Friday, March 29, 2013

The living noodle bowl: ASEAN trade agreements

Mega-regionalism is a major feature of trade strategies in the Asia Pacific today. The ‘spaghetti bowl’ of interwoven bilateral FTAs offers no real future, a realisation that has led to greater action on multi-country agreements. These agreements include the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), ASEAN+1 agreements, and the proposed China–Japan–South Korea Free Trade Area (CJK). The ASEAN Free Trade Area is a longstanding regional initiative that lies at the core of RCEP. The important question now is whether this work on multi-country agreements will help with global integration, or whether it will it simply add new noodles, like slabs of lasagne, to the ‘pasta bowl’ of Asian trade agreements

East Asian economies have been debating the appropriate size and makeup of regional arrangements. ASEAN chose the larger RCEP, which is open to all its plus-one partners, due to recent progress on the TPP in the light of renewed US interest, and a search for new sources of growth and an increased focus on ASEAN centrality following the global financial crisis. The CJK would have linked three of the big East Asian economies and could have been a threat to the centrality of ASEAN in regional trade, but the grouping is not big enough to manage the relationships among its partners. Japan has been searching for a way to manage the rise of China, largely through its relationship with the United States, and has chosen instead to sign up with the TPP. The tension between Japan and China over the Senkaku Islands would make the CJK difficult to achieve in any case. South Korea already has an FTA with the United States, meaning the TPP has less to offer it. The South Koreans may prefer an FTA with China, but have decided to work within RCEP.
The prospect, then, is for an RCEP bloc on one side and a TPP bloc on the other — although there will be some joint members, including a number of ASEAN countries, Australia and most likely Japan.
TPP negotiations will progress slowly — new members will be added and talks will be dominated by the US trade representative, whose interests may derail negotiations. The TPP is open to new members, but many, such as China and Indonesia, will find it difficult to meet the agreement’s expectations. It is also less relevant to East Asian supply chains. RCEP is likely to reach a conclusion sooner than the TPP. The agreement is less demanding, and its contribution will depend on whether it adopts a top-down or bottom-up approach. A top-down approach would require new negotiations and would lead to a greater ‘lasagne risk’, with many layers of overlapping multi-country agreements. A bottom-up approach would build on the existing plus-one agreements between each of the members. This approach would not be easy either because of the diversity of agreements, but it may offer a more substantial outcome and could strengthen existing supply chains.
RCEP members, if they can agree early enough, can make significant progress because of their size and the complementary nature of their economies. They could headhunt new members in the TPP and in Central Asia. Members could also establish a link with the European Union, which would be a great advantage. The United States would likely then take a concerted new approach to ASEAN. But several challenges remain. For example, Hong Kong could be rolled into RCEP but how could Taiwan be accommodated?
The two economic agreements — RCEP aligned with China and the TPP aligned with the United States — may add to the tensions surrounding the global leadership ambitions of both these countries. But China and the United States also have a lot of common interests, to the point where the China–US relationship could arguably now become too big to fail. On the other hand, RCEP could still be put at risk because of tensions between its members. Tension between China and Japan is based on domestic politics, which adds to the chance of accidental escalation. And the South China Sea dispute involving China and several ASEAN countries has still not been resolved. As Peter Drysdale puts it: ‘political instinct might dominate rational calculation’. Yet RCEP also provides an opportunity to practice rational calculation. Members can put immediate issues into a longer-term context and identify common interests.
RCEP can establish good economic policy and integration as long it has some higher-level principles. Without them, there is still the risk of the ‘lasagne outcome’. This could be the case whether the members take a top-down or a bottom-up approach. Jayant Menon argues, for instance, for the promotion of multilateralisation as a guiding principle. Members would pass on established preferences to non-members, providing a way to manage the ‘lasagne risk’. The principle of multilateralisation would also generate greater gains and provide a way to deal with non-members of the formal agreement, including Taiwan.
Christopher Findlay is Executive Dean of the Faculty of the Professions at the University of Adelaide.
Shandre Thangavelu is Associate Professor in the Department of Economics, National University of Singapore.

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