.5 (a)

NZ

35.8 n.a.

Lao

Source: World Development Indicators (World Bank); ILOSTAT Database (ILO).

44.2 39.4

Viet

Th

% Share in GDP % Share in total employment

40.2 30.4

28.2 n.a.

% Share in GDP % Share in total employment

Cam

Bru

 

44.6 35.7 (c)

China

49.1 59

Mal

56.3 28.1

India

n.a. n.a.

Mya

Table 7.3 Share of Services Sector in RCEP Member Economies, 2012

731. 67.2

Japan

57.1 52.5

Php

59.5 69.4

Korea

73.3 77.1 (a)

Sing

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In order to expedite the liberalization of services trade, ASEAN has adopted the “ASEAN minus X” formula that allows members — those who wish to and are prepared — to embark on cooperative initiatives at a faster pace than the rest of the grouping. While this may speed up liberalization to some degree, it risks slowing down the liberalization process by removing pressure on slower moving members. In addition, this is far removed from a most-favoured nation (MFN) approach, and may make it more difficult to extend liberalized treatment to non-ASEAN countries. This raises concerns about the type of approach that should be adopted for a region-wide agreement like the RCEP. In general, in the case of regional free trade areas, like the AEC, services sector liberalization is hampered by several political (for example, legal/constitutional) and economic barriers (Llanto and Ortiz 2013). Progress is limited by liberalization bottlenecks in foreign equity participation in local businesses,11 restrictions on landholding,12 and sensitivities in relaxing restrictions in the movement of professionals across states.13 Moreover, in areas where an agreement has been reached, domestic rules and regulations tend to hinder actual implementation (Nikomborirak and Jitdumrong 2013). As services sector liberalization (in the case of both ASEAN and the ASEAN+ partners) is still undergoing negotiations, it is difficult to say anything with certainty about the depth of integration at this stage. Indeed, as was discussed above, despite negotiating FTAs since the late 1990s, within ASEAN, and since the early 2000s between ASEAN and its FTA partners, sticking points over foreign ownership or movement of labour, for example, remain unresolved and these may have repercussions on the RCEP negotiations.

Macroeconomic Issues A major challenge for the RCEP agreement is the differences in the economic development stages of participating countries (see Tables 7.4 and 7.5). These differences are manifested not only in terms of GDP per capita, but also in terms of human development indicators such as life expectancy, literacy, public expenditure in health and education, and incidence of poverty. With regard to per capita income, the difference is particularly pronounced between less developed ASEAN member countries and mature countries like Korea, Australia, Singapore, New Zealand, and Japan. Vo (2005) has raised concerns that deeper economic integration could lead to huge social costs for the less developed economies of

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Indonesia, India, Laos, Philippines, Vietnam, Myanmar

Cambodia

China, Malaysia, Thailand

Upper Middle Income Economies (US$4,125– US$12,736)

Note: Economies are divided among income groups according to the 2014 gross national income (GNI) per capita. Source: Author’s compilation from the World Bank (country classification data).

Lower Middle-Income Economies (US$1,045–US$4,125)

Low Income Economies (US$1,045 or less)

Table 7.4 Varying Levels of Development

Australia, Brunei, Japan, Korea, New Zealand, Singapore

High Income Economies (US$12,736 and above)

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 30 136 108 139  62 150 117   9  89 121   2   7  91 135  17  15

Economy

Bru Cam Indon Lao Mal Mya Php Sing Th Viet Aus NZ China India Japan Korea

78.5 71.9 70.8 68.3 75 65.2 68.7 82.3 74.4 75.9 82.5 81.1 75.3 66.4 83.6 81.5

Life Expectancy at Birth (years) (2013)

95.1 62.8

95.4 73.9 92.8 72.7 93.1 92.7 95.4 95.9 93.5 93.4

2.1 1.3 1.2 1.5 2.2 0.4 1.7 1.7 3.0 2.8 6.1 8.5 3.0 1.3 8.3 4.1

Public Expenditure on Health (% of GDP) (2012)

3.3 3.8 5

3.3 2.6 2.8 3.3 5.1 0.8 2.7 3.3 5.8 6.6 5.1 7.2

Public Expenditure on Education (% of GDP) (2012) n.a. n.a. 12 n.a. 1.7 n.a. 25.2 n.a. n.a. 17.2 n.a. n.a. n.a. 21.9 n.a. n.a.

Population in Poverty (National Poverty Line, in %)

n.a. 18.6 (b) 16.2 (d) 33.9 (a) n.a. n.a. 18.4 (b) n.a. 0.4 (c) 16.9 (a) n.a. n.a. 11.8 (b) 32.7 (c) n.a. n.a.

Proportion of Population below US$1 (PPP) a day (in %)

Note: a — data in 2008; b — data in 2009; c — data in 2010; d — data in 2011 Source: United Nations Development Programme (UNDP) Human Development Report 2014 and World Development Indicators.

HDI (Rank)

Adult Literacy Rate (% age 15 & above) (2012)

Table 7.5 Human Development Indicators and Incidence of Poverty among RCEP Members

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ASEAN. This could be due to structural adjustments and the risk of falling into a low-cost labour trap, where there will be little incentive for domestic industries to move up the value chain. Hence, due consideration and appropriate resources should be allocated to these economies. A flexibility clause has been built into the RCEP framework to take developmental differences into account, but this could turn out to be either a boon or bane (Menon 2013a). While this clause can help break deadlocks and protect disparate national interests, it can also limit change or curtail progress towards greater liberalization. One of the reasons for initiating the RCEP agreement is to strengthen regulatory reforms and address “behind the border” measures for cross-border trade and investment. These are important issues for the private sector; and these are the factors that have limited private sector response to opportunities created by trade and investment liberalization measures, thereby constraining their utilization of FTAs. However, the sixteen partners currently vary in terms of their competitiveness. According to the World Bank’s Doing Business Index (see Table 7.6), members are on various platforms — while Singapore, New Zealand, and Republic of Korea occupy the 1st, 2nd, and 5th positions respectively, Cambodia, Laos and Myanmar occupy the 135th, 148th, and 177th positions. Although the RCEP has the potential to bridge these wide gaps, fundamental economic reforms are required, especially with regard to developing members. Failure to arrive at a decision on these issues will limit the realization of benefits arising from a promised comprehensive agreement.

The Issue of Negotiating Architecture A key issue for the RCEP negotiations is the question of whether the agreement ought to be modelled as leading to a future Free Trade Area of the Asia Pacific (FTAAP)14 or based on one of the existing ASEAN+1 FTAs, most likely the lowest quality FTA. If the RCEP takes on the latter approach, it would have fewer chances of transforming into a larger region-wide agreement. A comparison of the key provisions of each “+1” FTA reveals that the ASEAN–Australia–New Zealand FTA (AANZFTA) and the ASEAN–China FTA (ACFTA) are respectively the best and second best agreements. This is not only in terms of provisions but also with reference to the degree of tariff elimination and the rules of origin (ROO). This section discusses some of the key components

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101 135 114 148  18 177  95   1  26  78  10   2  90 142  29   5

179 184 155 154 13 189 161   6  75 125   7   1 128 158  83  17

 53 183 153 107  28 130 124   2   6  22  19  13 179 184  83  12

Source: Doing Business 2015, World Bank Group.

Bru Cam Indon Lao Mal Mya Php Sing Thai Viet Aus NZ China India Japan Korea

 42 139  78 128  27 121  16  11  12 135  55  48 124 137  28   1

162 100 117  77  75 151 108  24  28  33  53   2  37 121 v73  79

 89  12  71 116  23 171 104  17  89  36   4   1  71  36  71  36

110  92  43 178   5 178 154   3  25 117  71   1 132   7  35  21

 30  90 160 129  32 116 127   5  62 173  39  22 120 156 122  25

 46 124  62 156  11 103  65   1  36  75  49  27  98 126  20 3

139 178 172  99  29 185 124   1  25  47  12   9  35 186  26   4

 88  84  75 189  36 160  50  19  45 104  14  28  53 137   2   5

Ease of Dealing with Trading Resolving Doing Starting a Construction Getting Registering Getting Protecting Paying Across Enforcing Insolvency Economy Business Rank Business Permits Electricity Property Credit Investors Taxes Borders Contracts

Table 7.6 Ease of Doing Business in RCEP Member Economies, 2015

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of and challenges facing the current ASEAN+1 FTAs — namely tariffs, ROOs, and services — and is based on existing studies by Medalla (2011), Kawai and Wignaraja (2013), Fukunaga and Isono (2013), Sally (2013) and Basu Das (2013b). It also draws from the existing framework and legal text of the agreements that have been ratified and implemented by the members concerned. First, the five “+1” FTAs were signed in different time periods, starting from the early 1990s up till just recently (see Table 7.7). Negotiations are still on for the AIFTA and the ASEAN–Japan Comprehensive Economic Partnership (AJCEP) agreement with regard to services and investment liberalization. It should be noted that there are differences in the way these FTAs are negotiated: while China has negotiated its FTA with ASEAN as a group (apart from its only bilateral FTA with Singapore), Japan places more emphasis on bilateral linkages, concluding seven bilateral FTAs with ASEAN members and subsequently combining the bilateral ones for a regional ASEAN–Japan FTA. The provisions under each of these agreements also differ at this stage, although all of the FTAs are broad agreements with many WTO-Plus elements (see Table 7.8).15 For example, provisions vary across the agreements within the broad category of trade in goods. In one instance, while technical barriers to trade (TBT) are mentioned in agreements with the three northeastern partners, this topic is not included in the AIFTA or AANZFTA. Similarly, customs administrations and procedures are only mentioned in the AANZFTA and AIFTA. Secondly, tariff elimination rates and the coverage of goods differ significantly across the five “+1” FTAs. The AANZFTA agreement proposed eliminating 90 per cent of tariff lines as soon as it went into effect in 2010 and an additional 6 per cent, mostly covering agricultural commodities, are to be eliminated by 2020. All other agricultural commodities are excluded. While Australia and New Zealand collectively have long transition periods for textiles, clothing, and leather goods, Australia alone has excluded cars and car parts, and Indonesia has excluded sugar. Dairy products get a transition period of ten years under the AANZFTA. Cambodia, Laos, Myanmar, and Indonesia have transition periods up to 2025. In the case of the ACFTA, the participating countries are committed to reducing or eliminating tariffs under five different schedules. The Early Harvest Programme (EHP) allowed for the accelerated reduction of tariffs on certain products before the onset of the FTA. The programme reduced tariffs on these products over three years to: 10 per cent by 2004; 5 per cent by 2005; and zero tariffs by 2006. The bulk of tariff eliminations

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Table 7.7 ASEAN and ASEAN+1 FTAs Nature of Agreement

Framework Agreement Signed / Negotiation Completed and Signed

Status of Agreement, Dec 2014

ASEAN-10

Comprehensive

1992

Agreement in force, 1993

Australia– New Zealand

Comprehensive

2009

Agreement in force, January 2010 (G, S, I)

China

Comprehensive

2002 / 2004

Agreement in force, July 2005 (G), July 2007 (S), and Feb 2010 (I)

India

Comprehensive

2004 / 2009

Agreement in force, Jan 2010 (G)

Japan

Comprehensive

2005 / 2008

Agreement in force, Dec 2008 (G)

Korea

Comprehensive

2004 / 2006

Agreement in force, Jun 2007 (G), May 2009 (S), and Sept 2009 (I)

Plus one Partner

G: Goods, S: Services and I: Investment Note: The nature of each agreement is dependent on their stated objectives. Comprehensive Agreement: implies an agreement involving broader economic cooperation, trade in goods, and non-trade issues, and trade in services and investments. Source: Compiled by the authors from the Singapore FTA website, .

Table 7.8 Key Provisions in ASEAN and ASEAN+1 FTAs, December 2014 Chapters Included Trade in Goods Trade in Services Investment Movement of Business Person Dispute Settlement Intellectual Property

AFTA √ √ √ √ √ √

AANZFTA ACFTA AIFTA AJCEP AKFTA √ √ √ √ √ √

√ √ √ X √ X

√ X X X √ X

√ X X X √ X

√ √ √ X √ X

Note: √ implies chapter is already included in the EPA. X implies chapter is not yet included in the agreement. Source: Compiled by the authors from the Singapore FTA website, .

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between China and the ASEAN-6 members (Brunei, Cambodia, Indonesia, Malaysia, Singapore, and Thailand) was completed by 2010, with the ASEAN-4 members (Cambodia, Lao PDR, Myanmar, and Vietnam — also known as CLMV) complying by 2015 (Normal Track One). A second track eliminates some tariffs by 2012 (Normal Track Two). The two tracks, together with the EHP, cover 90 per cent of tariff lines. There is also a Sensitive Track that divides products under “sensitive” and “highly sensitive” lists and stipulates that China and the ASEAN-6 countries reduce their tariffs to 0–5 per cent by 2018, followed by the CLMV countries by 2020. In the case of the AIFTA, 80 per cent of Indian tariffs are subject to tariff elimination, although this figure is higher for ASEAN. The AIFTA has six nomenclatures for tariff reduction or elimination. First, under Normal Track One, India and the ASEAN-5 countries — Singapore, Malaysia, Thailand, Brunei, and Indonesia — have promised to eliminate tariffs by 2013. Under the same track, India and the Philippines have an extended time-frame till 2016 and the CLMV members have until 2018 to comply. Second, the Normal Track Two stipulates that India and the ASEAN-5 have until 2016 to eliminate tariffs, while India and the Philippines, and India and the CLMV, have until 2019 and 2021, respectively, to comply. Third, the Sensitive Track reduces 10 per cent of tariffs to a maximum of 5 per cent by 2016 for India and the ASEAN-5, while extending the time period to 2019 for India and the Philippines and to 2021 for India and the CLMV members. Fourth, the Highly Sensitive List reduces tariffs to 25 per cent or 50 per cent for India, Malaysia, Thailand, the Philippines, Cambodia, and Vietnam. Fifth, the list of Special Products, covering palm oil and pepper, are subject to tariff reductions but with very high caps. Finally, an exclusion list contains about 10 per cent of Indian agricultural products. The AJCEP eliminates tariffs on 93 per cent of imports for Japan and ASEAN-6 countries within the first ten years of the agreement’s effectiveness. The CLMV countries have more flexibility and have an additional five to eight years to comply. Although most of the tariff elimination targets for Japan and then ASEAN-6 countries abide by the Common Effective Preferential Tariff (CEPT) rates or a maximum tariff of 5 per cent by 2010, some tariffs have transition periods of six to sixteen years. The agriculture sector is excluded to a great extent

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or is only subject to tariff reduction over a long period or subject to tariff-rate quotas (TRQs). As the AJCEP is an agglomeration of Japan’s bilateral FTAs with ASEAN countries, the tariff schedule and transition period varies according to participating countries. The AKFTA eliminates around 90 per cent of tariff lines for Korea and ASEAN-6 countries by 2010. The agreement has a Sensitive List, under which tariffs have to be brought down to 0 to 5 per cent by 2016; and a Highly Sensitive List that has five tariff groups with tariff caps of up to 50 per cent, TRQs, and excluded products. As for the CLMV countries, they have until the 2016–18 period for the bulk of their tariff elimination, with an extra 5 per cent of tariffs to be eliminated by the 2018–20 period. These differences in tariff reduction and coverage of goods across the ASEAN+1 FTAs are important considerations for the RCEP negotiations. Table 7.9 shows an overview of tariff elimination target years under each of the ASEAN+1 FTAs. Third, with regard to the ROOs, there are four major methods of origin determination used in the various ASEAN+1 FTAs: Wholly obtained or produced (WO), Regional Value Content (RVC), Change in Tariff Classification (CTC), and Specific Process Rule (SPR). Product Specific Rules (PSRs) are attached as Annexes. All FTAs provide a general rule in the main text of the agreement (i.e., the applicable ROO), other than anything specified in the Annex (like the PSR), which could be a co-equal rule, combination, or variation of the different methods of determining origin). In most of the ASEAN FTAs, the ROO involves a combination of criteria (see Table 7.10). While the AANZFTA, ACFTA, and AKFTA mostly follow ROOs similar to the AFTA (or the ASEAN Trade in Goods Agreement (ATIGA)) rules of 40 per cent RVC or Change in Tariff Heading (CTH — equivalent to CTC at four-digit level)16 as the general rule, they have additional PSRs. The AANZFTA’s ROOs reflect the ROOs of the bilateral FTAs between Australia and New Zealand with ASEAN members. The only difference is that the cumulative value-added rule in the AANZFTA applies to all twelve countries covered. The AJCEP, in addition to abiding by rules of 40 per cent RVC, also follows productspecific exemptions, reflecting product-specific ROOs in Japan’s bilateral FTAs with individual ASEAN countries. In the case of the AIFTA, the general rule is 35 per cent RVC, but there are also CTSH (Change of Tariff Sub-Heading) and PSRs.

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FTA Partners

2017–203

2018

20125 (20176)

AIFTA2

AJFTA

AKFTA 2016

2018–24

2017–20

2018

2018

2018–205

2023–26

20223

1

2020–24

2020–25

2021–24

2026

2022

2018

2025

2010

2018

20173 (20204)

2012

1

2020

Notes: 1 Including Normal Track 2. Normal Track 1 for ASEAN-6 and China was completed in 2010. 2 In AIFTA, each year corresponds to 31 December of the previous year. For example, 2014 means 31 December 2013. 3 Including Normal Track 2 4 The Philippines 5 Including Normal Track 2. Normal Track 1 for ASEAN-5 was completed in 2010. 6 Thailand Source: Fukunaga and Isono (2013).

2012

1

2020–25

ACFTA

AANZFTA

CLMV Countries

2016

2018

2020

2018

—

Elimination Other Reduction Elimination Other Reduction Elimination Other Reduction (Normal Track or SL) (SL or HSL) (Normal Track or SL) (SL or HSL) (Normal Track or SL) (SL or HSL)

ASEAN-6

Table 7.9 Tariff Elimination Target Years under the ASEAN+1 FTAs

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Table 7.10 ROOs for ASEAN and ASEAN+1 FTAs Agreement ATIGA

Methods of Determining Origin WO, RVC, CTC, SPR

General Rule RVC (40) or CTH

AANZFTA

WO, RVC, CTC, SPR

RVC (40) or CTH

ACFTA

WO, RVC, SPR

RVC (40)

AIFTA

WO, 35% RVC + CTSH

35% RVC + CTSH

AJFTA

WO, RVC, CTC, SPR

RVC (40) or CTH

AKFTA

WO, RVC, CTC, SPR

RVC (40) or CTH

Source: Medalla (2011).

Fourth, the services chapters of the existing ASEAN+1 FTAs are still in the early stages of development. A service chapter is presently available for only AANZFTA, ACFTA, and AKFTA. The services sector adopts WTO’s GATS-style reporting. Looking individually, for the AANZFTA, the services sector agreement is negotiated based on a positive list approach, with financial and telecommunications services included as annexes. While there are some GATS-plus commitments by a few ASEAN members on education, finance, and telecommunication services, they do not entail substantial new liberalization. The AANZFTA has modest WTO-plus commitments on the movement of business persons through a provision for business visas. In contrast to the AANZFTA, most of the other services sector agreements that are concluded under the ASEAN+1 framework — such as the ACFTA and the AKFTA — are limited in scope and have limitations in terms of movement of natural persons or participation of foreign capital, implying that they have yet to go beyond the GATS provisions. Fifth, investment liberalization in the three ASEAN+1 agreements (the AANZFTA, ACFTA, and AKFTA have completed their investment agreements) have stated objectives of promoting investments and creating a liberal, facilitative, transparent, and competitive investment regime. In general, they have agreed to: (a) enter into negotiation to gradually liberalize the investment regime; (b) strengthen cooperation in investment, facilitate investment, and improve transparency of investment rules and regulations; and (c) provide for the protection of investments. In this way, the focus is not just liberalization but also facilitation. Though the

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investment chapter of AANZFTA has some post-establishment disciplines and investor–state dispute settlement, it is more of an investor protection agreement rather than an investment liberalization agreement for now. The ACFTA and AKFTA also do not address the issue of investment liberalization but focus on facilitation. Lastly, other areas of economic cooperation such as Mutual Recognition Arrangements (MRAs), government procurement, intellectual property, and the movement of business persons are not yet covered uniformly in these agreements. Nonetheless, each ASEAN+1 FTA goes beyond liberalization in trade in goods, services, and investments. The ACFTA lists five priority sectors and infrastructure projects, such as the Mekong River Basin and the Singapore–Kunming Rail Project. The AANZFTA includes provisions on negotiating future sectoral MRAs and for cooperation on sanitary and phytosanitary issues (SPS). General principles and cooperative mechanisms are outlined on competition rules. The agreement also contains chapters on e-commerce and intellectual-property provisions, including copyrights and transparency. The AJCEP agreement mentions cooperation mechanisms for SPS and TBT. Based on the comparative analysis above, a key challenge for the RCEP negotiations is agreeing to a common base or template from which negotiations on the granting of additional market access can be discussed by members. There is a chance that governments may continue to succumb to domestic pressures and may seek significant exclusions from a pathbreaking agreement. This is more so as the RCEP members have agreed on multilateralizing and following a “single undertaking”17 approach. In addition to these issues, the RCEP is yet to garner key domestic support, which is a key factor during ratifying and implementing the agreement. Often, the private sector complains about a lack of information and almost no consultation on FTAs. One should note that the RCEP was announced at a time when the private sector was struggling to understand other agendas such as the AEC 2015 and the existing bilateral FTAs. The experience from the ACFTA that came in force in 201018 leads to assertions that FTA-type engagements are still viewed as threats by the private sector.

Conclusion The group of ASEAN nations undertook a wise decision to embark on the RCEP initiative. Such an agreement has the potential to assert ASEAN’s central position in a larger regional integration architecture. It

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also serves as an opportunity for ASEAN to play a key role in forming an FTAAP in the future. The RCEP agreement has the potential not only to consolidate the existing multiple, smaller FTAs, but also to act as a building block for the multilateral trading system. However, as discussed, the negotiation for the RCEP agreement is likely to face several challenges. There are a number of issues that may thwart the RCEP negotiations even before it is concluded or it may result in an agreement that is not much different from the existing ASEAN+1 FTAs. Unless the policymakers find ways to overcome the challenges, it is difficult to visualize a comprehensive and good-quality trade agreement that may become a pathway for an FTAAP in the future. For a good-quality FTA, the RCEP needs to deliver a positive tariff elimination outcome of 95 per cent (Fukunaga and Kuno 2012), a common market access schedule, comprehensive coverage of WTO-plus issues (such as deeper cooperation in investment, environmental protection, financial services, and labour standards), a focus on domestic structural reforms, and needs to give consideration to private sector interests and “behind-the-border” integration measures such as physical and institutional connectivity (Basu Das 2012; Gupta 2014). Hence, ASEAN has a big role to play, especially when the RCEP is expected to serve ASEAN’s ideology of centrality in the regional architecture. Being the chair of RCEP negotiations, ASEAN must focus on the objectives of the agreement. It should earnestly work on its own integration process of an AEC so that it creates an impression that the region is serious about economic integration and is striving for a highstandard agreement. Of course, in the case of RCEP, there are significant short-term trade-offs but hopefully ASEAN and the other participating countries can think of long-term economic sustainability, thereby embracing the difficult decisions required to deliver on a comprehensive and mutually beneficial twenty-first century economic trade agreement.

Notes  1. I would like to thank Ms Reema Jagtiani, Research Officer at ISEAS–Yusof Ishak Institute, for her statistical assistance.   2. “Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership”, (accessed 10 June 2014).

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  3. The 2006 figures for Myanmar indicate that its share of agriculture in GDP was more than 40 per cent that year.   4. This is in the context of TPP negotiations. In the RCEP discussion, although Japan has not mentioned anything on protecting the five sacred products, one may reasonably assume from TPP negotiations that the Japanese government may try to protect these products in the RCEP too.  5. Producer support estimate (PSE) is a measure of domestic support. It is an indicator of the annual monetary value of gross transfers from consumers and taxpayers to agricultural producers, measured at the farm gate, arising from policy measures that support agriculture, regardless of their nature, objectives, or impact on farm production or income.  6. India has a share of less than 1 per cent of world trade in agriculture.   7. Cross-border services-trade is said to have taken place when neither producer nor consumer moves, but the service itself is traded (for example, business or financial services provided by mail or telephone).  8. Consumption abroad occurs when consumers move to the location of the service, such as tourism.   9. This happens when producers enter a host country via a long-term presence. 10. This happens when producers enter a host country by a shorter-term movement of people (for example, a foreign IT-expert travelling to a site to implement its technology plan). 11. The AEC Blueprint mentions 70 per cent of ASEAN equity share under liberalization in mode 3 (commercial presence). Sector-wise, most of the ASEAN member countries have complied with foreign equity ownership in hotel and lodging services (under tourism industry). However, certain members like Cambodia, Indonesia, the Philippines, and Thailand impose stringent foreign share participation for non-luxury hotels in order to protect small local providers. Also, certain members impose restrictive foreign equity participation for restaurant services, which are tied to the hotel and lodging services. Under e-ASEAN, the liberalization of information and communication technology (ICT) services and investment is most challenging as it requires member countries to change their foreign investment rule. Many ASEAN member states restrict foreign equity participation in their telecommunication sectors to a minority share. Only Singapore (highly competitive telecom market), Laos, Cambodia, and Myanmar, allow wholly foreign-owned operations. Again, state enterprises dominate certain member countries (the main telecom services providers in Vietnam are all state enterprises — Viettel, the Military Electronic Telecommunications Company, the Hanoi Telecom, the Vietnam Shipping Telecommunication Company (VISHIPEL), the Saigon Post and Telecom (SPT), and the Electricity Telecommunication Company (ETC)).

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12. Among ASEAN countries, Brunei, Laos, Myanmar, the Philippines, Singapore, Thailand, and Vietnam impose restrictions on foreigners owning land. Foreigners often resort to leasing land for a maximum period of time permitted by law which varies across countries. 13. For example, ASEAN members have concluded Mutual Recognition Arrangements (MRAs) in seven professions — for engineering, architecture, nursing, accountancy, surveying, medical and dental professionals — but this will not result in unrestricted flows as domestic rules and regulations would still apply. Moreover, only the engineering and architecture sectors discuss the recognition of a registered ASEAN professional, the rest have broad principles and framework agreements for negotiating bilateral and multilateral agreements. 14. The FTAAP is expected to be comprehensive and high-quality in nature and is expected to harmonize small-scale FTAs in the region. It was first discussed under the APEC framework. Over the last two years, the RCEP and TPP have been discussed as possible pathways for a future FTAAP (Scollay 2012). 15. WTO-Plus is the difference between commitments under FTAs and those under the GATS. Therefore, a WTO-Plus agreement typically includes “additions” to the original GATS provisions of the WTO. 16. The inputs from non-member parties are sufficiently transformed in production, thereby acquiring a change in classification in the output according to the HS (Harmonized System) Code. 17. Single Undertaking: virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed on separately. The other approach is sequential — a leading country decides whether to negotiate sequentially with only a subset of countries or simultaneously with all countries. 18. The ACFTA raised apprehension among the Indonesian private sector that the entry of cheaper Chinese products would undermine domestic manufacturing. Indonesian industries had submitted a request to delay the implementation of tariff reductions on some 228 items including iron and steel, textiles, machinery, electronics, chemicals, and furniture.

References ASEAN Secretariat. “ASEAN Framework for Regional Comprehensive Economic Partnership”. Jakarta: ASEAN Secretariat, 2011. (accessed 15 August 2014). ASEAN Secretariat and the World Bank. ASEAN Integration Monitoring Report 2013. Jakarta and Washington, D.C.: ASEAN Secretariat and the World

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Bank, 2013. (accessed 25 July 2014). Asia Regional Integration Center (ARIC) and Asian Development Bank (ADB). Free Trade Agreements. (accessed 13 August 2014). Banno, Yuko. “Japanese Agricultural Policy: Last Chance for Change”. The Tokyo Foundation, 12 May 2014. (accessed 13 August 2014). Basu Das, Sanchita. “Challenges in Negotiating the Regional Comprehensive Economic Partnership Agreement”. ISEAS Perspective no. 47-2013. Singapore: Institute of Southeast Asian Studies, 12 August 2013a. ———. “Moving ASEAN+1 FTAs towards an Effective RCEP”. ISEAS Perspective no. 29-2013. Singapore: Institute of Southeast Asian Studies, 10 May 2013b. ———. “RCEP: Going Beyond ASEAN+1 FTAs”. ISEAS Perspective. Singapore: Institute of Southeast Asian Studies, 17 August 2012. Bhagwati, Jagdish. Termites in the Trading System: How Preferential Agreements Undermine Free Trade. New York: Oxford University Press, 2008. Chandra, Alexander C. Indonesia and ASEAN Free Trade Agreement: Nationalist and Regional Integration Strategy. Lanham: Lexington Books, 2008. Corbett, Jenny. “Services Trade Liberalisation in the ASEAN Economic Community and Beyond”. In Deepening Economic Integration — The ASEAN Economic Community and Beyond, edited by Hadi Soesastro. ERIA Research Project Report 2007-1-2. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), March 2008. Fukunaga, Yoshifumi and Arata Kuno. “Toward a Consolidated Preferential Tariff Structure in East Asia: Going Beyond ASEAN+1 FTAs”. ERIA Policy Brief 2012-03, May 2012. (accessed 13 June 2014). Fukunaga, Yoshifumi and Ikumo Isono. “Taking ASEAN+1 FTAs towards the RCEP: A Mapping Study”. ERIA Discussion Paper Series ERIA-DP-2013-02. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), January 2013. Gupta, Sourabh. “Making RCEP about Region-Wide Liberalisation”. East Asia Forum, 23 February 2014. (accessed 13 June 2014). International Labour Organization (ILO). ILOSTAT Database. . Kawai, Masahiro and Ganeshan Wignaraja. “Patterns of Free Trade Areas in Asia”. East West Policy Studies no. 65 (2013). Llanto, Gilberto M. and Ma. Kristina P. Ortiz. “Regional Comprehensive Economic Partnership: Reform Challenges and Key Tasks for the Philippines”. Discussion Paper Series no. 2013-51. Manila: Philippine Institute for Development Studies, 2013. Medalla, Erlinda M. “Taking Stock of the ROOs in the ASEAN+1 FTAs: Toward Deepening East Asian Integration”. Discussion Paper Series no. 2011-36. Manila: Philippine Institute for Development Studies, December 2011. Menon, Jayant. “The Challenge Facing Asia’s Regional Comprehensive Economic Partnership”. East Asia Forum, 23 June 2013a. (accessed 13 August 2014). ———. “How to Multilateralise Asian Regionalism”. East Asia Forum, 6 January 2013b. (accessed 13 August 2014). Milner, Helen V. Interests, Institutions and Information: Domestic Politics and International Relations. New Jersey: Princeton University Press, 1997. Nikomborirak, Deunden and Supunnavadee Jitdumrong. “ASEAN Trade in Services”. In The ASEAN Economic Community: A Work in Progress, edited by Sanchita Basu Das, Jayant Menon, Rodolfo Severino, and Omkar Lal Shrestha. Singapore: Institute of Southeast Asian Studies, 2013. Ramdasi, Preeti. “An Overview of India’s Trade Strategy”. IDDRI SciencesPo no. 01/2010 March. (accessed 13 August 2014). Sally, Razeen. “ASEAN FTAs: State of Play and Outlook for ASEAN’s Regional and Global Integration”. In The ASEAN Economic Community: A Work in Progress, edited by Sanchita Basu Das, Jayant Menon, Rodolfo Severino, and Omkar Lal Shrestha. Singapore: Institute of Southeast Asian Studies, 2013. Scollay, Robert. “APEC’s Regional Economic Integration Agenda and the Evolution of Economic Integration in the Asia-Pacific Region”. KIEP Research Paper no. APEC-12-02. Seoul: Korea Institute for International Economic Policy, 2012. (accessed 19 August 2014). Urata, Shujiro. “Free Trade Agreements: A Catalyst for Japan’s Economic Revitalization”. In Reviving Japan’s Economy: Problems and Prescriptions, edited by Takatoshi Ito, Hugh Patrick, and David E. Weinstein. Cambridge: MIT Press, 2005.

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Vo Tri Thanh. “ASEAN Economic Community: Perspective from ASEAN’s Transitional Economies”. In Roadmap to an ASEAN Economic Community, edited by Denis Hew. Singapore: Institute of Southeast Asian Studies, 2005. World Bank. World Development Indicators. . World Trade Organization (WTO). “Trade Policy Review: Republic of Korea 2004”, WT/TPR/S/137. Geneva: WTO, 2004.

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8 From AEC to RCEP: Implications for the CLMV Vo Tri Thanh Introduction In the past decades, the Association of Southeast Asian Nations (ASEAN) has evolved rapidly to become one of the key emerging regional institutions in the world. As one of its key agendas, ASEAN has promoted progressive regional integration alongside the reduction of the intra-regional development gap. The process of ASEAN integration has been wide-ranging and inclusive, leading to significant benefits to members, even the less-developed ones such as Cambodia, Lao PDR, Myanmar, and Vietnam (CLMV). Although the “CLMV growth story is one ASEAN success story with lessons … on the potential benefits of economic integration” (ERIA 2014), maintaining the momentum for further improvement is essential. The idea of the Regional Comprehensive Economic Partnership (RCEP) is not new. The initiative actually represents a continuation of the “Concentric Circle Strategy”, which gradually builds on ASEAN integration in the form of the ASEAN Economic Community (AEC) to be created by 2015 and ASEAN-plus integration with “ASEAN centrality”. The RCEP was initiated by ASEAN itself in 2011 with the Association’s Framework for RCEP. In 2012, leaders of all sixteen economies — including ASEAN members, China, Japan, Korea, Australia, New Zealand, and India — supported and agreed to launch the RCEP negotiations. Fundamentally, the RCEP resembles the various efforts around the region for broader regional integration, such as the East Asian Free Trade Area (EAFTA) 147

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initiative by China and the Comprehensive Economic Partnership in East Asia (CEPEA) proposal by Japan. Since the RCEP originates from ASEAN’s aspirations, a couple of natural questions arise. The first is whether the RCEP arrangement can be really effective for sustaining growth and narrowing the development gap in the CLMV countries. The second question is whether the RCEP can benefit from the AEC framework. In answering these questions, one may need to start by identifying their possible impacts on these member economies. Complications introduced by the new context of Asia-Pacific integration — i.e., the ongoing Trans-Pacific Partnership (TPP) negotiations — should also be considered carefully even though not all the CLMV countries participate directly in the process. These questions and issues constitute the main analytical focus of this chapter. The remainder of the chapter is structured as follows. Section 2 summarizes the main possible impacts of the RCEP on the CLMV countries. Section 3 then discusses the role of the AEC framework as a reference point for the RCEP. Section 4 elaborates on the implications of the TPP for the CLMV countries. Finally, Section 5 summarizes the key findings of the chapter.

Possible Impacts of the RCEP on the CLMV Several studies have attempted to quantify the economic impacts of the RCEP and the AEC integration process. Itakura (2013) presents simulation results that show greater benefits for ASEAN member countries if East Asian economic integration attains greater depth (see Figure 8.1). Specifically, such benefits were quite small with the ASEAN Free Trade Area (AFTA) alone. Meanwhile, the scenario with all members of the RCEP liberalizing trade and investment among themselves would lead to the largest projected benefits for all ASEAN members. This finding should make sense, as the largest scope of trade and investment liberalization will enhance transparency and consolidate the production network that is already in operation in the RCEP region. For the CLMV in general, Itakura (2013) also presents evidence of substantial benefits. Cambodia and Vietnam received the largest benefits even under the context of ASEAN integration alone. Even if China, Japan, and Korea liberalize trade and investment among themselves under the China–Japan–Korea FTA (CJK FTA), the existing ASEAN+1 FTAs still bring about net benefits for Cambodia and Vietnam as compared to ASEAN integration alone. The RCEP generates even larger benefits

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Figure 8.1 Economic Impacts of Development of ASEAN++ FTA

16.0

13.4

14.0 12.0

9.5

10.0

8.3

8.0

5.8

6.0 4.0

2.3

2.0 0.0

i

ne

Bru

5.0

3.0

ia

od

mb

Ca

ia

es

on

Ind

DR

oP

La

sia

lay

Ma

3.3

es

pin

ilip

Ph

2.9

re

po

ga

Sin

nd

aila

Th

m

na

t Vie

ASEAN Coexistence of Five ASEAN+1 FTAs Coexistence of Five ASEAN+1 FTAs and CJK FTAs ASEAN+6 FTAs

Note: The impacts of development of the so-called ASEAN++ FTA are estimated for AFTA, its coexistence with five ASEAN+1 FTAs (ASEAN–China FTA, ASEAN–Japan FTA, ASEAN–Korea FTA, ASEAN–India FTA, and ASEAN–Australia–New Zealand FTA), and then with China–Japan–Korea FTA (CJK FTA), and for ASEAN+6 FTA (RCEP); Cumulative Percentage Point, deviation from baseline, 2011 to 2015; Myanmar is excluded due to data unavailability. Source: Dynamic GTAP [Global Trade Analysis Project] Simulation by Itakura (2013).

for Cambodia and Vietnam (in cumulative percentage terms). Lao PDR somehow obtains relatively smaller benefits but this may be magnified upon the country’s own institutional reforms and liberalization efforts. The CLMV also acquire more benefits if services trade and investment liberalization also takes place. A couple of reasons may explain why the RCEP can significantly enhance the positive impacts on the CLMV. First, notwithstanding the continuous improvement in income levels, the CLMV countries are still at a low development base with ample room for reforms and liberalization. Implementing the RCEP will not only increase access to foreign markets and investment, but also require domestic reforms. The pace of reforms may even increase over time once the CLMV can capture quick benefits after the RCEP’s implementation and become gradually more confident. Second, the RCEP will also facilitate further engagement of the CLMV

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in the regional production network. This regional production network is expanding rapidly with connections to both the major production houses and transnational corporations in the region. The figures in Table 8.1 may overestimate the actual net benefits of ASEAN member countries due to: (i) the overlapping of FTAs that involve a complex web of commitments and arrangements with large distortions to all economies; and (ii) the use of maximum liberalization commitments under each scenario that may not happen in practice. Meanwhile, the benefits could arguably be larger since the domestic institutional reforms accompanying the implementation of FTAs — which leads to more opportunities and/or better capacity to realize those opportunities by economic agents — are excluded from the model-based quantitative analysis. Depending on their own objectives, member economies may decide to liberalize trade and investment more aggressively than the commitments under RCEP. Even if AEC integration agreements (AEC, AEC+ and AEC++) are concluded and come into force, they still run the risk of producing unequal benefits for different members. This pattern of inequality may even arise among the CLMV countries. For instance, Table 8.1 shows that under various AEC scenarios, the CLMV countries may acquire different income gains. Some of the levels of percentage change (compared with the baseline) may vary significantly among the CLMV countries and between the CLMV and the rest of ASEAN. The case of Vietnam lays the ground for a caveat in interpreting the above simulations of impacts. In fact, most quantitative assessments seem to have underestimated the impacts of the Vietnam–United States bilateral trade agreement and World Trade Organization (WTO) membership on trade and gross domestic product (GDP) growth for the country. The outcomes of an income gap have been even less certain. This may be partly explained by: (i) the insufficient accounting for institutional reforms related to the integration efforts; and/or (ii) the management of capital flows that were induced by the integration process itself. Even the negative outcomes on less advanced members such as the CLMV countries can be avoided (Petri and Plummer 2013). The core argument lies in the attempts of the more advanced members of a trade agreement to strengthen cooperation with and assistance to the less advanced members to compensate for the negative impacts of such an agreement. Along this line, effective integration relies essentially on creating and enlarging the new business and development opportunities, enabling access to these opportunities, and strengthening the capability to maximally exploit

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10.1 0.2 0.3 1.0 0.0 0.0 2.7 0.9 2.6 1.6 0.9 0.9 0.4 0.1 –0.2

38.0 0.4 0.5 6.2 0.1 0.2 2.9 2.2 14.0 9.8 1.6 –17.4 –4.6 –1.3 –1.4

AFTA+ 69.4 0.5 0.6 27.6 0.2 0.6 5.7 4.5 15.1 12.2 2.4 –16.9 –7.8 –1.6 –2.7

AEC 115.6 0.6 0.7 36.5 0.2 0.7 21.1 4.4 18.1 19.5 13.8 28.4 –6.5 9.2 10.6

AEC+ 151.0 0.7 1.2 43.2 0.2 1.4 27.9 5.9 19.0 25.8 25.7 17.9 –12.2 7.3 9.1

AEC++ 0.78 2.56 2.74 0.22 0.63 0.33 1.41 0.61 1.64 0.65 1.10 0.00 0.01 0.00 –0.02

AFTA 2.92 5.38 5.42 1.40 2.50 1.22 1.55 1.59 9.00 3.93 1.81 –0.04 –0.10 –0.02 –0.15

AFTA+ 5.34 7.00 6.26 6.21 3.59 4.39 2.99 3.24 9.68 4.90 2.82 –0.04 –0.16 –0.03 –0.27

AEC 8.89 9.29 7.23 8.21 3.76 4.80 11.16 3.16 11.59 7.82 16.00 0.07 –0.14 0.17 1.07

AEC+

Percentage Change from Baseline

11.61 10.62 12.34 9.71 4.56 9.31 14.70 4.29 12.16 10.38 29.83 0.04 –0.26 0.14 0.92

AEC++

Note: A  FTA: completion of AFTA by reducing all remaining tariffs on intra-ASEAN trade; AFTA+: intensification of AFTA by removing non-tariff barriers (NTBs), including regulatory barriers such as diverging standards and testing requirements; (lacking detailed information on these measures, we assume a horizontal reduction of trade costs equal to 5 per cent of trade values); AEC: further reforms that improve the investment climate, modelled via increasing Foreign Direct Investment (FDI) inflows to levels similar to those in the most open ASEAN countries; AEC+: additional bilateral FTAs with other RCEP economies; and AEC++: additional bilateral FTAs with the United States and the European Union. Source: Extract from Petri and Plummer (2013).

ASEAN Brunei Cambodia Indonesia Lao PDR Myanmar Malaysia Philippines Singapore Thailand Vietnam Partners China Japan Korea

AFTA

Income Gain

Table 8.1 Impacts of ASEAN Integration Scenarios Relative to Baseline, 2015 (%)

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the opportunities. In this regard, the AEC process so far truly offers a paradigm of integration and cooperation aiming at enhancing prosperity as well as narrowing development gap. The next section will elaborate on why the AEC framework can serve as a reference for the RCEP process.

AEC Framework — A Reference Point for the RCEP In all ASEAN member countries, both the poverty rate and income gap have been decreasing sharply. At the same time, the share of the middle-income class is rising. The relatively more impressive growth performance of the CLMV countries has led to a narrowing development gap between the CLMV and the ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) during the past decade (see Table 8.2). This observation is even more meaningful as the average economic growth rate of the ASEAN-6 has been respectable during the 1996 to 2011 period. As a reflection, the growth process in the ASEAN region and within each member state has been inclusive. More importantly, there remains ample room for the CLMV to further strengthen its efforts. ASEAN’s GDP growth performance in Table 8.2 is explained partly — but significantly — by the modality and template of ASEAN’s integration itself. In December 1997, ASEAN started to adopt the ASEAN Vision 2020, which aimed at “… transforming ASEAN into a Table 8.2 Average GDP Growth (%), 1996–2011

Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

1996–2000

2001–5

2006–11

1.35 7.18 1.06 6.17 4.99 8.35 3.59 5.84 0.87 6.96

2.08 9.36 4.71 6.33 4.76 12.87 4.60 4.83 5.45 7.51

0.94 6.80 5.86 7.99 4.57 10.30 4.75 6.33 3.09 6.83

Source: Cited in Intal et al. (2014).

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stable, prosperous, and highly competitive region with equitable economic development, and reduced poverty and socio-economic disparities” (ASEAN 1997). In October 2003, the ASEAN member countries agreed on the establishment of the ASEAN Community by 2020, resting on the three pillars of the political-security community, economic community, and socio-cultural community. In August 2006, the ASEAN Economic Ministers agreed in principle to accelerate the establishment of the AEC by 2015, as an intermediate goal to the ASEAN Vision 2020. The concept of the AEC rests on four important pillars. The first pillar is the creation of a single market and production base with free flows of goods, services, investment, and skilled labour and freer flows of capital — alongside the development of priority sectors such as food and agriculture. The second pillar concerns strengthening the competitiveness of the region as a whole. The third pillar is an emphasis on equitable development, with efforts to promote the development of small- and medium-sized enterprises (SMEs) and implement the Initiative for ASEAN Integration (IAI). The fourth pillar is to ensure ASEAN’s continuous pursuit for deeper integration into the global economy. The realization process of the AEC has several fundamental elements. The progressive and transparent liberalization of goods trade, services trade, and investment plays a pivotal role in creating more opportunities. Such liberalization at the border is complemented by joint and harmonized efforts to facilitate trade and investment at behind-the-border level. That is, ASEAN member countries should seek to reduce transaction costs associated with production networks and value chains. In another direction, coordinated connectivity enhancement constitutes an important work agenda for the Master Plan for ASEAN Connectivity (MPAC). This agenda is wide-ranging, resting on a three-pronged approach to promote the development of institutional connectivity, physical connectivity, and people-to-people connectivity. Ultimately, this agenda will work towards the easier access to new opportunities and reduction of transaction costs. Besides, development cooperation is asserted as a framework for capacity building efforts. Examples of these are the list of prioritized actions under the IAI as well as other donors’ programmes. The substance of development cooperation is specifically tailored to support the ASEAN integration process (Vo and Nguyen 2010). Development cooperation also serves to improve institutional capacity and human resources, which in turn is meaningful for exploiting new opportunities efficiently.

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How Should the RCEP Look Like? The above considerations bear relevance for the eventual design of the RCEP itself. Although the structure of the RCEP remains ambiguous — especially on whether the arrangement involves a hub-and-spoke structure — ASEAN remains the driving force for the process. The AEC Blueprint (ASEAN 2008, p. 25) states that “ASEAN shall work towards maintaining ‘ASEAN Centrality’ in its external economic relations, including, but not limited to, its negotiations for FTAs and CEPs agreements”. More importantly, as argued in the Expert Roundtable for RCEP in May 2013, the agreement needs to be consistent with the AEC’s four pillars. These requirements have a couple of implications. On the one hand, ASEAN should play an active leading role in coordinating and harmonizing integration commitments with different partners. On the other hand, the development levels and needs of the CLMV countries should be maximally addressed so that ASEAN adheres closely to its objective of reducing the intra-regional development gap, among others. In another aspect, the RCEP should be appropriately designed to attain “significant improvements over the existing ASEAN+1 FTAs”. The Guiding Principles and Objectives of the RCEP are already aligned with this purpose, specifically to achieve a modern, comprehensive, highquality, and mutually beneficial economic partnership agreement among ASEAN members and ASEAN’s FTA partners. The Guiding Principles and Objectives still reflect some ambiguities, particularly about the meaning of “significant improvements” over the existing ASEAN+1 FTAs and whether the RCEP allows for a hub-and-spoke structure. Nonetheless, the RCEP also reflects the substance of flexibility, which by no means contradicts the gradualistic approach of ASEAN. The process may take some time, but the cumulative progress so far can certainly compensate for the wait. In fact, liberalization levels under AEC in terms of trade in goods and services as well as investment are the highest in East Asia, particularly compared with most of the ASEAN+1 FTAs (Intal et al. 2014). From ASEAN’s experience, merely focusing on the traditional liberalization of goods and services trade may not help realize the full benefits of economic integration. Various surveys by the Economic Research Institute for ASEAN and East Asia (ERIA) on non-tariff measures and the utilization of FTAs already show major impediments to such a realization process. In this regard, there emerges room for more meaningful liberalization by increasing efforts toward trade and investment facilitation. Therefore, the RCEP also needs to concretize trade facilitation

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programmes that can strengthen regional production networks. Similarly, ASEAN and its partners need to commit to a development and cooperation agenda that is tied to connectivity under the RCEP. For consistency, this enhancement of connectivity should be built upon the current MPAC, which entails flagship regional projects. More importantly, the framework for development cooperation under the RCEP should also incorporate substances of inclusivity and sustainability.

Major Issues and Challenges (including those of importance for CLMV) The community building process of ASEAN also encounters some new challenges. First, the region as a whole and each member country are facing a more complex web of regional cooperation arrangements and stakeholders’ engagements. Regarding regional and bilateral FTAs involving ASEAN member countries, the so-called “spaghetti-bowl” syndrome already embodies huge inconsistencies in the rules of origin (ROO), the depth of investment and services trade liberalization. There is a need to harmonize trade and investment regimes, particularly in the aspects of behind-theborder regulations, national single windows, standards, and conformance. Coping with these inconsistencies is no easy task and the extent of such inconsistencies may even increase with new FTAs in the region. Second, ASEAN still faces a major challenge in strengthening its connectivity and centrality. It is important that ASEAN’s centrality be seen as the facilitator of process and driver of substance. Nevertheless, even the meaning of “centrality” remains ambiguous. Specifically, whether such centrality requires external agreements to be jointly concluded, centrally overseen, or negotiated in consultation with other members is far from clear. MPAC is well and broadly defined with three major pillars of connectivity (physical infrastructure, institutions, and people-to-people) and specified projects under each pillar (ASEAN 2011), yet the coordination of external development partners and the mobilization of technical and financial resources still encounter difficulties. Third, the RCEP still lacks a number of mechanisms to support and enforce its implementation. Its dispute settlement mechanism is a challenge, notwithstanding its necessity to induce proper compliance with future provisions. The process of reviewing progress and issues represents another area of deficiency. Setting up relevant committees in the ASEAN Secretariat also requires material efforts, even though resources may not be the key constraint. The relevance of the current ASEAN Secretariat for the

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RCEP presents another issue for consideration in the RCEP. Upgrading the ASEAN Secretariat to support the RCEP has its own advantages, though subject to capacity improvement and consensus within itself in settling issues with external partners. Fourth, ASEAN and its partners under the RCEP also need to mount a joint effort to address the regionally common challenges related to nontraditional security. Food security constitutes a material issue as it has implications for income and employment in agriculture and access to food at reasonable prices. Meanwhile, energy security is another concern with various impacts for the RCEP region, being both a major consumer and exporter of energy. Other issues include the spread of infectious diseases and human trafficking. However, the scope of impacts varies between countries, which may undermine the consensus on the priorities and practical measures to address the above issues. Finally, enhancing the feasibility of an East Asian Cooperation and Development Fund is no easy task, though it may help extend the IAI into the Initiative for East Asian Integration. This process should incorporate effective cooperation and coordination to support the CLMV countries, particularly in the areas of institutional reform, capacity building, and SME development. Given the importance of SME development, Intal et al. (2014) has identified eight major dimensions of the ASEAN SME development policy index (see Box 8.1). First, the institutional framework needs to enable and support the establishment and operations of SMEs. Second, given their scale, the SMEs are in dire need of efficient and cost-effective support services. Third, the business environment needs to be more enabling, thereby allowing for cheaper and faster start-ups for SMEs. In line with Box 8.1 Eight Policy Dimensions of the ASEAN SME Development Policy Index 1.  Institutional framework 2.  Access to support services 3.  Cheaper and faster start-up and better regulations for SMEs 4.  Access to finance 5.  Technology and technology transfer 6.  International market expansion 7.  Promotion of entrepreneurial education 8.  More effective representation of SMEs’ interests Source: Intal et al. (2014).

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this, regulations must be more efficient so that the compliance costs for SMEs are modest. Fourth, improving access to finance, especially formal finance, presents another area that policy efforts should build upon. Fifth, acknowledging that big corporations have their own importance and the production network is being deepened in the region, ASEAN needs policies to promote and facilitate technological advances and technology transfers for SMEs. Sixth, expanding direct and indirect access to international markets is pivotal for the SMEs. Seventh, entrepreneurial education should be promoted. Finally, ASEAN needs to allow for the more effective representation of SMEs’ interests at different policy levels.

The RCEP, TPP, and CLMV The RCEP and TPP: Similarities, Differences, and Challenges Despite attempts to promote trade liberalization at regional and plurilateral levels, the RCEP and the TPP exhibit major similarities and differences (see Table 8.3). The RCEP is a new regional FTA, yet the underlying Table 8.3 Comparison of RCEP and TPP RCEP

TPP

Common Features –  Commitment to deepen liberalization of trade in goods, services, and investment –  Commitment to openness Started in 2013 and to be concluded by 2015

Started in 2010 and likely to be concluded by end-2015

ASEAN is the driving force.

Led by the United States

Aims to form agreement that is deeper than ASEAN+1 FTAs and to support cooperation for equitable development

Aims to establish a twenty-first century FTA to address new issues (labour and environmental standards, competition, state-owned enterprises (SOEs), government procurement, intellectual property rights, etc.)

Does not need to be a “single undertaking” (Layer 1: trade in goods; Layer 2: trade in services and investments; Layer 3: movement of natural persons, competition, intellectual property rights, government procurement)

Needs to be a “single undertaking”

Source: Author’s compilations (for RCEP, based on Expert Roundtable for RCEP (2013)).

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idea of this arrangement is not new. In fact, it is an improvement of the idea of liberalization under an East Asian framework, either in the form of the EAFTA or the CEPEA. Additionally, the RCEP finds itself in line with the proposal of creating an East Asian Community, whereby a continuation of the Concentric Circle Strategy is made from ASEAN integration into an ASEAN-plus process. Similarly, the TPP endeavours for a more in-depth liberalization across a group of APEC (Asia-Pacific Economic Cooperation) economies, possessing a form similar to a comprehensive economic partnership. Some other similarities are noteworthy. Participation in demanding FTAs such as the RCEP and TPP is induced by the ex ante belief that those FTAs represent a positive-sum game. In addition, both agreements seek to make way for commitments to further liberalize trade in goods, services, and investment. Underlying such commitment is the fundamental attempt to increase openness in trade and investment regime. In this regard, adding more economies is possible, though subject to the approval of existing members. Nevertheless, the RCEP acknowledges, retains, and strives to consolidate the centrality of ASEAN, while the TPP is driven by the United States in its strategy to pivot towards Asia. While seeking to achieve deeper commitments than the existing ASEAN-plus FTAs, the RCEP also incorporates various development agendas with a philosophy of community building in an “Asian way” through deepening economic integration and narrowing the development gap (Intal et al. 2014). In essence, the RCEP can be characterized as a process similar to the AEC. Meanwhile, the TPP resembles a high-quality new-generation FTA which focuses more on commitments regarding a long list of new issues such as investment facilitation, competition, labour and environmental standards, state-owned enterprises (SOEs), government procurement, and intellectual property rights. Finally, the TPP has adopted a single undertaking approach, which implies transparency as well as pressures on members during negotiations. Such an approach is not compulsory in the RCEP process, as members may proceed in different layers.

Can Both Converge into the FTAAP? From a liberalization perspective, proceeding at a multilateral level is the first best option although it is not always possible. Therefore, bilateral and regional FTAs work best if they constitute intermediate efforts to

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multilateral ones. Accordingly, benefits can be maximized with modest adjustment costs for various participating economies if the RCEP and TPP represent different moves towards a Free Trade Area of the AsiaPacific (FTAAP). Several factors support this convergence. First, both the RCEP and TPP are committed to open regionalism and further liberalization. Second, market forces are being strengthened, thanks to these arrangements. Third, the gains will be larger if the tracks proceed to region-wide integration.1 Finally, the world trading system, AEC, and the RCEP should be dealing with “twenty-first century trade issues” such as labour standards and competition policy. The TPP appears to be close to that although controversial issues remain with the arrangement. Also, any region-wide agreement will have to reconcile higher standards with the capacities and needs of their diverse economies. The goal, then, should be to include innovative provisions for cooperation to help reduce development gaps. In this way, the TPP is not in conflict with the RCEP. The above factors, nonetheless, fail to overshadow some material risks underlying the TPP and the RCEP. If not appropriately designed and promoted, both agreements may merely represent inappropriate ways of dealing with regional geopolitical problems. Arguably, the RCEP was, in some sense, promoted to rival the TPP and more importantly to counter the United States’ “pivot” to Asia. The distribution of benefits from further integration among regional economies presents another source of risk. While the benefits depend also on each country’s own liberalization and reform efforts, the unequal distribution of benefits may undermine the incentive for further liberalization. Another question lies in whether ASEAN can retain centrality in the presence of the RCEP and the TPP, acknowledging that they both may evolve into an FTAAP. While the RCEP was initiated by ASEAN, only four out of ten ASEAN member countries are in the TPP negotiations. Apparently, the level of liberalization depends upon the development level and objectives of each country. Yet the different attitudes towards the TPP — often regarded as a high-quality FTA of the twenty-first century — somehow show that ASEAN as a whole may not be ready to initiate and lead bolder liberalization attempts. Their capacity to do this is by no means adequate. Still, it also appears that adverse side effects could be managed with thoughtful policy responses, such as policies to promote high economic interdependence, strengthen dialogue, and reinforce the role of ASEAN (Petri and Vo 2012).

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The RCEP, TPP, and Vietnam Vietnam is among the few countries that holds memberships in both the TPP and the RCEP. There are several reasons for this. First, there have been significant developments in the regional geopolitical arena that requires careful consideration from Vietnam. Balancing relationships with major powers is almost unavoidable. Meanwhile, the key principles of having no military alliances, no reliance on one to fight against another, and no foreign military bases were also asserted. More importantly, regional stability and the mitigation of geopolitical risks are crucial for the development of all countries in the region, including Vietnam. Second, pursuing a development paradigm that relies on exports and investment, Vietnam is striving for the expansion of and easier access to major markets. Opportunities for trade, Foreign Direct Investment (FDI), transfers of technology, and management skills are among the top inducements for Vietnam. Finally, given their tough requirements, the TPP and the RCEP can serve as credible sources of pressure for spurring domestic reforms. The lessons from Vietnam’s preparation for WTO accession show that institutional reforms, especially those related to the SOE sector and competition, may not be appropriately designed and/or enforced in the absence of such pressures. The TPP and the RCEP are also expected to produce ample positive impacts on Vietnam’s economy. Table 8.4 shows that its GDP in 2025 may increase by up to US$48.7 billion (or 14.3 per cent) and US$17.3 billion (or 5.1 per cent), respectively, under the TPP or the RCEP.2 Wider membership of the TPP also increases Vietnam’s income gains. Notably, under the various possible scenarios of the TPP (with twelve members or sixteen members), Vietnam has the largest income gains in percentage terms (10.5 per cent and 14.3 per cent, respectively). The above projected benefits of the TPP and the RCEP can be explained by several reasons. First, the TPP and the RCEP include many of Vietnam’s important economic partners such as the United States, China, Japan, Australia, and ASEAN. These also represent the markets for Vietnam’s major export commodities; and access to these markets may be enhanced due to further tariff reductions. Second, FDI inflows to Vietnam are likely to increase considerably so as to take advantage of the new opportunities and incentives created by the TPP and the RCEP. In particular, the FDI projects from many advanced partners may bring about substantial positive spillovers, including the transfer of technology

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1,978

292

2,004

Americas

Canada

Chile

Mexico

322

2,117

Korea

Philippines

5,338

Japan

431

1,549

Indonesia

Malaysia

5,233

India

406

17,249

China

Hong Kong

20

Brunei

20,273

34,901

United States

Asia

320

24,867

Economy

Peru

GDP 2025 (bn 2007 dollars)

–0.80

24.20

–2.80

104.60

–2.20

–2.70

–0.50

–34.80

0.20

125.20

76.60

3.90

9.90

2.50

8.70

101.70

TPP12

22.10

30.10

50.20

128.80

62.20

–6.90

–1.30

–82.40

0.40

299.80

108.20

5.40

31.20

3.50

12.40

160.80

TPP16

7.60

14.20

82.00

95.80

17.70

91.30

46.80

249.70

1.20

627.00

–0.10

0.00

2.80

0.00

–0.10

2.50

RCEP

Income Gains (bn 2007 dollars)

17.40

43.50

131.80

227.90

41.30

226.20

88.40

699.90

1.60

1,658.60

295.20

6.20

73.70

7.60

29.70

412.40

FTAAP

–0.24

5.61

–0.13

1.96

–0.14

–0.05

–0.12

–0.20

0.95

0.36

0.38

1.22

0.50

0.86

0.44

0.41

TPP12

6.88

6.98

2.37

2.41

4.02

–0.13

–0.32

–0.48

1.84

0.86

0.53

1.69

1.56

1.20

0.63

0.65

TPP16

2.35

3.29

3.87

1.79

1.14

1.74

11.54

1.45

5.85

1.80

0.00

0.02

0.14

0.00

0.00

0.01

RCEP

5.42

10.09

6.23

4.27

2.67

4.32

21.77

4.06

7.64

4.75

1.46

1.93

3.68

2.61

1.50

1.66

FTAAP

Per Cent Change from Baseline

Table 8.4 Projected Income Gains under Different TPP and RCEP Scenarios

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83

1,634

1,433

Other ASEAN

Oceania

Australia

13,208

62.20

223.40

–9.00

–1.40

–3.70

–14.10

4.10

6.60

35.70

–2.40

Source: Author’s summary from Petri and Plummer (2013).

ASEAN

Memorandum

103,223

16,241

Rest of the World

World

2,865

22,714

Europe

Russia

41,280

Others

201

10.70

340

Vietnam

New Zealand

–0.40

558

Thailand

–1.00

840

Taiwan

7.90

415

TPP12

Singapore

Economy

GDP 2025 (bn 2007 dollars)

217.80

450.90

–16.30

–3.00

–4.90

–24.20

4.70

9.80

14.60

–0.50

48.70

42.50

–6.40

12.30

TPP16

77.50

644.40

–6.60

–5.30

5.10

–6.80

1.90

19.80

21.70

1.60

17.30

15.50

–16.10

2.40

RCEP

Income Gains (bn 2007 dollars)

230.70

2,279.60

–79.00

287.50

–36.40

172.20

6.40

30.10

36.50

3.50

75.30

30.00

53.70

18.10

FTAAP

Table 8.4  (continued )

0.48

0.22

–0.06

–0.05

–0.02

–0.03

2.02

0.46

0.65

–0.42

10.52

–0.44

–0.12

1.90

TPP12

1.67

0.44

–0.10

–0.10

–0.02

–0.06

2.36

0.68

0.89

–0.58

14.34

7.61

–0.76

2.97

TPP16

0.59

0.62

–0.04

–0.18

–0.02

–0.02

0.92

1.38

1.33

1.88

5.10

2.79

–1.92

0.58

RCEP

1.77

2.21

–0.49

10.04

–0.16

–0.16

3.16

2.10

2.23

4.19

22.15

5.38

6.39

4.37

FTAAP

Per Cent Change from Baseline

162 Vo Tri Thanh

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and management know-how. Finally, the fulfilment of TPP and RCEP commitments will help build a transparent and competitive investment environment in Vietnam, thereby facilitating the efficient allocation of capital resources. Still, the above figures and arguments are only presented on an ex ante basis. As Vietnam‘s seven years of WTO membership show, opportunities may instead become challenges in the absence of appropriate macroeconomic policy responses and necessary domestic reforms. Hence, the realization of TPP- and RCEP-induced opportunities depends crucially on whether Vietnam can overcome the challenges in implementing its commitments. Unlike the context of the early 1990s, economic reforms in the country — still at low development stage — now interact very closely with the economic integration process. The gap between the requirement of new-generation FTAs3 and the actual capacity of Vietnam, meanwhile, remains significant. As such, the country needs to make further efforts to improve economic institutions, especially its legal framework and enforcement structure, so as to internalize the commitments made under those FTAs. At the same time, Vietnam also has to harmonize its commitments under various integration tracks. As discussed previously, Vietnam’s memberships in many FTAs show a commitment to establish a more favourable investment environment in the country. Yet, the benefits of such agreements may be reversed if the commitments under those FTAs are inconsistent or developed without sequential consideration. Should this happen, businesses will encounter difficulties in developing appropriate investment strategies if adjustment costs turn out to be high. In the meantime, Vietnam needs to restore and further consolidate market confidence. This again depends importantly on political will as well as consistency in macroeconomic stabilization and the long-term economic restructuring process. The TPP and the RCEP may produce significant net benefits, yet the pattern of impact may vary across sectors and enterprises. The previously protected and/or weak ones may experience contraction or even bankruptcy, resulting in associated social consequences. In general, minimizing adjustment costs and social risks in the economic integration process such as the TPP and the RCEP should be the main priority in Vietnam’s agenda. In this regard, it may be convenient for Vietnam to focus on the TPP as it shares some consistency with the reforms Vietnam would like to and/or should follow in its new stage of development.

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The TPP and CLM The CLM (Cambodia, Lao PDR, and Myanmar) countries and some other ASEAN member countries are currently not in the TPP negotiations. Given the depth and scope of its liberalization commitments, the TPP may be expected to produce investment and trade diversion effects on the CLM countries. Still, mitigating the adverse impacts and disadvantages for nonTPP negotiating members is not impossible. Several lines of effort may be proposed, which necessarily require active involvement of the CLM countries. First, the commitments in the AEC and the RCEP need to be harmonized with comparable depth, especially for the post2015 period. Second, harmonization can be even promoted further by incorporating some new areas covered in the TPP to the AEC and the RCEP processes. Here, the experience of the four ASEAN member countries involved in the TPP negotiations will be valuable (Intal et al. 2014). Third, the CLM countries should be encouraged to implement unilateral liberalization and domestic reforms. Finally, capacity building efforts should be provided to support the CLM countries.

Conclusion A number of quantitative studies already show that the RCEP can bring substantial benefits to the CLMV countries. The optimality of such benefits, nonetheless, is by no means automatic since the extent of the benefits also depends upon each country’s own reform efforts and the effectiveness of assistance to the CLMV. Most importantly, the process needs to create easier access to and capacity in exploiting new opportunities for growth and sustainable development. In that sense, the AEC template is a valuable experience for RCEP negotiations and establishment. There are several factors supporting the convergence of the RCEP and TPP towards a FTAAP. Still, the risks of competition between the RCEP and the TPP cannot be underestimated. That is why the new requirements for sustainable development in the process of Asia-Pacific economic integration need to be strengthened. In this context, ASEAN can play an important role.

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East Asian and Asia-Pacific integration can succeed only with the strengthening of ASEAN integration. Acknowledging and facilitating the centrality of ASEAN is an important pre-condition. Also, ASEAN integration will not succeed if the development gap in ASEAN widens too much. Accordingly, the successful formation of the AEC itself represents a condition of essence.

Notes 1. See Petri and Plummer (2013) for a reference. 2. Measured at 2007 dollar. 3. Such as TPP and RCEP, not to mention European Union–Vietnam FTA, Vietnam–Korea FTA, etc.

References ASEAN Secretariat. Master Plan on ASEAN Connectivity. Jakarta: ASEAN Secretariat, June 2011. ———. ASEAN Economic Community Blueprint. Jakarta: ASEAN Secretariat, 2008. ———. “ASEAN Vision 2020”. Kuala Lumpur, 25 December 1997. . Economic Research Institute for ASEAN and East Asia (ERIA). Mid-Term Review of the Implementation of AEC Blueprint: Executive Summary. Jakarta: ERIA, October 2012. Expert Roundtable for Regional Comprehensive Economic Partnerships (RCEP). “Recommendations on the Approaches to be Adopted in the Negotiations of RCEP and Its Implementations” (Draft). Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), 2013. Intal, Jr., Ponciano, Yoshifumi Fukunaga, Fukunari Kimura, Phoumin Han, Philippa Dee, Dionisius Narjoko, and Sothea Oum. ASEAN Rising: ASEAN and AEC Beyond 2015. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), 2014. Itakura, Ken. “ASEAN Prospects Beyond 2015: A Baseline Simulation with GTAP”. Paper presented at the “Final Workshop of ASEAN and AEC: Beyond 2015 Project”, organized by the Economic Research Institute for ASEAN and East Asia (ERIA), Jakarta, Indonesia, 26 November 2013. Petri, Peter A. and Michael G. Plummer. ASEAN Centrality and the ASEAN-US Economic Relationship. Policy Studies no. 69. Honolulu: East-West Center, November 2013.

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Petri, Peter A. and Vo Tri Thanh. “Asian and Trans-Pacific Initiatives in Regional Integration”. In State of the Region 2012–2013. Singapore: The Pacific Economic Cooperation Council, September 2012. Vo Tri Thanh and Anh Duong Nguyen. “Development Cooperation in East Asia”. Paper presented at the conference on “East Asia Economic Integration in the Wake of Global Financial Crisis”, Seoul, South Korea, 7 July 2010.

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9 RCEP: An Indian Perspective Amitendu Palit Introduction Nearly two decades after announcing its Look East Policy (LEP), India is poised to play a much greater role in the Asia-Pacific than it had probably envisaged at that point in time. After several years of lukewarm ties with most countries of the region since the beginning of the Cold War, India’s strategic economic links with the region have increased sharply. This is reflected in its presence in regional institutional mechanisms like the East Asia Summit (EAS), ASEAN Regional Forum (ARF), and several other bilateral trade and economic cooperation agreements in the region. Notwithstanding these, it is still not as deeply entrenched in the economic domain of the Asia-Pacific as it could possibly be. A major factor behind the relatively low integration is India’s hesitation to decisively abandon a defensive and inward-looking trade agenda. The hesitation has been a compelling determinant of its relatively lesser interface with a region that has long taken a more liberal approach to trade and investment than India and followed strongly outward-oriented policies. The reputation of being a hesitant economic liberalizer and difficult trade negotiator is firmly affixed on India as it negotiates the Regional Comprehensive Economic Partnership (RCEP) — its largest trade and economic deal with the Asia-Pacific region so far. The gradual maturing of negotiations at the RCEP has been accompanied by significant domestic changes in India, the most notable being a change in government with the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) 167

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having a pronounced right-of-centre political and economic ideology replacing the more left-of-centre Congress-led United Progressive Alliance (UPA). There are wide expectations from the new government in pursuing a more aggressive course of market-based economic reforms than its predecessor. Such expectations extend to India adopting a forward-looking and constructive approach in its external trade negotiations, including the RCEP. This chapter examines the context of India’s participation at the RCEP, including its active Free Trade Agreement (FTA) policy and the questions about the benefits of these FTAs. It illustrates the economic and strategic significance of the RCEP for India, particularly the gains accruable from its greater presence in global value chains and a larger strategic role in the region. However, as the chapter points out, India faces significant challenges in negotiating at the RCEP due to the domestic industry’s lack of enthusiasm for FTAs and the absence of a holistic approach to trade negotiations. In order to ensure greater confidence in the RCEP, the chapter emphasizes the importance of making industry a key stakeholder in the negotiations. It concludes by arguing that the RCEP offers India the opportunity of reducing its distance from the evolving trade architecture in the region and should hence be taken as the first step in this regard.

Context India’s presence at the RCEP needs to be viewed in the context of its deepening engagement with the Asia-Pacific and its significant involvement in bilateral and regional trade agreements. The RCEP marks advancement in both respects. In terms of greater engagement with the Asia-Pacific region, the RCEP represents the extension of the various trade and economic institutional agreements that India has entered into with different countries of the region. The most significant among these are the agreements with the Southeast Asian region in goods and services and investments. The other important economic agreements that India has with the region include bilateral ones such as Comprehensive Economic Partnership Agreements (CEPAs) with Japan and Korea, Comprehensive Economic Cooperation Agreements (CECAs) with Singapore and Malaysia, and the FTA with Thailand. The RCEP will enlarge the domain of the preferential market access space for India in the Asia-Pacific well over what it already has through various agreements. Creating preferential market access domains has been

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a key objective of India’s external engagement policy, which is evident from its pursuit of a highly active Regional Trade Agreement (RTA) and FTA strategy. It began negotiating the RCEP at a time when its FTA negotiations with Europe and Canada were at fairly advanced stages. At the same time, it is also at various stages of progress in negotiating FTAs with Australia, New Zealand, Indonesia, and the Gulf Cooperation Council (GCC) countries. India is also reviewing its existing preferential trade agreements with Sri Lanka, Peru, and Thailand, with the possible scope of upgrading and expanding these. It is important to understand the context of the RCEP, especially when it is the largest RTA that is being negotiated by India at a time when many of its FTA negotiations are finding it difficult to make progress. Negotiations with Europe and Canada, for example, have been going on for quite some time. Despite being discussed substantively and covering large grounds, the negotiations remain inconclusive due to the lack of agreement with negotiating partners on key issues.1 The delay in concluding FTAs has exacerbated India’s reputation of being a difficult negotiating partner with inflexible positions on certain issues. This impression would prevail among the RCEP members too with the India–ASEAN services agreement taking fairly long to conclude, similar to the lengthy delays experienced by the India–ASEAN goods agreement earlier.2 The RCEP negotiations therefore, while being economically and strategically significant for India in several aspects, also comprise challenges in terms of it having to fight the rather negative impression it has acquired. These impressions have been strengthened by the rather poor performance of the Indian economy during the last couple of years leading to slower economic growth and adverse ratings by international agencies, and the inability of the incumbent Congress-led UPA government to implement critical reforms in product and factor markets. The final factor in the contextual outlook for the RCEP is the new government in India that took charge from May 2014, led by a prime minister recognized for a pro-business outlook. Trade and export promotion is a major priority, along with the focus on improving business conditions that has led the new government to devote attention to the removal of procedural hindrances to investment.3 The new long-term national foreign trade policy (2015–20) has been announced with specific market access strategies for manufacturing and service exports and domestic reforms for increasing competitiveness of Indian exports. At the same time, the new government has been quick to begin a review of India’s existing RTAs and FTAs, assessing the benefits flowing from these. The review has

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arguably been influenced by several segments of the domestic industry complaining about the RTAs and FTAs resulting in far greater imports into India than exports. Indeed, India’s trade deficits with its FTA partners have increased, indicating that signing FTAs as a strategy for promoting exports has not worked (Dhar 2014). The new government’s approach to FTA negotiations, including the RCEP, is likely to be conditioned by the objective of increasing market access for Indian exports in an aggressive fashion. This would entail the Indian perspective on negotiations at the RCEP factoring in issues like how the RCEP can be utilized for the deeper integration of Indian producers in global value chains (GVCs). Furthermore, the new government’s active engagement of major RCEP members like Japan, China, Australia, Singapore, and Vietnam soon after assuming office points to the significance of these members and the RCEP grouping in India’s vision of the region’s strategic architecture. This is vindicated by India’s decision to upgrade its “Look East Policy” by a more action-oriented “Act East” strategy.4

Significance The importance of the RCEP in India’s external trade strategy can hardly be overemphasized. The government has been emphatic in highlighting this aspect as is evident from the Indian Commerce Secretary’s statement: “Regional Comprehensive Economic Partnership (RCEP) is an important pact for India and industry should equip itself to avail the opportunities which would emerge from this” (Press Trust of India 2014a). There is little doubt that the Indian commercial and trade establishment visualizes the RCEP as a “game changer” primarily due to the benefits it can bring by integrating India deeper with the economies of the Asia-Pacific. Closer integration with the Asia-Pacific economies is important for India for several reasons. Since the announcement of the LEP in the early 1990s, the Indian economy has developed greater links with several economies in East and Southeast Asia like China, Indonesia, and Singapore, particularly during the last decade. Seven economies negotiating the RCEP have been among India’s top twenty-five trade partners since 2000 (see Table 9.1). Though the relative rankings of these economies among India’s top trade partners have varied over time, their combined share in India’s total trade has increased from 15.1 per cent in 2000–1 to 21.5 per cent in 2013–14. Trade with almost all the economies, except Japan, has increased over time, with the largest increases being for China

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Table 9.1 RCEP Economies Among India’s Top Twenty-five Trade Partners5 2000–1

2013–14

Country

Rank

Share (%)

Country

Rank

Share (%)

Japan Singapore China Malaysia Australia Korea Indonesia Total

 6 11 12 14 16 19 22

 3.8  2.5  2.5  1.9  1.6  1.4  1.4 15.1

China Indonesia Singapore Korea Japan Malaysia Australia

 1  8 10 15 16 21 22

 8.7  2.6  2.5  2.2  2.1  1.8  1.6 21.5

Source: Computed from the Export Import Data Bank, Department of Commerce, Ministry of Commerce & Industry, Government of India, .

and Indonesia. Given the significance of these economies in India’s overall trade, as well as the growing trade links with other RCEP members like Thailand, Philippines, Vietnam, Myanmar, and New Zealand, the RCEP is a major preferential trade agreement for India. Empirical studies measuring the quantitative impact of the upcoming mega-regional trade agreements (henceforth mega-regionals) in the AsiaPacific point to significant income and export gains for India from the RCEP, with these gains far outstripping the potential economic losses from diversionary impacts of the Trans-Pacific Partnership (TPP) that precludes India (Petri and Plummer 2014). The gains are mostly accrued from preferential access to the markets of some of its major trade partners in the region, such as China and Australia, as well as the possibility of obtaining incremental preferential access to other major regional markets like Indonesia, Thailand, Vietnam, and the Philippines above what is currently available through the India–ASEAN FTA. The RCEP group offers India the prospects of connecting deeper with markets that can absorb more of its exports, compared with traditional Western markets, many of which are yet to recover from the economic contractions experienced since the global financial downturn of 2008. India’s major export markets, such as those in North America and Europe, are only showing subdued improvements in the growth of real gross domestic product (GDP) compared with the emerging markets in Asia,6 several of which are in the RCEP.

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From the Indian perspective, the RCEP comprises an ideally diverse combination of industrially mature economies (Japan, Korea, and Singapore), robust middle-income economies (China, Malaysia, Indonesia, Thailand, and the Philippines), and large resource-intensive high-income economies (Australia, Brunei, and New Zealand). The diversity ensures the sustenance of discrete growth impulses in different parts of the RCEP geography — even if in a non-uniform fashion — at various points in time. This is in marked contrast to Europe and North America where subregional business cycles and growth trajectories are more consistent and synchronized. India should benefit from the various growth cycles in the RCEP economies and overcome the absence of similar impulses during the periods of economic contraction in its traditional economic partners. These benefits multiply with the RCEP offering Indian industries the possibilities of playing more prominent roles in the GVCs running through it. With country positions in contemporary trade negotiations becoming increasingly determined by the comparative advantages perceived in performing discrete tasks in various industry value chains, the RCEP would be influenced by similar priorities. India’s participation in GVCs — measured both in terms of the use of its products as imported inputs in exports of other countries or its own use of imported inputs in exports — is among the lowest within the RCEP group (see Figure 9.1). Several other RCEP members — particularly Singapore, Malaysia, the Philippines, Thailand, Vietnam, and Korea — have much higher participations in GVCs reflecting their active involvements in regional intra-industry trades. While one can argue that the higher presence of these economies in value chains is due to their proficiencies as processing centres for varied industrial intermediates, India’s presence in the GVCs is lower than even the more “non-processing” and resource-intensive RCEP economies like Australia, Brunei, and Indonesia (see Figure 9.1). This is an anomaly that India would be keen on correcting with the distinct opportunities that the RCEP can provide. India’s involvement in the rule-making process of global trade has been largely confined to the World Trade Organization (WTO). However, mega-regionals — such as the TPP, Transatlantic Trade and Investment Partnership (TTIP), the Pacific Alliance (PA), and the RCEP — are emerging as the dominant architectures in global trade. These various agreements, including the RCEP, are rewriting trade rules by stretching trade governance to areas where the WTO has been found wanting. These include the various WTO “plus and extra” issues such as trade

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Figure 9.1 RCEP Members in GVC7 Vietnam Thailand Singapore Philippines Malaysia Cambodia Brunei Darussalam Indonesia India China New Zealand Korea Japan Australia 0

10

20

30 FP

40

50

60

70

80

BP

Note: FP is forward participation and BP is backward participation in GVCs. See endnote 7. Source: OECD–WTO Trade in Value Added (TiVA) statistics from May 2013, a joint initiative of the OECD (Organisation of Economic and Co-operative Development) and WTO (World Trade Organization).

in services, intellectual property, government procurement, competition policy (including State-Owned Enterprise (SOE) issues), investment, and labour and environment standards. These issues have been preponderant in global trade for several years now but the multilateral framework of the WTO has lacked the political consensus and institutional capacity for addressing them exhaustively. Indeed, subjects like labour, environment and SOEs have not been discussed at the WTO at all. While the RCEP is expected to be much less ambitious than the TPP and TTIP in addressing these issues, it will nonetheless focus on some of them, such as trade in services, investment, intellectual property, and competition (ASEAN 2012). The RCEP is the only mega-regional that includes India. There are several common members between the RCEP and the TPP (Australia, Brunei, Japan, New Zealand, Malaysia, Singapore, and Vietnam). Korea is expected to join the TPP in the near future. At the same time, China is also actively aligning its regulatory policies with many of the rules

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likely to be implemented by the TPP. These are being done through efforts like the ongoing bilateral investment discussions with the United States and the opening of dedicated enclaves — such as the Shanghai Free-Trade Zone (SFTZ) — permitting trade in services on the basis of a “negative list” approach. It is important for India to keep abreast of these developments. The RCEP offers it two opportunities in this regard. First, it enables India to contribute to the rule-making process in the mega-regionals, particularly in the WTO plus and extra issues that the RCEP takes up. Second, by doing so, this would help India align its domestic regulations in a manner that reduces their distance from the standards required in more ambitious trade compacts like the TPP. It is also important to note the geostrategic significance of the RCEP for India. By connecting India to a regional initiative that includes several members of the Asia-Pacific Economic Cooperation (APEC), the RCEP functions as a stepping stone to India’s possible entry into the APEC club in future and assuring its greater strategic presence in the Asia-Pacific region. By getting it closer to the APEC architecture, the RCEP allows India the opportunity of overcoming its historical neglect of the region caused by a combination of factors including an inward-looking trade policy, ideological commitment to non-alignment, and discomfort with laissez-faire. This had created an almost unbridgeable distance between India and APEC (Palit 2014a).

Challenges As mentioned before, India’s trade negotiations present both opportunities and challenges. The latter, in particular, are multitudinous and complex. The critical aspects of some of these challenges are discussed below. Trade negotiations in India have been characterized by prominent disconnects between the domestic industry and the government. Most of India’s FTAs, certainly the relatively early ones, were motivated more by strategic motives than well thought out economic assessments. The enthusiasm of the government in negotiating and signing FTAs with various countries and groups has not been accompanied by similar enthusiasm on the part of the domestic industry. A major reason behind the mismatch in enthusiasm is the aversion among the majority of Indian industries to opening up. With India relatively less competitive in the final production of most manufactures compared to its East and Southeast Asian neighbours, the fear of being

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swamped by cheaper imports has always been a threat for producers — resulting in a lack of enthusiasm for FTAs. These apprehensions have not been confined to producers of final goods for consumption and investment, but have also affected domestic producers of raw materials and intermediaries. The result has often been the creation of an “inverted” duty structure where import duties on intermediate inputs are higher than those on final products, creating further inefficiencies for domestic manufacturers. The government-industry disconnect on FTAs continues to loom large in the backdrop of the RCEP negotiations. As mentioned earlier, India’s existing FTAs are being reviewed by the government for identifying specific benefits these have produced for the domestic industry. The review is also aiming to address the perception that some FTAs have generated more benefits for partner countries than India (Press Trust of India 2014b). There is little doubt that most FTAs have led to rise in imports from partner countries. Lower tariffs in FTAs like those with ASEAN and its members have indeed increased imports of intermediate goods and components (Francis and Kallummal 2013). However, when assessing the rise in imports, it is important to note that tariff reduction — particularly in automobile parts and components — was lobbied hard for by several India-based automobile assemblers and original equipment manufacturers (OEMs). It is evident that all segments of the Indian industry do not have the same perspectives on FTAs and are selectively defensive or offensive in pressing their interests — though the defensive interests mostly outweigh the latter. Indeed, the demand for lower duties on imported auto components has paradoxically been made by the same assemblers urging for higher import tariffs on vehicle imports. Such demands from significant industry interests represented by influential associations — like the Society for Indian Automobile Manufacturers (SIAM) or in case of dairy products voiced by the largest dairy cooperative, Amul — can hardly be overlooked and have significant influence on ongoing trade negotiations (Palit 2014b). The RCEP, much like India’s FTA negotiations with the European Union (EU), might be impacted by these influences. The cynicism of significant sections of the Indian industry on engaging in FTAs has resulted in their low utilization. Lack of knowledge about the multiple FTAs that India has signed or is currently negotiating has left many of these agreements underutilized. Additionally, the high user costs of FTAs — typically in comprehending their legal content,

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implications, and complex Rules of Origin (ROOs) — have restricted their use (Mehta 2014). The India–ASEAN goods FTA is a case in point. The FTA insists on the simultaneous satisfaction of both the value addition and change in tariff classification criteria. While such insistence discourages imports into India, it also disheartens exporters from using the FTAs, making them redundant. India’s challenge at the RCEP will be to keep its rules and procedures functionally simple and user-friendly. For doing so, it will need to adopt a constructive and business-enabling approach to regulations. The foremost challenge for India will be to make the domestic industry a willing partner in the RCEP negotiations. India’s hesitation in fully committing to outward-oriented external trade policies has been largely due to the extensive defensive interests of domestic industrial constituencies unwilling to accede greater local market access to foreign producers (Palit 2014b). While guarding sensitive sectors through tariffs and other restrictive measures is common in international trade and would also be visible at the RCEP, particularly for market access in agriculture, India needs to approach non-agricultural tariffs in a more rational and objective fashion. This is particularly important for seizing opportunities in GVCs. The competitiveness of India’s producers and its prospects of moving into value chains would continue to be hampered if import duties on raw materials and semi-finished intermediates remain high. For example, although India has good prospects for playing a more prominent role in the textiles GVC, higher customs duties on chemicals used for polyester fibre production make domestic textile production inefficient. It is important to correct these distortions through the RCEP. The challenge in this regard would be to identify the various distortions affecting efficiency and eliminate them systematically. An important part of this process would be to convince the constituencies about the futility of the tariffs they lobbied for in the first place. The exercise is unlikely to be successful unless the Indian industry is convinced about the larger and long-term gains that a mega-regional like the RCEP can bring for it. One of the existing ASEAN+1 FTAs is likely to be chosen as the basic framework for the RCEP. The India–ASEAN FTA has the lowest depth and coverage among all ASEAN+1 FTAs. This is unlikely to be chosen as the basic framework since all other negotiating partners have already committed to greater coverage and higher preferential access. Any other ASEAN+1 FTA chosen as the base would entail proportionally

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greater grants of preferential market access by India compared with other RCEP members. There is little choice India has in this regard. Again, going along with the RCEP would involve the inevitability of convincing domestic defensive lobbies about the importance of India “giving up” more. This will increase the challenge and difficulty of involving the domestic industry as a stakeholder in the RCEP process. At the same time, benefits obtained by consumers from the RCEP could be substantive given the greater access to cheaper imports, both as final products as well as intermediates. Convincing the industry on the lines of these benefits might be a useful strategy. Though India has negotiated comprehensive bilateral economic agreements with various RCEP members — notably Japan, Korea, Malaysia, and Singapore — it has also followed the practice of first negotiating goods agreements before negotiating services and investment pacts. One of the reasons behind the approach is the excessive emphasis on tariffs and market access for goods. Most of India’s existing bilateral agreements are relatively shallow in terms of their coverage of services and WTO plus and extra issues (Wignaraja 2011).8 This applies even for the more comprehensive agreements with the four RCEP members mentioned above. For obtaining the maximum benefits from a mega-regional like the RCEP, it is important for India to approach the negotiations holistically with particular attention given to the importance of negotiating trade and investments together. From the GVC perspective, it is clear that large firms decide on investments in various locations on the basis of the local producer’s competitive advantage in executing specific functions of the industrial value chain. India needs to appreciate this perspective and address market access through a composite prism of “border” and “behind-the-border” issues that would involve a simultaneous and equal focus on tariffs and investment rules. The change in the Indian approach to negotiations at the RCEP, in terms of taking trade and investment together, needs to be complemented by a sharper focus on offensive trade interests. India’s trade negotiating agendas have been overtly defensive. The new approach at the RCEP needs to come in through a clear comprehension and articulation of export interests in value chains. The rationalization of tariffs and nontariff barriers (NTBs) along with trade facilitation should be visualized accordingly. In services, India must stake its offensive interests in mode 3 service exports by gaining greater access for its producers in RCEP markets. These interests should be placed above the levels allowed in

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India’s FTAs with ASEAN and other RCEP members. An aggressive and offensive agenda seeking greater market access for Indian exports of goods and services is the most effective way of making the Indian industry a willing partner in the RCEP negotiations and extracting the highest gains out of the deal.

Thoughts for the Future There is little doubt that the RCEP is one of the most important FTA negotiations for India. The economic and strategic benefits flowing from the RCEP has firmly established its significance from an Indian perspective. Despite this, the RCEP negotiations also entail significant challenges for India. Two of these challenges are: making the domestic industry an engaged and constructive stakeholder in the RCEP negotiations; and adopting a radically new negotiation approach through a synchronized focus on trade and investment, while pursuing export promotion interests. Both challenges are interconnected and need to be addressed through a clear comprehension of long-term trade interests. India’s new long-term foreign trade policy (2015–20) outlines the new government’s vision on making trade a vital instrument for India’s economic growth and prosperity. The policy emphasizes the importance of RCEP in this regard. If the policy is successful in convincing the domestic industry about the benefits of engaging in FTAs and increasing their utilization, the RCEP negotiations would possibly result in considerable profits. In the absence of greater industrial participation, however, the RCEP might remain indistinguishable from several other largely underutilized FTAs entered into by India. The offensive interests of the Indian industries in FTAs have been largely selective up until now. As with the automobile assemblers mentioned earlier, these interests are mostly from industries where foreign firms have developed close associations with local counterparts or where Indian industries are more involved in GVCs (Palit 2014b; Francis and Kallummal 2013). The information technology (IT) and pharmaceutical industries are other such examples. As more Indian industries get involved in GVCs and develop closer relations with foreign lead firms, the incentive to use FTAs like the RCEP more effectively would increase. The opportunity to insert local industries into GVCs is a major long-term benefit that the Indian government needs to impress upon the domestic industry, in order to make RCEP and other FTAs

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meaningful. It is encouraging that India’s Ministry of Commerce has initiated various consultations with the domestic industry on RCEP to increase the awareness and faith in the agreement. The new government has also made an encouraging start by focusing on improving domestic competitiveness. The defensive position of most Indian industries on foreign trade manifesting in protective demand for tariffs on imports can be traced to their inability to achieve efficiencies in domestic production. Rising costs related to expensive raw and intermediate materials, infrastructure deficiencies, and regulatory bottlenecks contribute to these inefficiencies. Many of these issues require urgent intervention through corrective domestic policies. The efforts to improve India’s business environment by eliminating or amending outdated procedures is an encouraging step. 9 These reforms aiming to increase domestic competitiveness would reduce the protectionist tendencies of the Indian industry over time. They would also naturally help to integrate Indian producers into GVCs more quickly. The good work on improving domestic competitiveness needs to be complemented by a forward-looking vision on external engagement. For India, the RCEP cannot and should not be construed as an end in itself. The trade and economic architecture in the Asia-Pacific region is changing rapidly. The TPP is the most prominent economic compact responsible for this change. Once concluded and implemented, the TPP’s regulatory standards are expected to establish the benchmarks for a modern twenty-first century trade agreement in the Asia-Pacific. The shadow of the TPP looms large on the RCEP. With several common members, the RCEP would be influenced by the contents of the TPP. At the same time, several actors in the Asia-Pacific region are also actively considering the prospect of a Free Trade Area of the Asia-Pacific (FTAAP). It is not clear whether the two mega-regionals — TPP and RCEP — will eventually proceed on a path of structural convergence to yield the FTAAP. But irrespective of such outcomes, the recognition of the significance of the TPP and a much distant but nonetheless conceivable FTAAP is essential from India’s perspective. India’s long-term objective of being an active strategic presence in the Asia-Pacific through wider and deeper integration with the regional economies and its economic architecture cannot be achieved by overlooking the TPP. India needs to view the RCEP as the first major step towards drawing closer to the TPP and the Asia-Pacific’s emerging trade governance framework.

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Notes 1. The FTA talks with Europe have run into difficulties over tariffs on wines and automobiles, market access issues in government procurement, intellectual property, data security, and temporary movement of professionals. India called off talks in August 2014 due to Indian generic drugs being denied entry in Europe. Discussions on the Indo–Canada FTA have been encountering problems over tariffs on agricultural products, the “negative list” approach for discussing market access in services and movement of professionals. 2. The India–ASEAN goods FTA was operationalized from January 2010 after more than five years of long negotiations. The services agreement has taken almost as long and has been finally concluded and formalized in September 2014. 3. In his vision for “Brand India” outlined a couple of months before the recent elections to the Indian Parliament in April–May 2014, Prime Minister Narendra Modi, then the Chief Minister of the state of Gujarat and the BJP’s Prime Ministerial candidate, mentioned trade, technology, tourism, talent, and tradition as the 5Ts for building “Brand India”. These Ts were also mentioned in the Indian President’s address to the Parliament after the election of the new government and while laying out the roadmap for the government. See Menghani (2014). 4. The “Act East” policy was announced by Indian Prime Minister Narendra Modi at the India–ASEAN Summit in Myanmar on 12 November 2014. See Prashanth Parameswaran, “Modi Unveils India’s ‘Act East Policy’ to ASEAN in Myanmar”, The Diplomat, 17 November 2014, (accessed 4 May 2015). 5. The figures are only for merchandise trade. The shares are the proportions of the country’s trades with India in its total trade for the year. 6. Real GDP growth in the United States and Europe are projected at 3.1 per cent (both years), and 1.5 per cent and 1.6 per cent, respectively, for 2015 and 2016. On the other hand, the emerging and developing Asian economies are expected to grow by 4.3 per cent and 4.7 per cent in 2015 and 2016. Data obtained from IMF (2014). 7. FP and BP are forward and backward participation indices for the year 2009. Forward participation index is defined as “the share of exported goods and services used as imported inputs to produce other countries’ exports”. Similarly, backward participation index is “the share of exported goods and services used as imported inputs to produce other countries’ exports”. 8. The reflection of WTO plus and extra issues, albeit in a partial sense, can be gathered from the coverage of “Singapore” issues in India’s FTAs that

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refer to investment, competition policy, government procurement, and trade facilitation with reference to their emphasis in the Singapore Ministerial of the WTO in 1996. See Wignaraja (2011) for more details. 9. The Indian Prime Minister has mentioned his plan to improve the current “Doing Business” ranking of India from 134 to 50 (Dhume 2014).

References ASEAN. “Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership”. ASEAN, 2012. (accessed 13 October 2014). Dhar, Biswajit. “Are Free Trade Agreements a Dead End for India?”. East Asia Forum, 10 October 2014. (accessed 12 October 2014). Dhume, Sadanand. “Holding Modi to His Promise”. The Wall Street Journal, 28 September 2014. (accessed 15 October 2014). Francis, Smitha and Murali Kallummal. “India’s Comprehensive Trade Agreements: Implications for Development Trajectory”. Economic and Political Weekly (EPW) XLVIII, no. 31 (3 August 2013). International Monetary Fund (IMF). “Overview of the World Economic Outlook Projections”, April 2015. (accessed 4 May 2015). Mehta, Pradeep S. “Feel Free to Trade”. Deccan Chronicle, 25 September 2014. (accessed 14 October 2014). Menghani, Saahil. “President Outlines Modi Government’s Agenda, Focus on 5Ts, 3Ds, 3Ss”. IBNLive.com, 14 June 2014. (accessed 11 October 2014). Narendramodi.in. “Ensuring Security, Equality, Prosperity and Equity is Instrumental to the Nation’s Growth: Shri Narendra Modi”, 7 February 2014. (accessed 11 October 2014). Palit, Amitendu. “India and APEC: Not Yet There, But Getting Closer”. Pacific Economic Cooperation Council (PECC) Discussion Forum, 16 July 2014a. (accessed 13 October 2014). ———. The Trans Pacific Partnership, China and India: Economic and Political Implications. Abingdon: Routledge, 2014b.

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Petri, Peter A. and Michael G. Plummer. ASEAN Centrality and the ASEAN-US Economic Relationship. Policy Studies no. 69. Honolulu: East-West Center, 2014. Press Trust of India. “RCEP Important Agreement for India: Commerce Secretary”. Business Standard, 4 April 2014a. (accessed 22 June 2014). ———. “Review of FTAs Almost Finalized: Nirmala Sitharaman”. The Economic Times, 11 October 2014b. (accessed 14 October 2014). Wignaraja, Ganeshan. Economic Reforms, Regionalism, and Exports: Comparing China and India. Policy Studies no. 60. Honolulu: East-West Center, 2011.

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Section III

Regional Economic Integration A Multi-Stage Approach

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10 AEC and ASEAN+1 FTAs: Progress, Challenges, and Future Chia Siow Yue Introduction The Asia-Pacific region is seeing growing economic integration through market-driven production networks, and through plurilateral and bilateral Free Trade Agreements (FTAs) and the emerging mega-trade blocs of the Regional Comprehensive Economic Partnership (RCEP) and Trans-Pacific Partnership (TPP). Both economic and political factors are driving the proliferation of FTAs in East Asia. The former is the push for economic growth and employment through improved economic competitiveness, access to markets and investments, and the strengthening of regional production networks and supply chains. The latter is to promote regional resilience and traditional and non-traditional security through closer cooperation. Bilateral FTAs are proliferating among East Asian and non-East Asian countries. Plurilateral FTAs have also mushroomed, such as the ASEAN+1 FTAs. This proliferation is driven by the following developments: the stalled World Trade Organization (WTO) Doha Round and need for alternative paths to trade and investment liberalization; the shock of the Asian Financial Crisis (AFC) in the late 1990s impelling countries in the region to work more closely together; the desire to partially imitate North American and European regional economic integration; the fear 185

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of being left out of preferential deals and its resulting domino effect; and the desire to have a stronger East Asian voice and presence in the international fora. Questions that arise from such proliferation include: Will they be effective in liberalizing trade and investment flows? Will they undermine the WTO and the multilateral trading system? Will the various stakeholders, particularly the business community, find them useful and helpful? Will they create a “noodle bowl” phenomenon that actually fragments markets and add to business costs? ASEAN has been playing a central role in FTA formation in the region. The ASEAN Free Trade Area (AFTA) entered into force in 1993, ASEAN Framework Agreement of Services (AFAS) in 1995, and ASEAN Investment Area (AIA) in 1997 and was succeeded by the ASEAN Economic Community (AEC) in 2007, ASEAN Trade in Goods Agreement (ATIGA) in 2010, and ASEAN Comprehensive Investment Agreement (ACIA) in 2012. The development of FTA networks with ASEAN’s Dialogue Partners has been an integral part of the AEC. As a result, five ASEAN+1 FTAs have come into force, namely the ASEAN–China FTA (ACFTA), ASEAN–Japan Comprehensive Economic Partnership (AJCEP), ASEAN–Korea FTA (AKFTA), ASEAN–India FTA (AIFTA), and ASEAN–Australia–New Zealand FTA (AANZFTA). Efforts at regionwide FTAs include the proposals for ASEAN+3 (East Asia Free Trade Area or EAFTA) and ASEAN+6 (Comprehensive Economic Partnership of East Asia or CEPEA), which culminated in the ongoing negotiations for RCEP. Some ASEAN members are also currently negotiating the TPP. Computable General Equilibrium (CGE) modelling has attempted to quantify the benefits of FTAs.1 The chapter is structured as follows. Section 2 is on ASEAN production networks, which is market-driven integration but increasingly facilitated by FTAs. Section 3 focuses on the AEC and Section 4 on the ASEAN+1 FTAs, while Section 5 concludes the chapter.

ASEAN Production Networks: Market-Driven Integration Facilitated by FTAs As ASEAN countries adopted outward-oriented development strategies and unilateral and FTA-led trade and investment liberalization from the mid-1980s, production networks have played a significant role by relocating labour intensive segments from higher to lower wage economies in East Asia, resulting in rapidly growing regional intra-industry trade in

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parts and components. The ASEAN and broader East Asian region have wide differences in wage and labour productivity levels, thus enabling a wide choice of competitive cost locations for different parts of the value chain. Production networks make use of each economy’s advantages to boost productivity and cut costs. Trade and investment liberalization and facilitation, together with availability of efficient infrastructural links and logistics, result in lower production as well as procurement-distribution costs. What role do ASEAN FTAs play in the rapidly expanding trade by production networks? Although production networks are essentially marketdriven, trade and investment liberalization and facilitation under AFTA, AFAS, AIA, and AEC as well as industrial complementation under ASEAN Industrial Cooperation (AICO) scheme have encouraged Foreign Direct Investment (FDI) by multinational corporations (MNCs) and the location of multi-plants in the ASEAN region — the most apparent being in the electronics and automotive sectors. While studies have shown that the utilization of AFTA tariff preferences have been low (Kawai and Wignaraja 2011), improvements in ASEAN customs and standards harmonization have facilitated trade flows, while investment liberalization, facilitation, and protection have attracted MNCs to establish operations in different ASEAN locations. More particularly, participation in ASEAN trade and investment liberalization and facilitation programmes has also resulted in production networks spreading from the core ASEAN countries to the less developed CLMV (Cambodia, Lao PDR, Myanmar and Vietnam) countries. ASEAN needs to build upon its existing production networks. Collectively and individually, ASEAN countries must move up the global value chain and strive to become innovators, particularly for the more advanced countries such as Singapore, Malaysia, and Thailand. With dynamic changes in competitive advantages, some of their industrial segments need to relocate to other ASEAN countries with lower wage and production costs. Most of Northeast Asia’s and ASEAN’s exports are now manufactures of growing sophistication and dominated by electronics. By the early years of the twenty-first century, more than 70 per cent of intra-East Asian trade comprised trade in parts and components, which were further produced and re-exported to the rest of the world, particularly developed country markets in the United States and European Union (EU) (ADB 2008). Over 60 per cent of total Asian exports is eventually

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destined for outside the region, particularly the United Sates and EU. This highlights the vulnerability of ASEAN and other East Asian exports to external shocks emanating from the United States and EU, as demonstrated by the slowdown in manufactures and parts and components exports of most ASEAN countries in 2012. It also highlights the role of some ASEAN+1 FTAs (particularly ACFTA, AJCEP and AKFTA) in integrating markets through production networks. India and Australia–New Zealand are largely outside of the East Asian production networks but will likely be incorporated with the implementation of AIFTA and AANZFTA.

AEC: Progress, Challenges, and Future2 In the wake of the AFC and the rise of China and India as competitors for markets and FDI, ASEAN leaders — concerned over ASEAN’s competitiveness — decided at the 2003 Bali Summit to deepen economic integration with the establishment of the AEC. Initially, the AEC was to be realized by 2020, but this was advanced to January 2015 (with a longer time line of 2018–20 for CLMV) and then delayed to December 2015.

AEC Blueprint: Component Pillars and Core Elements The AEC Blueprint, outlining the various measures and strategic schedules for implementation, was adopted in late 2007. As shown in Table 10.1, it has four pillars that aim to “transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy” (ASEAN 2008). Specifically, the single market and production base involves: • Free flows of goods (under AFTA in 1993 and under ATIGA in 2010) with the reduction and elimination of tariffs and non-tariff barriers (NTBs), the liberalization of Rules of Origin (ROO), customs integration, the establishment of the ASEAN Single Window, and the harmonization and mutual recognition of standards and conformance. • Free flows of services with the implementation of AFAS, Mutual Recognition Arrangements (MRAs), and cooperation on financial services.

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• Free flows of investment with the implementation of AIA (in 1998) and ACIA (in March 2012) with investment liberalization, facilitation, promotion, and protection. • Freer flows of capital with the strengthening of ASEAN capital market development and integration, measures on foreign direct and portfolio investment, and current account transactions. • Free flows of skilled labour: it entails completing MRAs for major professional services and developing core competencies (concordance of skills and qualifications) for jobs and occupational skills in services sectors. • Food, agriculture, and forestry: enhance ASEAN’s trade and competitiveness and improve regional food security. ASEAN established the ASEAN Integrated Food Security Framework and its medium-term Strategic Plan of Action on ASEAN food security. • Priority integration sectors: twelve sectors were identified and significant progress has been made covering agro-based, automotive, electronics, fisheries, rubber-based, textiles and apparel, wood-based, air transport, e-ASEAN/ICT (information and communications technology), healthcare, logistics and tourism sectors. Table 10.1 AEC Blueprint: Four Pillars and Core Elements Pillars

Core Elements

A. Single Market and Production Base

A1.  Free flow of goods: nine strategic approaches A2.  Free flow of services: three strategic approaches A3.  Free flow of investment: five strategic approaches A4.  Freer flow of capital: seven strategic approaches A5.  Free flow of skilled labour A6.  Priority integration sectors A7.  Food, agriculture and forestry

B. Competitive Economic Region

B1.  Competition policy B2.  Consumer protection B3.  Intellectual property rights B4.  Infrastructure development: ten strategic approaches B5. Taxation B6. E-commerce

C. Equitable Economic Development

C1.  Small and medium-sized enterprise (SME) development C2.  Initiative for ASEAN Integration

D. Integration into Global Economy

D1. Coherent approach toward external economic relations D2. Enhanced participation in global supply networks

Source: ASEAN (January 2008).

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AEC: Blueprint Implementation and Outcomes The realization of the AEC could mean full implementation of all the actions and measures listed in the AEC Blueprint or realizing the AEC objectives. The first would be easier to achieve, while the second would require measures beyond those set out in the AEC Blueprint. The AEC Scorecard (ASEAN Secretariat 2012) covers 2008–11. It only records compliance or non-compliance with the measures and gives no indication whether these measures and their implementation are adequate to achieve the AEC’s declared objectives by 2015. The compliance or performance of individual ASEAN members are not made public and there are no penalties for defaulters. The ASEAN Integration Report released in November 2015 highlighted that the AEC would be established come 31 December 2015. As of October 2015, some 92.7 per cent of the High Priority Measures (HPM) in the AEC Blueprint has been implemented, although if non-HPMs are also counted, the implementation rate would be less than 80 per cent. The highlights of the Scorecard are as follows. First, the implementation rates are higher for the earlier period 2008–9 than for the later period 2010–11. This slowdown is worrisome in view of the 2015 deadline. Second, the highest non-implementation rate is in the free flow of services, followed by the free flow of investment. The key problem with investments implementation is enforceability, as temporary exclusion and sensitive lists allow ASEAN countries to delay or opt out of implementing measures. Third, for the competitive economic region, shortfalls in implementation on transport are mainly due to delays in the ratification of regional agreements and translating them into respective national laws. Most of these regional agreements are signed after years of consultation. Finally, for equitable economic development and integration into the global economy, non-full implementations are found only in the later period for SME and IAI developments. Table 10.2 shows the progress towards the AEC. The ASEAN Integration Monitoring Report (AIMR) (ASEAN and the World Bank 2013) further provides outcome indicators of ASEAN’s progress towards the AEC. Towards a Single Market and Production Base: • Trade in goods liberalization: Intra-ASEAN trade in goods has been growing stronger, particularly from 2009 as the impact of the global financial crisis started to recede. The intra-ASEAN trade share rose marginally from 24.3 per cent in 2004 to 25.0 per cent in 2011.

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Table 10.2 Progress Towards the AEC: Selected Indicators Outcome Indicators Goods trade liberalization, and single market and production base: Total trade in goods Intra-ASEAN total (US$ bn) Intra-ASEAN share (%) Extra-ASEAN total (US$ bn) Average price level (PPP conversion factors) GDP basket of commodities   ASEAN-6: CLMV ratio   ASEAN coefficient of variation Consumer basket of commodities   ASEAN-6: CLMV ratio   ASEAN coefficient of variation Services trade and investment liberalization: Trade in services   ASEAN total exports (US$ bn)   ASEAN total imports (US$ bn) Tourist arrivals   Intra-ASEAN total (millions)   Intra-ASEAN share (%) Inward FDI   Intra-ASEAN total (US$ bn)   Intra-ASEAN share (%) Competitiveness and facilitation of capital flows: Average cost to trade per container (US$)   To import   To export Effective interest rates Deposit (% per year)   ASEAN-6: CLMV (% points)   ASEAN coefficient of variation Lending (% per year)   ASEAN-6: CLMV (% points)   ASEAN coefficient of variation Domestic credit provision,% of GDP From the banking sector   ASEAN average   ASEAN-6: CLMV ratio To the private sector   ASEAN average   ASEAN-6: CLMV ratio Narrowing the development gap: GDP per capita (PPP$)   ASEAN average   ASEAN: CLMV ratio Population with under $1.25 per day (%)   ASEAN average   CLMV–ASEAN-6 gap (% points) Human Development Index   ASEAN average   ASEAN-6–CLMV gap (%)

Benchmark Benchmark Latest Latest Year Value Year Value

2004 2004 2004

260.9 24.3 428.1

2000 2000

1.57 0.327

2000 2000

1.57 0.387

2005 2005

120.7 143.1

2000 2000

15.9 40.7

2000 2000

0.85 3.9

2005 2005

695 795

2000 2000

8.3 23

2000 2000

1.1 2.3

2000 2000

55.6 9.7

2000 2000     2000 2000   2000 2000   2005 2005

50.7 8.8     2882 3.4   32.8 15.5   0.635 25

 

Status

2011 2011 2011     2011 2011   2011 2011

  598.2 25 914.8     1.56 0.251   1.42 0.279

  Increasing Increasing Increasing     Converging Converging   Converging Converging

  2011 2011   2011 2011   2011 2011

  260.9 269.1   37.7 46.5   26.27 23

  Increasing Increasing   Increasing Increasing   Increasing Increasing

  2011 2011     2010 2010   2010 2010     2011 2011   2011 2011  

  742 815     8.5 3.4   3.1 0.9     68 3.3   64 2.6     5581 2.6   15.3 1.4   0.657 22.9

  Increasing Increasing     Converging Converging   Converging Converging     Increasing Converging   Increasing Converging     Increasing Converging   Decreasing Converging   Increasing Converging

2011 2011 2010 2010 2010 2010

Note: PPP = Purchasing power parity; FDI = Foreign Direct Investment; CLMV = Cambodia, Lao PDR, Myanmar and Vietnam Source: ASEAN Secretariat (March 2013).

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• Price convergence: Overall price variance in terms of a broad basket of products declined, reflecting more integrated ASEAN markets. • Liberalization of services: Data on intra-ASEAN services trade are not available. However, imports of services have increased rapidly, especially in priority integration sectors such as communications, computers, and related information services; travel services; and business services, royalties, and licences. Exports of services also increased. Trade in transport services recovered after a substantial decline in 2008 due to the global financial crisis. • On people movement via tourism: Intra-ASEAN tourism is becoming more dominant accounting for a 46.5 per cent share of total ASEAN tourism by 2011. • Investment liberalization: Intra-ASEAN inward FDI rose rapidly, particularly since 2009 to reach US$26.3 billion by 2011, accounting for 23.0 per cent of total FDI inflows into ASEAN. Competitiveness and facilitation of capital flows: • Competitiveness as measured by costs of trade: The average per container cost of importing and exporting in ASEAN declined in real terms from 2005 to 2011. However, the cross-country variation in per container costs remains large. To some extent, these cross-country variations may reflect natural geographical differences, with landlocked Laos experiencing higher trading costs. • Capital flows facilitation: Effective interest rates for lending and deposits continued to show significant variation, although there is a trend towards convergence. On domestic credit provision, while domestic sources of capital appear to have played an increasing role from the mid-2000s, there is still a wide divergence between ASEAN-6 and CLMV. Narrowing the development gap: • While aggregate GDP (in PPP$ [purchasing price parity dollar]) grew at an average of 7.7 per cent for ASEAN between 2000 and 2011, it grew faster for CLMV (9.9 per cent) than for ASEAN-6, signifying a narrowing of the income gap. However, the average income gap in absolute terms is still very large. • The extent of absolute poverty, as measured by percentage of the population living on less than PPP$1.25 a day has declined for both ASEAN-6 and CLMV, with also a narrowing of the absolute gap.

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• The Human Development Index (HDI) for 2005 to 2010 shows CLMV catching up with ASEAN-6, but with unequal progress in the economic, health, and education indices. The Mid-Term Review (MTR) from the Economic Research Institute for ASEAN and East Asia (ERIA) recommends seven policy actions as the way forward toward 2015 (ERIA 2012): • Address the non-tariff barrier effects of non-tariff measures (NTMs) more effectively; • Deliver better on trade, investment, and transport facilitation; • Forge ahead on services and investment liberal­ization; • Enhance the AEC Blueprint’s third pillar on more equitable development; • Finish RCEP negotiations; • Develop “success stories” in other AEC measures; and • Address institutional issues and manage regulatory reform in ASEAN. The MTR also recommends several priority policy actions moving beyond 2015: • Actions dealing with standards and conformance, capital market development and financial market integra­tion, MRAs on professional services and labour mobility, ICT, energy, intellectual property rights (IPRs), competition policy, agriculture, and others such as consumer protection and taxation. • Promotion of a freer flow of goods and services through common standardization and certification policies as well as a freer flow of capital and labour require ASEAN member states to address many technical, macro-prudential, and regulatory challenges. • Second-generation reforms are required for IPRs, competition policy, and consumer protection, while agriculture policy actions have to address climate change, sanitary and phytosanitary (SPS) conditions, and other areas of cooperation. • Adequate infrastructure has to be in place to facilitate deeper connectivity through ICT and energy policy actions.

Future Directions: Moving Beyond AEC 2015 Two studies by ERIA and the Asian Development Bank Institute (ADBI) (Intal et al. 2013; ADBI 2014) and another study by Chia and Plummer (2015) have the following recommendations for ASEAN and AEC beyond

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2015. First, ERIA’s ASEAN Rising outlines the vision of an “ASEAN Miracle — sustained high and equitable growth” and identifies four interdependent pathways for moving ASEAN and AEC forward beyond 2015. These four pillars are: integrated and highly contestable ASEAN; competitive and dynamic ASEAN; inclusive and resilient ASEAN; and global ASEAN. The report contains a wealth of recommended measures to achieve these objectives. Second, ADBI’s ASEAN 2030 study argues that in order to move forward beyond 2015, ASEAN needs to create a borderless economic region, which pragmatically lies between the AEC and the EU. To achieve a resilient, inclusive, competitive, and harmonious (RICH) ASEAN by 2030, it must face four development challenges, namely: enhance macroeconomic and financial stability; support equitable growth; promote competitiveness and innovation; and protect the environment. The study outlined various policy options to overcome these challenges. At the 27th ASEAN Summit in November 2015, ASEAN adopted a new ASEAN Economic Community Blueprint 2025 under the title of ASEAN 2025: Forging Ahead Together. The 2025 Blueprint builds on the 2015 Blueprint with the following reinforcing characteristics: (a) a highly integrated and cohesive economy; (b) a competitive, innovative and dynamic ASEAN; (c) enhancing connectivity; (d) a resilient, inclusive, people-oriented and people-centred ASEAN; and (e) a global ASEAN. The new emphasis is on an innovative, connected, inclusive and peopleoriented ASEAN. ASEAN has eschewed progressing towards either a Customs Union or a Common Market.

ASEAN+1 FTAs: Progress, Challenges and Future Comparison of ASEAN+1 FTAs Table 10.3 shows the relative sizes of ASEAN’s FTA partners, as measured by population size, GDP size, total trade and FTA trade size, and by development level as proxied by GDP per capita. The larger the FTA, the larger the potential gains from trade. ACFTA is the largest by population size, GDP size, merchandise trade size, and services trade size. AIFTA ranks second by population size, followed by AJCEP, AKFTA, and AANZFTA. AJCEP ranks second by merchandise trade size followed by AKFTA, AIFTA, and AANZFTA. AJCEP also ranks second by services trade size. By GDP per capita, Japan is the richest country, followed by Closer Economic Relations (CER), and Korea, while China and India are developing countries like ASEAN

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595.7 595.7 1,357.4 1,953.1 595.7 127.3 723.0 595.7 50.2 645.9 595.7 1,252.1 1,847.8 595.7 23.1 4.4 623.2 595.7 316.5 912.2

2,480.1 2,480.1 9,143.8 11,623.9 2,480.1 5,899.9 8,380.0 2,480.1 1,299.0 3,779.1 2,480.1 1,952.8 4,432.9 2,480.1 1,512.6 174.6 4,167.3 2,480.1 17,113.8 19,593.9

GNI Size 2013 (US$ billion) 4,163 4,163 6,740 5,951 4,163 46,330 11,452 4,163 25,870 5,850 4,163 1,560 2,399 4,163 65,410 39,300 6,847 ,163 54,070 21,480

GNI per Capita 2013 (US$)

Source: Compiled from data in World Development Indicators 2015 (World Bank 2015).

ASEAN-10 ASEAN-10 China ASEAN+China ASEAN-10 Japan ASEAN+Japan ASEAN-10 Republic of Korea ASEAN+Korea ASEAN-10 India ASEAN+India ASEAN-10 Australia New Zealand ASEAN+CER ASEAN-10 United States ASEAN+U.S.

Population 2013 (million)

Table 10.3 ASEAN’s FTA Partners

1,272.6 1,272.6 2,209.0 3,481.6 1,272.6 715.1 1,987.7 1,272.6 559.6 1,832.2 1,272.6 314.8 1,587.4 1,272.6 252.6 39.4 1,564.6 1,272.6 1,579.6 2,852.2

Exports 2013 (US$ million) 1,238.0 1,238.0 1,850.0 3,088.0 1,238.0 833.1 2,071.1 1,238.0 515.6 1,753.6 1,238.0 465.4 1,703.4 1,238.0 242.1 39.6 1,519.7 1,238.0 2,329.0 3,567.0

Imports 2013 (US$ million)

2,510.6 2,510.6 4,059.0 6,569.6 2,510.6 1,548.2 4,058.8 2,510.6 1,075.2 3,585.8 2,510.6 780.2 3,290.8 2,510.6 494.7 79.0 3,084.3 2,510.6 3,908.6 6,419.2

Total Trade 2013 (US$ million)

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(excluding Brunei and Singapore). Similarity in development level is conducive for economic integration due to the similarity in consumption patterns and scope for horizontal intra-industry trade. Members of FTA may show competitive economic structures pre-FTA and complementary economic structures post-FTA. Production networks also enhance the complementarity of trade structures. Table 10.4 shows the actual trade flows between ASEAN and its FTA partners. Apart from intra-ASEAN trade, the most important FTA trade is with China, followed by Japan and South Korea. Trade with India, South Korea, and Australia–New Zealand are relatively small. If ASEAN–United States and ASEAN–EU trade agreements are signed, it would considerably boost the share of ASEAN’s FTA trade. Table 10.5 shows FDI inflows into ASEAN from its FTA partners for the period 2012–14. The largest FDI inflows from FTA partners are Japan and China. It is noted that India and New Zealand are not in the top ten sources of FDI and hence no data are available. It also bears noting that the EU and United States are the largest and third largest sources of ASEAN FDI, so the conclusion of FTAs with these entities would benefit ASEAN FDI inflows greatly. Table 10.4 ASEAN’s Trade with FTA Partners, 2013 Share of Total ASEAN Trade

ASEAN ASEAN ASEAN Exports Imports Total Trade Exports Imports Total Trade (%) (%) (%) (US$ bn) (US$ bn) (US$ bn) Total ASEAN

1,271.1

1,240.4

2,511.5

100.0

100.0

100.0

Intra-ASEAN

330.3

278.2

608.6

26.0

22.4

24.2

Extra-ASEAN

940.8

962.1

1,902.9

74.0

77.6

75.8 14.0

China

152.5

198.0

350.5

12.0

16.0

Japan

122.9

117.9

240.8

9.7

9.5

9.6

52.8

82.1

135.0

4.2

6.6

5.4

Republic of Korea India

41.9

25.9

67.9

3.3

2.1

2.7

Australia

45.5

22.5

68.1

3.6

1.8

2.7

5.7

4.1

9.8

0.4

0.3

0.4

EU28

New Zealand

124.4

121.8

246.2

9.8

9.8

9.8

United States

114.5

92.3

206.9

9.0

7.4

8.2

Source: Compiled from ASEAN Statistics Database.

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Table 10.5 ASEAN’s FDI Inflows from FTA Partners, 2012–14 Value (US$ million) Total ASEAN FDI inflows

Share of ASEAN Inflows (%)

369,321

100.0

Intra-ASEAN

64,326

17.4

Extra-ASEAN

304,995

82.6

China

21,366

5.8

Japan

56,353

15.3

9,698

2.6

Republic of Korea India

NA

Australia

12,412

New Zealand

NA

NA 3.4 NA

EU28

58,066

15.7

United States

32,351

8.8

Source: Compiled from ASEAN Statistics Database.

Relative Tariff Levels Table 10.6 shows the most-favoured nation (MFN) tariffs of ASEAN and its FTA partners. The net welfare gains from an FTA will be larger the higher their MFN tariff rates. The MFN applied average tariff rates show wide variations among ASEAN countries — ranging from zero for Singapore to over 10 per cent for Thailand, Cambodia, and Vietnam. Thailand and Vietnam still have a highly protectionist agricultural sector with average agricultural tariffs of over 20 per cent. The other high average tariff groups are found in beverages and tobacco (except the Philippines), clothing and textiles (Vietnam), transport equipment (except the Philippines). Among ASEAN’s FTA partners, the average rates range from a high of 14.5 per cent for India to a low of under 3.5 per cent for CER. China has an average MFN applied tariff of 9.9 per cent, with 15.8 per cent in agriculture and highs of 16.0 per cent in clothing, 13.5 per cent in leather and footwear, and 11.5 per cent in transport equipment. Japan has low average MFN applied tariffs, but very high agriculture (21.8 per cent) and leather and footwear (11.2 per cent) tariffs. Korea has a relatively high average MFN applied tariff rate of 12.2 per cent, an extremely high rate for agriculture at 49.0 per cent and 12.6 per cent for

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95.3 96.6 83.7 66.8 69.2 74.7 100 — 17.4 100   100 99.6 94.6 73.8 97.0 99.9

Brunei Indonesia Malaysia Philippines Singapore Thailand Cambodia Laos Myanmar Vietnam   China Japan Korea India Australia New Zealand 10.0 5.1 17.0 50.2 9.9 9.9

25.3 37.1 24.5 25.6 12.1 28.1 19.0 — 83.0 11.4

MFN Bound Simple Av 3.6 6.9 8.4 6.3 0 10.0 14.2 9.7 5.6 16.8   9.9 5.1 12.2 14.5 3.5 3.0

MFN Applied Simple Av

6.6 55.1 14.1 2.8 20.9 47.7

0.0 2.5 5.2 2.6 15.9 2.8 1.0 — 0.9 14.3

MFN Bound Max Duty

79.9 22.3 57.3 2.8 100 18.3 5.5 0 3.5 32.6   6.7 52.3 15.4 3.8 48.8 63.2 65 648 887 372 55 183

>1,000 210 >1,000 80 >1,000 252 60 — 550 200

>1,000 150 >1,000 65 112 216 35 40 40 150   65 648 887 289 245 17

MFN Applied Max Duty

% Share of HS Six-Digit Subheadings

MFN Applied Duty-Free

Note: The Harmonized System (HS) uses code numbers to define products. A six-digit code is the most detailed definition and is used as the standard. Source: Chia (February 2010).

Binding Coverage

Country

MFN Bound Duty-Free

Table 10.6 East Asia: Country Tariff Profiles for All Products

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clothing. India has the highest average MFN applied tariff of 14.5 per cent, a very high rate for agriculture at 34.4 per cent, and over 20 per cent for textiles, clothing, and transport equipment.

Scope and Coverage FTA notification to the WTO can be either under the General Agreement on Tariffs and Trade (GATT) Article XXIV for goods and General Agreement on Trade in Services (GATS) Article V for services or under the Enabling Clause. The former sets a higher standard for FTAs as it has to conform to certain requirements3 while the latter provides more flexibility for developing countries. AJCEP, AKFTA, and AANZFTA are notified under Articles XXIV and V, while AEC, ACFTA, and AIFTA are notified under the Enabling Clause. Table 10.7 shows the time-frames for the ASEAN+1 agreements, that is, the framework agreement and agreements on trade in goods, trade in services, investment, and dispute settlement. The agreements may also contain some WTO-plus features and economic cooperation. It should be noted that negotiations for ASEAN–Japan and ASEAN–India on services and investment have been protracted, signalling difficulties of achieving consensus among the ASEAN countries over the terms of services and investment liberalization.

Framework Agreements The framework agreements provide the framework to negotiate further agreements on goods, services, and investments. Only the ASEAN–CER is negotiated as a single undertaking, while the other FTAs have been negotiated in stages, with goods, followed by services and investment. • The ASEAN–China agreement includes an Early Harvest Programme (EHP). ASEAN countries also accord market economy status on China. • The ASEAN–Japan agreement highlights a range of cooperation programmes. While trade in goods agreement has been signed and implemented, negotiations on services and investment are still ongoing. And while China, from the start, prioritized the plurilateral FTA with ASEAN, Japan prioritized bilateral FTAs with individual ASEAN countries and AJCEP is more of an umbrella agreement. • The ASEAN–Korea agreement also provides for a long list of cooperation areas. ASEAN agreed to the inclusion of the Kaesong Industrial Complex in North Korea.

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X X

 

 

Negotiating Nov 2002 2004 Jan 2007 Aug 2009   Oct 2003 Apr 2008       Dec 2005 Aug 2006 Nov 2007 Jun 2009 Dec 2005   2003 Aug 2009 Sep 214  Sep 2014   Sep 2001 Feb 2009      

 

Concluded/Signed

Source: Author’s compilation from the various agreements and press releases.

ASEAN–China (ACFTA)   Framework Agreement  Goods  Services  Investment ASEAN–Japan (AJCEP)   Framework Agreement  Goods  Services  Investment ASEAN–Korea (AKFTA)   Framework Agreement  Goods  Services  Investment   Dispute Settlement ASEAN–India (AIFTA)   Framework Agreement  Goods  Services  Investment ASEAN–CER (AANZFTA)   Framework Agreement   Single Undertaking  Goods  Services  Investment

Agreements     Jul 2005 Jul 2007 Feb 2010   Apr 2008 Jan 2009         Jun 2007 May 2009         Oct 2010         2010      

Implemented

Table 10.7 Time-frames for ASEAN+1 Agreements

2020

2017–20

2010–16

2018

 

2010–18

 

FTA Partners     2010–18         2018–24         2010–16           2017–20         2020–25      

ASEAN-6

    2018         2023–26         2018–24           2022         2020–25      

CLMV

Completion Date for Tariff Commitments

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• The ASEAN–India Framework Agreement was signed in 2003 but it took more than ten years to conclude the services and investment agreements, while an EHP was later rescinded.

Trade in Goods The focus of the ASEAN+1 FTAs seems to be on trade in goods. Tariff elimination and reduction schedules have the normal tracks, the sensitive, highly sensitive and exclusion lists. There is usually special and differential treatment with longer time-frames for the CLMV countries. Table 10.8 shows the tariff elimination coverage: six ASEAN countries have committed to eliminate tariffs in more than 90 per cent of the Table 10.8 Tariff Elimination Coverage by Countries under the ASEAN+1 FTAs  

ACFTA

AJCEP

AKFTA

AIFTA

AANZFTA

Average

(%)

  Brunei

98.3

97.7

99.2

85.3

99.2

95.9

Cambodia

89.9

85.7

97.1

88.4

89.1

90.0

Indonesia

92.3

91.2

91.2

48.7

93.7

83.4

Laos

97.6

86.9

90.0

80.1

91.9

89.3

Malaysia

93.4

94.1

95.5

79.8

97.4

92.0

Myanmar

94.5

85.2

92.2

76.6

88.1

87.3

Philippines

93.0

97.4

99.0

80.9

95.1

93.1

Singapore

100.0

100.0

100.0

100.0

100.0

100.0

Thailand

93.5

96.8

95.6

78.1

98.9

92.6

Vietnam

NA

94.4

89.4

79.5

94.8

89.5

 

 

 

 

94.1

 

 

 

 

 

 

 

 

 

 

78.8

 

 

  China Japan

91.9

Korea

 

India

 

Australia–NZ Average

90.5

  94.7

92.8

  94.5

79.6

100 95.7

   

Note: HS2007 version, HS six-digit base. Data on Vietnam under ASEAN–China are missing. Data on Myanmar under ASEAN–China are also missing for HS01–HS08. Source: Fukunaga-Isono (2013), Table 1.

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products after the transition period, while Indonesia, Laos, Myanmar, and Vietnam have committed to less than 90 per cent on average. Among the FTA partners, India has committed only 78.8 per cent while the others have committed over 90 per cent, with CER committing 100 per cent. Reflecting the restrictiveness of the Indian offers, ASEAN members also show the lowest levels of commitments.

Rules of Origin (ROOs) Table 10.9 shows the three basic types of ROOs used for processed goods and manufactures: Regional Value Content (RVC), Change in Tariff Classification (CTC), and Product Specific Rule (PSR). These rules could be used singly, and as options (co-equal rules), or jointly. The general rule for AJCEP, AKFTA, and AANZFTA is “RVC(40) or CTH [Change in Tariff Heading]”; for ACFTA, it is RVC(40) only; and for AIFTA, it is RVC(35) plus CTSH (Change of Tariff Sub-Heading), which is considered the most restrictive as both rules need to be complied with. There are numerous types of ROOs used and a lot of variations exist within each grouping. All the FTAs also have features of Back-to-Back Certificate of Origin and Third Party Invoicing. As noted by Fukunaga and Isono (2013), there is substantial ROO convergence at RVC(40) or CTH, except for two sectors. ROO divergence is the highest in the textile and garments chapters (Chapters 50–63), with many process specific rules, followed by agriculture (Chapters 1–27). In the automotive sector (Chapter 87), there is higher convergence using a single rule of RVC(40). Considering the number of different parts and components involved in automotive production, this rule may be sufficient.

WTO-Plus Coverage Twenty-first century trade agreements often go beyond the WTO agenda to include provisions on the “Singapore issues” (trade facilitation, investment, government procurement, and competition policy) as well as on issues such as IPRs, environment, and labour. Most ASEAN+1 agreements have not included competition policy, government procurement, IPRs, and movement of business persons, with the ASEAN–CER the main exception. However, ASEAN+1 agreements generally contain a wide range of cooperation areas.

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ACFTA

AKFTA

AJCEP

AANZFTA

AIFTA

Form D

Certificate of Origin

Form E

Yes Form AK

Yes

Yes

PSR

Yes

Yes

PSR

Form AANZ

Yes

Yes

PSR

Form AI

Yes

Yes

—

Change in tariff Change in tariff Change in tariff Change in tariff Heading (4-digit) Heading (4-digit) Heading (4-digit) Subheading (6-digit)

Note: RVC = Regional Value Content; PSR = Product Specific Rule Source: Compiled by the author from various agreements.

Yes

Third Party Invoicing

Yes

PSR

PSR

Yes

—

Change in tariff Heading (4-digit)

Wholly Obtained Wholly Obtained Wholly Obtained Wholly Obtained Wholly Obtained Wholly Obtained RVC > 35% FOB RVC > 40% RVC > 40% RVC > 40% RVC > 40% FOB RVC > 40% and FOB or FOB or FOB or FOB or

Back-to-back Certificate of Origin

ROO

AFTA/ATIGA

Table 10.9 ROO in ASEAN and ASEAN+1 FTAs

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Assessment of ASEAN+1 FTAs Some Negotiating and Implementation Issues and Challenges ASEAN–China: China was aware of ASEAN’s perceptions of the “China threat” and agreed to implement (a) the Agreement step-by-step, with special and differ­ential treatment given to the least developed members of ASEAN, and (b) the EHP. Still, there were concerns and complaints from affected countries, sectors, and stakeholders. For example, in Thailand, farmers complained of a flood of imports from China following implementation of the EHP. In Indonesia, SME manufacturers in iron, steel, textiles, clothing, footwear, and electrical goods sectors complained of cheap Chinese imports and prompted the Indonesian government to request longer transition periods for tariff elimination. ASEAN–India: The framework agreement was signed in 2003. The agreement on trade in goods was signed only after five years of arduous negotiations over India’s long negative list and highly restrictive ROOs. The negative list initially had 1,410 agricultural and industrial products (which included major ASEAN export items such as palm oil, rubber, pepper, tea, and coffee) but was eventually pruned down to 560 items, notwithstanding tremendous fears of import competition expressed by Indian farmers. The agreements on services and investment were repeatedly delayed and finally signed in September 2014. The main obstacles came from some ASEAN members, concerned over India’s competitiveness in the delivery of services and over the entry of Indian professionals under Mode 4 (Srivastava 2014).4 Areas of improvement needed in ASEAN+1 FTAs5 • On agricultural trade liberalization: Coverage of agricultural trade is usually less than satisfactory (as is also the case in the WTO), with high protectionism due to food security concerns, the need to protect poor farmers in rural areas, and powerful farm lobbies. Such protectionism is manifested in long exclusion lists, continuing high tariffs and quotas and NTBs. • On services trade liberalization: Two approaches to services trade liberalization are the positive list approach (adopted by the WTO) whereby only service sectors offered for commitment are listed; and the negative list approach which lists only service sectors that are

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excluded. A high quality agreement should adopt a negative list approach and open all four modes of supply. While opening to Mode 1 and Mode 2 is generally accepted, there is greater resistance to Mode 3 (right of establishment) and Mode 4 (movement of natural persons). A high quality FTA needs to cover key service sectors such as financial services, ICT services, business and professional services, and labour mobility of business persons. • On WTO-plus provisions: WTO-plus agreements that address at least the four Singapore issues (trade facilitation, investment, competition policy, and government procurement) are becoming more common. U.S. FTAs also include labour and environment. ASEAN–Japan, ASEAN–Korea, and ASEAN–CER are WTO-plus agreements while ASEAN–China and ASEAN–India are less comprehensive. • On minimizing the “noodle bowl” effect: Where FTAs have overly complicated and restrictive ROOs, they risk being underutilized because of the high business transaction costs; multiple ROOs also pose a severe burden for businesses.

How Do ASEAN+1 FTAs Compare? ASEAN+1 FTAs tend to follow the template of partner countries. For example, FTAs signed by the United States are usually very comprehensive and of a high standard, while FTAs signed by developing countries such as India tend to be shallow and restricted to tariff elimination. Sally (2013) assesses the five ASEAN+1 FTAs as follows: • ASEAN–China is weak, although strong on tariff elimination and has relatively simple ROOs, it does not really tackle NTBs in the goods trade, and does not really liberalize services, investment, or government procurement. • ASEAN–Japan is weaker than ASEAN–China: It has long transition periods for tariff elimination, excludes more agricultural products, and has more restrictive ROOs for many products. • ASEAN–Korea is stronger than ASEAN–Japan in eliminating more tariffs with shorter transition periods and with agreements on services and investment. However, it excludes government procurement, and does not take other issues such as movement of business persons and IPR beyond WTO disciplines. • ASEAN–India is the weakest. It eliminates under 80 per cent of tariffs for India as well as Indonesia, Malaysia, Myanmar, Thailand,

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and Vietnam, and has long transition periods, considerable variation in bilateral schedules, and restrictive ROOs. Also, it hardly covers NTBs despite these regulatory barriers posing greater obstacles to ASEAN–India trade. • ASEAN–Australia–New Zealand is the strongest among ASEAN+1 FTAs. However, it does not seriously liberalize or provide much harder WTO-plus disciplines on services, investment, MRAs, and SPS and does not cover government procurement.

ASEAN–EU and ASEAN–United States FTAs? Why are there no ASEAN–EU or ASEAN–US FTAs? After all, they are economic superpowers with huge markets and are major suppliers of FDI and technology to the developing world, including ASEAN. A major stumbling block had been posed by Myanmar, as both the EU and the United States had imposed economic sanctions because of Myanmar’s human rights record and political regime. A second stumbling block is the U.S. insistence on high standard FTAs, which many of the ASEAN countries are unable and unwilling to comply with. ASEAN and the EU have strong and growing economic ties, reflecting their complementary economies. ASEAN is now the EU’s third largest trading partner and the EU is ASEAN’s fifth largest. The EU is ASEAN’s biggest foreign investor, constituting approximately one-third of ASEAN’s FDI. In addition to trade and investment, the two blocs have also enjoyed cooperation covering a wide range of political, economic and cultural initiatives. ASEAN and the EU originally launched negotiations for an ASEAN– EU FTA in 2007, but following several rounds of negotiation, the plan was aborted in March 2009, largely as a result of political disagreements over Myanmar’s human rights record and political regime. With this, the EU switched to negotiating bilateral FTAs with individual ASEAN countries. Singapore became the first ASEAN country to sign an FTA with the EU in September 2014. Bilateral negotiations are also underway between the EU and Malaysia, Thailand, and Vietnam. The 20th Asia– Europe Meeting (ASEM) in Brussels in July 2014 raised the possibility of resuming negotiations for an EU–ASEAN FTA, now that the EU has lifted its economic sanctions against Myanmar. For ASEAN–United States economic relations, the 2002 Enterprise for ASEAN Initiative (EAI) and the 2006 United States–ASEAN

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Trade and Investment Framework Agreements (TIFAs) set out terms for possible bilateral FTAs between the United States and ASEAN. So far, the United States has a bilateral FTA only with Singapore, implemented in January 2004; its negotiations with Malaysia and Thailand have been stalled. The United States–ASEAN Expanded Economic Engagement (E3) initiative was launched in November 2012, a new framework for economic cooperation designed to promote closer ASEAN–United States cooperation as the United States’ strategic response to a rising China and a rising India. The E3 also meets ASEAN’s objective of getting the United States more economically engaged with ASEAN as part of the United States rebalancing towards Asia. Under the E3, United States and ASEAN are working together to develop new cooperative activities that complement the United States–ASEAN TIFA. Ongoing activities under E3 include cooperation on the digital economy, standards and technical barriers to trade, trade facilitation, trade and environment and business environment for SMEs, business-to-business and business-to-government interaction.

RCEP and TPP? The RCEP is currently being negotiated among ASEAN and its six ASEAN+1 FTA partners. Originally the RCEP was targeted to be concluded by end 2015 but the completion date has been delayed to 2016, while the TPP had concluded negotiations by October 2015. Will the emergence of RCEP render the ASEAN+1 FTAs redundant? If RCEP is of a higher standard than all the existing ASEAN+1 FTAs, then the existing ASEAN+1 FTAs become redundant, especially if RCEP’s ROO allows for cumulation across the sixteen RCEP countries.6 If RCEP is mid-way between the best and worst of the existing ASEAN+1 FTAs, then it merely adds one more complexity to the “noodle bowl” issue. ASEAN would then need to renegotiate the provisions of ASEAN+1 FTAs and attempt a convergence. Four of the ASEAN countries (Brunei, Singapore, Malaysia, and Vietnam)7 were also involved in negotiating the TPP. This has led to the question whether the TPP will undermine ASEAN solidarity. A domino effect is taking place, with Indonesia, the Philipines and Thailand slated to join when the TPP opens up for new membership. Thus TPP membership cuts across maritime and mainland ASEAN and across the ASEAN income divide. Also, individual ASEAN countries have been

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pursuing bilateral FTAs with non-ASEAN countries. If anything, the existence of the RCEP, TPP, and bilateral FTAs should strengthen the ASEAN resolve to strengthen ASEAN ties through the AEC as well as the ASEAN Political-Security Community and the ASEAN Socio-Cultural Community. The United States has proclaimed the TPP as a twenty-first century gold standard agreement. Although TPP conclusions were concluded in October 2015, it is far from a “gold standard” agreement. In particular, there were no “common concessions approach” with significant bilateral side agreements and exclusions in the areas of agriculture and services resulting in a “messy noodle bowl” agreement. Moreover, the ratification process by member governments is anticipated to be a protracted process, not only in the US but also in several other countries.

Summary and Conclusions The Close Link between Market-driven Production Networks and Government-initiated FTAs Decisions to locate segments of production networks in different countries and areas are determined by private investors, particularly MNCs on the basis of location costs, coordination costs, and logistics costs. However, these costs are influenced by FTA measures — trade and investment liberalization that facilitate cross-border trade and investment including tariff elimination; simple ROOs and certification, and cumulation of value added products; simplified, transparent and efficient customs practices; and improved transportation and logistics connectivity. For policymakers and businesses, it is not an issue of either production networks or FTAs, but production networks being facilitated by FTAs.

Where Does the AEC Stand Now and Where Is It Going Beyond 2015? The AEC deadline is imminent and ASEAN leaders have declared at the 27th ASEAN Summit in November 2015 that the AEC would be established on 31 December 2015, even though not all targets would be met by then. However, AEC 2015 should be regarded as an ongoing process and some of the Blueprint’s measures will be realized only beyond 2015. More importantly, what are the new objectives and measures going forward? The AEC Blueprint 2025 highlights the vision beyond

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31 December 2015. The overall vision over the next ten years to 2025 is (a) a highly integrated and cohesive economy; (b) a competitive, innovative and dynamic ASEAN; (c) enhanced connectivity and sectoral cooperation; (d) a resilient, inclusive, people-oriented and people-centred ASEAN; and (e) a global ASEAN. The immediate priority is to complete the implementation of measures under the AEC Blueprint 2015 by end 2016 and the continuing commitments of CLMV up to 2018. Beyond that, ASEAN will emphasize the development micro and small and medium enterprises (MSMEs), embrace digital technology in trade and investment, promote good governance and facilitate the use of green technology.

Whither the ASEAN+1 FTAs? For geopolitical and economic reasons, ACFTA, AJCEP, AKFTA, AIFTA, and ASEAN–CER have been signed and implemented, with ASEAN–EU and ASEAN–United States being the obvious missing links in this global networking. These agreements lack a common template, with different scopes, coverage of WTO-plus issues, tariff elimination/reduction schedules, and ROOs. They are weak in the removal of NTBs and in services and investment liberalization but strong in provisions of cooperation. Despite the complicated and confusing ROOs, production networks continue to flourish, being incentivized by cost differentials, market opportunities, and improved connectivity. The production networks extend to most ASEAN+1 countries but have yet to extend to fully include India. For this to happen, India needs to liberalize trade and investment much further and develop transport and communication links with the rest of the region. When these agreements come up for review, they should aim at converging towards a common template to minimize the “noodle bowl” effect.

The Emergence of RCEP and TPP Mega-Blocs The TPP has been concluded and poses two challenges for RCEP. First, the RCEP has to match the TPP in terms of scope and depth of economic integration. Second, and relatedly, RCEP should be attractive for its negotiating members so that their interests are not diverted. The TPP already has seven RCEP members of Brunei, Singapore, Malaysia, Vietnam, Japan, Australia and New Zealand, and possibly four new members of Indonesia, Philippines, Thailand and South Korea. Of the

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sixteen RCEP negotiating members, only Cambodia, Laos PDR, Myanmar, China and India will remain outside the TPP. Additionally, completion of RCEP is complicated by the South China Sea conflict between China and some ASEAN states. RCEP is expected to resolve the “noodle bowl” issues associated with the ASEAN+1 FTAs, and offer East Asia a “united voice” in international fora. ASEAN is a minor economic player in the RCEP scenario and needs to strengthen the AEC to maintain ASEAN centrality. The RCEP and TPP should incentivize each other towards a common template that would facilitate eventual merger.

Notes 1. The welfare and income effects are dependent on the assumptions of the model, particularly full tariff liberalization. 2. This section draws heavily on Chia and Plummer (2015). 3. Such as covering substantial amount of trade, not raising trade barriers against non-members, and completing tariff liberalization within a ten-year time-frame. 4. Srivastava (2014) noted that India “got almost nothing” from the Services and Investment Agreement. It had anticipated that Mode 4 would provide a “commercially meaningful market” for Indian professionals, including those from the IT (information technology) sector. ASEAN members wanted a single MFN offer against their individual offers. 5. See for example Kawai and Wignaraja (2013), and Fukunaga and Isono (2013). 6. That is ASEAN-10 countries plus China, Japan, South Korea, India, Australia, and New Zealand. 7. Brunei and Singapore are the original members of the Trans-Pacific Strategic Economic Partnership Agreement (TSEP), the predecessor of the TPP. There are currently twelve TPP negotiating members — the original TSEP members, the United States, Canada, Mexico, Peru, Japan, Malaysia, Vietnam, and Australia. 8. See discussions on the topic in Chia and Plummer (2015).

References ASEAN. ASEAN Statistics Database. . ASEAN and the World Bank. ASEAN Integration Monitoring Report: A Joint Report by the ASEAN Secretariat and the World Bank. Jakarta and Washington, D.C.: ASEAN Secretariat and the World Bank, 2013.

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ASEAN Secretariat. ASEAN Integration Report. Jakarta: ASEAN Secretariat. November 2015. ———. ASEAN 2025: Forging Ahead Together. Jakarta: ASEAN Secretariat, November 2015. ———. ASEAN Brief 2012: Progress Towards the ASEAN Community. Jakarta: ASEAN Secretariat, March 2013. ———. ASEAN Economic Community Scorecard. Jakarta: ASEAN Secretariat, 2012. ———. ASEAN Economic Community Blueprint. Jakarta: ASEAN Secretariat, January 2008. Asian Development Bank (ADB). Asian Development Outlook 2007. Manila: ADB, 2008. Asian Development Bank Institute (ADBI). ASEAN 2030: Toward a Borderless Economic Community. Tokyo: ADBI, 2014. Chia Siow Yue. “Regional Trade Policy Cooperation and Architecture in East Asia”. ADBI Working Paper Series no. 191. Tokyo: Asian Development Bank Institute, February 2010. Chia Siow Yue and Michael G. Plummer. ASEAN Economic Cooperation and Integration: Progress, Challenges and Future Directions. Cambridge: Cambridge University Press, 2015. Economic Research Institute for ASEAN and East Asia (ERIA). Mid-Term Review of the Implementation of AEC Blueprint: Executive Summary. Jakarta: ERIA, October 2012. Fukunaga, Yoshifumi and Ikumo Isono. Taking ASEAN+1 FTAs Towards the RCEP: A Mapping Study. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), January 2013. Intal, Jr., Ponciano, Fukunari Kimura, Yoshifumi Fukunaga, and Dionisius Narjoko. ASEAN Rising: Moving ASEAN and AEC Forward Beyond 2015. Powerpoint presentation. Jakarta: Economic Research Institute for ASEAN and East Asia (ERIA), 16 November 2013. Kawai, Masahiro and Ganeshan Wignaraja. “Patterns of Free Trade Areas in Asia”. East West Policy Studies no. 65. Honolulu: East-West Center, 2013. ———. Asia’s Free Trade Agreements: How is Business Responding? Cheltenham and Northampton: Edward Elgar, 2011. ———. “ASEAN+3 or ASEAN+6: Which Way Forward”. ADBI Discussion Paper no. 77. Tokyo: Asian Development Bank Institute, September 2007. Plummer, Michael G. and Chia Siow Yue, eds. Realizing the ASEAN Economic Community: A Comprehensive Assessment. Singapore: Institute of Southeast Asian Studies, 2009. Sally, Razeen. “ASEAN FTAs: State of Play and Outlook for ASEAN’s Regional and Global Integration”. In The ASEAN Economic Community: A Work in Progress, edited by Sanchita Basu Das, Jayant Menon, Rodolfo Severino

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and Omkar Lal Shrestha. Singapore: Institute of Southeast Asia Studies, 2013. Srivastava, Shruti. “ASEAN Free Trade Agreement Review Shows India ‘Got Almost Nothing’”. Financial Express, 3 October 2014. . World Bank. World Development Indicators 2015, 15 April 2015. (accessed 1 July 2015).

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11 CJK FTA Rationale, Prospects, and Challenges1 Hyung-Gon Jeong and Boram Lee Introduction Northeast Asia is an active region that forms one important pillar of the world economy. Considering the cumulative effect of the population and global trade volume of each economy, the region has the potential to create one of the largest economic blocs in the world, on par with the European Union (EU) and North American Free Trade Agreement (NAFTA). The financial and debt crisis derived from the United States and the EU during 2008–12 has increased the importance of further regional economic cooperation in the region. In order to achieve greater and more effective regional cooperation, China, Japan, and South Korea2 — the key players in the Northeast Asian region — should continue their efforts to find areas where the countries share common economic objectives and look for concrete measures to pursue them. One viable option to spur economic cooperation among the three countries is to pursue a Free Trade Agreement (FTA). Heeding the broad consensus on the need of a China–Japan–Korea FTA (CJK FTA), the governments of the three countries recently launched the negotiations for a CJK FTA in November 2012. This was an achievement after nearly ten years of in-depth research on the needs and possible impacts

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of a CJK FTA on each country. However, the possibility of concluding a high standard CJK FTA seems dim as competition between major industries among the three countries is intensifying (Jeong and Bang 2011). Nevertheless, the intensified production network of Northeast Asia, labelled as “Factory Asia” (Baldwin and Kawai 2013; Baldwin 2008), the increased overlapping FTAs in East Asia, the potential of Northeast Asia to evolve into a “Global Mall” (Helble and Ngiang 2014), and the recent trend of pursuing mega-FTA blocs by advanced countries all support the argument that a CJK FTA is a viable option to enrich the region as a whole. The important considerations here are to what extent the region should liberalize and through which path the negotiations should take.

Literature Review Many studies have examined the necessity of a CJK FTA. By assessing the economic impacts of a CJK FTA via a computable general equilibrium (CGE) model, the Trilateral Joint Research project concluded that a CJK FTA “will be a win-win-win strategy bringing about benefits to all members” (DRC, NIRA and KIEP 2008, p. 3). Park and Jang (2010) analysed the economic effects of a CJK FTA in the agriculture and goods and services sectors using a CGE model, GTAP (Global Trade Analysis Project) Version 6.2 database (2001). According to the analysis, China, Japan, and Korea will all gain from a CJK FTA, based on the assumption that the negotiating countries will remove all tariffs, by predicting an increase in gross domestic product (GDP) in the 0.02 per cent to 0.41 per cent range. In particular, the study predicted that Korea’s GDP will increase by 0.41 per cent (or US$1.83 billion), and China and Japan’s GDP will increase by 0.21 per cent (or US$1.80 billion) and 0.02 per cent (or US$0.43 billion) respectively from a ratified CJK FTA. Suh and Kwon (2013) used a recursive dynamic global CGE model and compared the potential impacts of a Korea–China FTA (KC FTA) and a CJK FTA on Korea’s agriculture sector. The authors found that Korea would benefit more from a KC FTA than a CJK FTA in terms of GDP contribution; however, liberalization through a CJK FTA will be more beneficial than a KC FTA. The backup argument was that Japan’s participation would lower the level of agriculture protection and

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that the benefit the Korean farmers would enjoy from the opening of Japan’s agriculture sector could mitigate the negative impact of increased Chinese imports on Korea’s agriculture sector. Other studies conducted an in-depth analysis of trade patterns and its implications for the CJK FTA negotiations. Sohn (2012) studied the characteristics of intra-regional trade between the three countries, finding an escalating intra-regional trade dependency rate in the machinery and transport equipment sector (SITC [Standard International Trade Classification] 7) and in intermediate goods. Based on the results, he argued that the CJK FTA negotiations should further focus on the elimination of technical barriers to trade (TBT) and aim for growth in the consumption goods market. Jeong (2013) closely observed the trade and investment relationship between the three countries and concluded that a CJK FTA could serve as a halfway point between a KC FTA and the Regional Comprehensive Economic Partnership (RCEP) or Trans-Pacific Partnership (TPP) and that Korea could enhance its role in the East Asia FTA discussion via actively pursuing a CJK FTA. Choi (2011), using an ordered probit model, identified that “product-level competitiveness is important in the determination of FTA staging categories” (Choi 2011, p. 14) for all three countries and that “each country has taken a different liberalization approach for the industries with the forward and backward linkage effects” (Choi 2011, p. 14). Meanwhile, Lee and Bang (2011), Choi and Lee (2012), and Madhur (2013) covered a CJK FTA in the context of an East Asian FTA. In particular, Lee and Bang (2011) focused on the correlation between a CJK FTA and other ongoing East Asian FTAs and insisted that while forming a region-wide FTA in the mid- and long-term, the Korean government should give priority to a CJK FTA over bilateral ones. Choi and Lee (2012) attempted to suggest a road map of Korea’s East Asia FTA policy via analysing possible East Asian FTA scenarios, including bilateral FTAs, the RCEP, and the TPP. The authors concluded that Korea should give priority to the FTAs in the following order: a KC FTA, a KJ FTA, a CJK FTA, an ASEAN+3 FTA, the RCEP, and the TPP. While previous studies focus more on the economic effects of a CJK FTA, the objective of this study is to closely examine the economic challenges of a CJK FTA in the attempt to deduce a viable and practical negotiation path. First, we look into the economic stances

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of the three countries and examine the economic and strategic benefits of a CJK FTA to demonstrate the necessity of constructing such an agreement. Second, we closely examine the economic challenges facing the completion of a CJK FTA by comparing the comparative advantage index tariff rates and the trade patterns between the three countries to identify the sensitive sectors of each country, which contribute to the main challenges of negotiating a high standard CJK FTA.

Strategic and the Economic Rationale for a CJK FTA Potential to Form One Pillar of the World Economy The three countries are major global economic players that consisted of 20.6 per cent of the world’s GDP in 2013. Its economic stance has considerably expanded during the past two decades. From 1992 to 2013, the region’s share of world GDP increased by 1.9 percentage points from 18.7 per cent in 1992 while the world GDP share of North American Free Trade Agreement (NAFTA) and EU decreased by 2.6 percentage points and 10.3 percentage points, respectively. The rapidly growing Chinese economy — its world GDP share increased from 1.7 per cent to 12.3 per cent during the same period — serves as one of the contributing factors to the recognition of Northeast Asia’s economic importance. According to Global Insight (2014), the three countries’ share of world GDP is projected to exceed that of the NAFTA’s and the EU’s by 2030; their shares of world GDP is expected to reach 26.9 per cent while the NAFTA and the EU are expected to record 20.4 per cent and 17.2 per cent respectively. The three countries also lead world trade in goods and services as the region accounts for 18.0 per cent of the world’s total trade in goods and 11.6 per cent of the world’s total trade in services. The region’s trade in goods and services volume has respectively increased its share of world trade from 1992 figures by 6.3 percentage points and 1.9 percentage points, while that of NAFTA’s and EU’s share has decreased. Meanwhile, the three countries’ shares of the world’s inward and outward Foreign Direct Investment (FDI) stock are relatively low compared to the size of its GDP and trade, representing 5.0 per cent and 6.9 per cent respectively in 2013.

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21.5  0.7 19.1  1.8  6.6  7.1

Population (%)

24.5  0.8 21.4  2.3  6.9  8.8

Population (%)

20.6 1.7 12.3  6.5 26.6 23.2

GDP (%)

18.7  1.3  1.7 15.6 29.2 33.5

GDP (%)

10,063 25,977  6,807 38,492 41,987 34,240

GDP per Capita (US$)

3,455 7,555 363 31,014 19,224 17,202

GDP per Capita (US$)

18.0  2.9 11.0  4.1 14.9 32.0

11.6  2.5  5.8  3.6 14.9 40.0

Trade in Services

 9.7  1.3  1.0  7.4 18.0 47.3

Trade in Services

Trade (%) Trade in Goods

11.7  2.1  2.2  7.5 18.0 42.3

Trade in Goods

Trade (%)

Note: In the case of 2013 trade and investment data, EU (28) data was used. Source: World Bank, World Development Indicators; WTO Statistics Database; UNCTAD Statistics.

CJK Korea China Japan NAFTA EU

2013

CJK Korea China Japan NAFTA EU

1992

Table 11.1 Current Economic Status of CJK, NAFTA, and EU (1992 and 2013)

11.0  0.2  0.4 10.4 37.3 39.1

OFDI (%)

 5.0  0.7  3.6  0.7 23.4 33.7

IFDI (%)

 6.9  0.8  2.3  3.8 27.5 40.3

OFDI (%)

Investment (Stock)

 2.4  0.3  1.5  0.6 34.7 35.0

IFDI (%)

Investment (Stock)

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Closer Economic Relations between the CJK Countries The growth of trade interdependency between the three countries constitutes a powerful economic rationale for a CJK FTA (DRC, NIRA and KIEP 2007; JSC 2011). China, Japan, and Korea’s trade interdependence has intensified during the past two decades from 12.3 per cent in 1990 to 19.4 per cent in 2013. It is important to note that these deeper economic relations occurred in the absence of bilateral and regional trade agreements in Northeast Asia compared to the intense pursuit of an FTA and economic community by ASEAN member countries. However, it was also found that intra-regional trade dependency has slightly decreased from 24.1 per cent in 2004. Compared with other regional trading blocs such as the EU and NAFTA, Northeast Asia’s intra-regional trade dependency rate is still low. In 2013, the intra-regional trade levels for the EU and NAFTA reached at 63.7 per cent and 41.1 per cent respectively, while the three countries’ interdependence level was still at 19.4 per cent (see Figure 11.1).

Figure 11.1 Intra-Regional Trade Levels within Regions

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 0.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

10.0%

EU

NAFTA

CJK

Source: IMF (2014).

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Figure 11.2 Shares of Intra-Regional Trade Levels of China, Japan, and Korea

35.0% 30.0% 25.0% 20.0% 15.0% 10.0%

0.0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

5.0%

China

Japan

Korea

Source: IMF (2014).

Among the three countries, Korea’s intra-regional trade dependency has been the highest since 2000, when it was recorded at 25.1 per cent and rose to 30.1 per cent in 2013. Japan’s intra-regional trade dependency grew at the most rapid pace among the three countries, soaring from 9.1 per cent in 1990 to 26.0 per cent in 2013. In contrast, China’s trade dependence on Korea and Japan jumped from 15.0 per cent in 1990 to 27.6 per cent in 1996, although the dependency rate has declined recently — reaching below the 1990 level in 2013 (see Figure 11.2). The growing trade interdependency among the three countries is also reflected in rankings of each country’s major trade partners: China ranks as Japan’s and Korea’s largest export and import partner. In the past two decades, China’s share in Japan’s and Korea’s trading volume has significantly soared, surpassing the United States’ and the EU’s decreasing share. For China, Japan and Korea are among its top two import partners. On the other hand, China’s most important export partner is the United States, while EU countries

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are also ranked high. Japan and Korea rank as China’s third and fourth largest export partners.

FTA Deals on the Rise in the Region The long-term stalemate of WTO’s Doha Round reflects the obstacles of reaching a multilateral trade agreement, which has contributed to the proliferation of bilateral and regional FTAs. Since 2000, the growth in the number of FTAs in Asia has been significant and has caused concerns about the Asian “noodle bowl” effect, resulting in the rise of transaction costs due to multiple tariffs and Rules of Origin (ROOs) in overlapping FTAs. Korea, China, and Japan have also actively pursued FTAs with economies inside and outside of Asia. As of January 2014, Korea has engaged in 32 FTAs in total — including the proposed, on-going negotiations, signed, and in effect FTAs — while China and Japan have respectively concluded 27 and 26 trade deals (ARIC 2014). Despite the flourishing FTA deals of the Northeast Asian countries, the three countries have still yet to conclude an FTA with themselves — their geographically and economically closest partners. Considering the size of its economy, growth potential, the high level of trade dependency, and an increasing number of plurilateral FTA deals not only in East Asia but also around the world, a CJK FTA seems to be an inevitable path for the three countries.

Benefits from a CJK FTA Macroeconomic Impact Various empirical studies have been conducted on the economic impacts of a CJK FTA. The Trilateral Joint Research project (2008) evaluated the possible economic impact of a CJK FTA on China, Japan, and Korea in different scenarios under different dyads and orders of agreement. The study found that the scenario in which the three countries agree on a trilateral FTA would have the largest economic benefit for them. After implementing a CJK FTA, the GDP of Korea, China, and Japan for the 2021–25 period — which is the last period of analysis that

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shows economic effects — will respectively increase by 2.8 per cent, 0.4 per cent, and 0.3 per cent (see Table 11.2). Korea, Japan, and China will respectively see a US$25 billion, US$13.7 billion, and US$8.4 billion GDP increase between 2021 and 2025. One interesting point is that, in the case of Korea and Japan, each will have bigger economic benefits if one signs the FTA with China earlier than the other. Also, if only two of the three countries sign an FTA, the country that is left out may either not be able to reap any benefits at all or even suffer from economic loss due to a trade diversion effect (see Table 11.2). From Korea’s perspective, a CJK FTA is expected to bring about positive effects on Korea’s GDP and welfare. The Korea Institute for International Economic Policy’s (KIEP) research (2012) predicts that Korea’s real GDP will increase by about 0.32 to 0.44 per cent in the short term (five years) and by about 1.17 to 1.45 per cent in the long term (ten years) after a possible CJK FTA. Also, Korea’s welfare is predicted to reach about US$7.189 billion to US$9.625 billion in the short term (five years) and about US$11.611 billion to US$16.347 billion in the long term (ten years). Table 11.2 Simulation on the Scenarios Conducted by CJK Joint Study Scenarios 2006–10

2011–15

2016–20

CJK Trilateral FTA

Korea

China

Japan

2.79

0.37

0.30

Korea–China FTA

Korea–Japan FTA

CJK FTA

2.92

0.31

0.13

Korea–China FTA

China–Japan FTA

CJK FTA

2.77

0.36

0.18

Korea–China FTA

Korea–Japan FTA

3.13

0.15

–0.02

China–Japan FTA

Korea–China FTA

CJK FTA

2.37

0.35

0.27

China–Japan FTA

Japan–Korea FTA

CJK FTA

2.09

0.27

0.31

China–Japan FTA

–0.30

0.20

0.31

Korea–China FTA

3.00

0.18

–0.07

Korea–Japan FTA

0.10

–0.04

0.07

Source: DRC, NIRA and KIEP (2008).

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Table 11.3 Simulation on the Scenarios Conducted by KIEP 5 Years After in Effect Scenarios

Nominal GDP (%)

Welfare (US$ billion)

10 Years After in Effect Nominal GDP (%)

Welfare (US$ billion)

Low Standard

0.32

7.198

1.17

11.611

Middle Standard

0.37

8.279

1.31

13.753

High Standard

0.44

9.625

1.45

16.347

Source: KIEP (2012).

Building Block for Multilateral Trade Agreement with Higher Levels of Liberalization The rise in preferential trade agreements is not only a phenomenon in East Asia. In fact, advanced countries have recently started attempts to negotiate the so-called mega-regional trade deals, including the Transatlantic Trade and Investment Partnership (TTIP), the TPP, and RCEP. Considering only Asia, the TPP and the RCEP stand out as competition led by countries — in this case, the United States and China — that “attempt to create a preferred regional framework in which it can exercise exclusive influence” (Hamanaka 2014). The RCEP includes China, Japan, and Korea as well as ASEAN, Australia, and New Zealand. The TPP includes the United States, Japan, and ten other Asia-Pacific countries. It is worthwhile to note that the RCEP excludes the United States while the TPP excludes China. The two preferential trade agreements differ in their prospective levels of liberalization. The TPP, led by the strong leadership of the United States, aims for a comprehensive, high quality twenty-first century trade agreement. It has already concluded nineteen rounds of negotiations and now faces the final, political decisions on how deep, wide, and ambitious the agreement will become (Elms 2013). Meanwhile, the RCEP, which China is engaged in and seemingly led by ASEAN, has little possibility for a high quality FTA as some countries show more interest in developmental issues rather than on trade liberalization. The current negotiations are based on five ASEAN+1

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FTAs and are of a low quality in terms of transparency and the level of liberalization (Urata 2013). However, concluding a CJK FTA prior to an RCEP may serve as a milestone in facilitating a higher level of trade liberalization in East Asia (Lee and Bang 2011; Choi and Lee 2012; Jeong 2013). Recent studies tried to find out whether FTAs are building blocks that facilitate global free trade or stumbling blocks that disrupt trade liberalization. According to Nomura et al. (2013), in a three-country model with asymmetric domestic markets, a bilateral FTA between two large countries can act as a building block for a multilateral free trade (MFT), a bilateral FTA between two small countries acts as a stumbling block for MFT, and FTA can be Pareto improving when a multilateral trade agreement is not feasible.

Aghion et al. (2007) found that a bilateral FTA between an agenda-setter and a follower eventually leads to a MFT (quoted by Nomura et al. 2013). As such, with China, Japan, and Korea all being big economies, simulation studies show that a CJK FTA in this case is likely to have a positive effect on trade creation rather than trade dispersion. According to the results of empirical studies, a CJK FTA has the potential to serve as a building block and an agenda-setter for the Northeast Asian trade regime.

Current Status of the CJK FTA Negotiations A CJK FTA has long been advocated by academia since 2003. From 2003 to 2009, a consortium of national research institutes from each of the three countries — Development Research Center (DRC) of China, National Institute for Research Advancement (NIRA) of Japan, and the Korea Institute for International Economic Policy (KIEP) — conducted a series of studies on a possible CJK FTA. In 2009, the researchers advised the leaders of the three countries to establish an official mechanism for government officials to discuss a CJK FTA. Endorsing the recommendation, the leaders of the three countries initiated a joint research committee which included the participation of government officials, scholars, and top business leaders to conduct a feasibility study on a CJK FTA. The research examined a comprehensive coverage of a possible CJK FTA including trade in goods, trade in services, investment, and other

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issues such as TBT issues, sanitary and phytosanitary (SPS) measures, intellectual property rights (IPR), transparency, competition policy, dispute settlement mechanism, industrial cooperation, consumer safety, e-commerce, energy and mineral resources, fisheries, food, government procurement, and the environment (JSC 2011). This broad coverage approach has become the basis of a comprehensive scope and coverage of a future CJK FTA. The joint study report was completed in December 2011 and endorsed during the CJK Trilateral Summit in May 2012. Even though discussions on a possible CJK FTA started in 2003, it took nearly a decade of feasibility studies and discussions to officially launch the negotiations. Part of the reason why the CJK FTA negotiations were postponed is because of gaps between China, Japan, and Korea in their economic systems, levels of economic developments, and the coverage and openness in FTAs (DRIC, NIRA and KIEP 2008, p. 112). With regard to the level of openness in FTAs, China only began negotiating a comprehensive FTA since its FTA with New Zealand in 2008, which covers a wide range of issues including investment and trade in services. On the other hand, in most cases, Korea and Japan have found additional merits to pursuing high quality FTAs, more rigid and detailed than those stipulated under the General Agreement on Tariffs and Trade (GATT)/WTO (DRIC, NIRA and KIEP 2008). Of course, a lack of mutual trust due to non-economic factors is another reason for the delay of the CJK FTA. In November 2012, the CJK FTA negotiation was officially commenced by the Economic and Trade Ministers of the three countries. The CJK FTA negotiations are being held under four basic principles: a comprehensive and high level FTA, consistency with WTO rules, balanced interests, and consideration to sensitive sectors. In March 2013, the first round of negotiations took place. Apart from their territorial and diplomatic disputes, the three countries have showed determination to hold three rounds of negotiations annually. As of December 2015, nine rounds of CJK FTA negotiations have taken place. The ninth round of negotiation took place in Japan from 14 December, and the three countries are still in a preliminary stage of negotiations. During the ninth round of negotiations, chief delegates are expected to discuss the modalities for trade in goods, services and investment, along with twenty or more expert dialogues on various fields including cooperation, competition policies, and intellectual property. The negotiations have faced slow progress after the official launch in 2012 because the three countries are still focusing on setting the overall negotiation guidelines

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and the scope and coverage of the negotiations. The three countries are also holding Experts Dialogue meetings on environment, government procurement, and food, along with the discussion on trade in goods and services, ROOs, customs procedures, trade remedies, TBT issues, SPS measures, competition policies, IPR, and e-commerce (MOTIE 2014). The slow pace of negotiations can best be attributed to increased competition among the industries of the three countries.

Challenges of a CJK FTA Intensification of Competition due to Similarity of Industrial Structures The growing similarities of the three countries’ industrial structures have caused intensified competition among the three countries, which is expected to create a significant obstacle to the construction of the CJK FTA. Table 11.4 exhibits the change in export structure of the three countries between 1992 and 2013. China’s change in industrial structure is particularly impressive whereas little change can be observed in Japan’s industrial structure. In 1992, the electric and electronics sector was the only common top five export product among the three countries. While in 2013, the three countries had four of the top five main export products in common: electric and electronics, rubber and chemical, transport equipment, and the general machinery sector. In particular, the fact that the export products of the three countries are the most sensitive sectors of the three countries highlights the severity of the situation. This overlap is expected to create negative ripple effects from the fierce competition resulting from the wider market opening (Jeong 2012). Furthermore, the gap in the technology and capital levels of the three countries could lead to partial economic benefits to a specific country rather than a mutually beneficial outcome. When industrial structures are highly similar and the gap in technology levels is wide — as is the case of Korea, China, and Japan — it is highly possible that a country’s industry with the lowest technology capacity will decline due to import competition. This could lead to concerns that a trade deal might reduce the chance for certain industries to transit into higher value businesses in the long term. As the three countries compete in the regional and global markets in key industries, concerned voices from the affected industries will be high during the negotiation process.

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Transport equipment (13.0)

General machinery (10.6)

Processed minerals (10.3)

3 Iron/metal products (9.4)

4 General machinery (8.6)

5 Rubber/chemical (8.0)

Source: UN Comtrade, (accessed 18 June 2014).

Other manufacturing products (6.3)

Primary products (7.2)

Processed minerals (7.9)

Iron/metal products (7.1)

Rubber/chemical (7.6)

Clothing/textile (15.3)

General machinery (17.3)

Electric & electronics (9.7)

Rubber/chemical (13.4)

2013

2 Clothing/textile (22.7)

1992 Electric & electronics (25.4)

2013

China

1 Electric & electronics Electric & electronics Clothing/textile (23.3) (24.2) (35.2)

1992

Korea

General machinery (18.9)

Precision machinery (6.3)

Iron/metal products (6.4)

Iron/metal products (9.4)

Rubber/chemical (13.0)

Electric & electronics Electric & electronics (22.4) (15.1)

General machinery (22.7)

2013 Transport equipment (20.8)

Japan

Transport equipment (23.6)

1992

Table 11.4 Top Five Export Products of Korea, China, and Japan (%)

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Sensitive Sectors Trade liberalization through a CJK FTA poses a potential threat to those engaged in any relatively weaker industry. It would be helpful to discuss the economically sensitive sectors of each of the three countries. Additionally, the chapter will conduct an analysis of the tariff dispersion, a comparison of the comparative advantage index and tariff rates, and a review of trade patterns in the following pages.

Sensitive Sectors from the Standpoint of Tariff Rates A comparison of tariff dispersion in Korea, China, and Japan (based on the HS [Harmonized System] six-digit codes) summarized in Table 11.5, shows that Korea and China exhibit a high ratio of items on which a 5–10 per cent tariff rate is applied (58.4 per cent for Korea and 44.0 per cent for China). Meanwhile, 52.5 per cent of items in Japan had no applicable tariffs compared to the 14.4 per cent and 6.9 per cent levels in Korea and China, respectively. Since Japan has already liberalized most sectors, the country is expected to gain more than Korea and China. It is also interesting to point out that China’s tariff rates have been significantly reduced after its WTO accession and are now comparable to, even lower than, those faced by some industries of Korea (Loke 2013). Table 11.6 compares the comparative advantage index and the tariff rates of the three countries. It shows that the three countries set high tariff rates in the industrial fields in which they possess a somewhat lesser comparative advantage, which can be classified as sensitive sectors for the purposes of analysing the impact of a CJK FTA. Table 11.5 Import Ratio of Korea, China and Japan, by Tariff Rate (%) 0

0