Can Asia go the next round on economic integration?

Free trade agreements have not brought significant commercial gains or domestic reforms to Asia. There needs to be a stronger focus on multilateral economic integration.

Increased economic exchange and integration of markets in North America and Europe were institution-led through NAFTA and the European Union. The diversity — in levels of development, political systems, political closeness and by many other measures — and the geography saw no such institutional arrangements emerge to promote integration in Asia. Yet East Asia has managed to achieve economic integration on par with North America or Europe through market-led efforts.

Economies in East Asia committed to opening up in the 1980s and 1990s without binding and enforceable external agreements but because they recognised it was the only path to development and prosperity.

The benefits of unilateral trade liberalisation were compounded by doing so in concert, a collective regional endeavour that APEC reinforced. China’s massive unilateral liberalisation in its 15-year-long march to WTO accession was launched under the umbrella of APEC in 1995. The foundations for the road to regional integration in Asia were the principle of most-favoured nation (MFN) in international trade (Article I of the GATT) and commitment by successive governments around the region to open foreign investment regimes.

That was then. Most border barriers are now at negligible levels apart from politically sensitive sectors such as agriculture. The real game is now behind the border: in connecting economies, in the contestability and efficiency of markets in domestic economies, and in reducing trade and transactions costs among regional markets. Transparency in economic policy implementation is also important.

‘Free trade’ agreements that proliferated after the Asian Financial Crisis have been focused on reducing those remaining traditional trade barriers that are now a small share of global commerce, and finding ways of getting firms preferential access to foreign markets. But FTAs, as most serious analysts accept, have not brought significant commercial gains nor domestic reform to Asia.

Furthermore, their preferential nature undermines the core MFN principle of the multilateral trading system under which the regional economy has thrived. Additionally, difficulties in concluding the Doha Round have impeded the WTO from being able to renew its rules for commerce in the 21st century characterised by supply chains that require not only free trade at the border but confidence in the investment and regulatory environments. To achieve that, there needs to be significant reform of WTO governance.

In what is a modest role reversal,  Peter Drysdale takes stock of the different initiatives to promote economic integration in the region, at a time when the global trading system and regional trade strategies ‘are in a state of fluidity’ with ‘uncertainty about the best way to take trade and investment reform forward’.

In an attempt to fill the void at the global level and make progress where the FTAs have failed, Asia is grappling with two mega-regional agreements: TPP and RCEP.

The second round of ASEAN 6 Regional Comprehensive Economic Partnership (RCEP) negotiations were conducted in Brisbane last week and the Trans-Pacific Partnership (TPP) negotiators are currently wrapping up inter-sessional meetings in Washington.

There is a big push to make as much progress as possible before the APEC summit in Bali next weekend. TPP announcements have occurred on the sidelines of APEC, despite not all APEC members being part of TPP. The self-imposed pressure to complete a deal on TPP comes from the last two year-end deadlines set by US President Obama not being met in 2011 or 2012.

Wrapping up a deal quickly would require significant compromises that would result in a bad agreement that would only frustrate members and threaten those outside the arrangement. Drysdale sends a blunt warning that Australia should push “hard to ensure that countries’ offers improve sufficiently … and to protect its interests’ otherwise Australia ‘needs to opt out, in its own national interests”.

Australia’s and the region’s interests include incorporating other regional economies that are integral parts of Asian supply chains. A TPP that does not incorporate the interests of  (and over time aim to integrate) Indonesia, China, India and others in the region will divert trade and investment to the detriment of the most dynamic element in regional trade.

The experience of the opening up of East Asian economies to the rest of the world has shown that overcoming political relations is a significant constraint to further integration. If the TPP or RCEP turn into blocs that do not make it easy for others to join in the future, there is the real risk of geopolitics spilling over into commerce and integration in ways that will damage and diminish economic benefits. That is not good in a region that is not politically close.

Whatever progress in TPP is trumpeted at APEC in Bali next week, the Indonesian hosts — who are not a party to TPP — will be getting on with business as usual by helping to further economic cooperation and integration in the APEC way.

Barriers to trade and commerce are best understood by businesses that operate in the regional economy. APEC has institutionalised business input into identifying those barriers and helping set the priorities for cooperation and increased connectivity. That is different from domestic lobbying in trade negotiations, which are focused on the pursuit of the narrower interests of firms and gaining privileged access to markets.

APEC’s track record in immunising information and communications technology goods from tariffs and other protectionism (later implemented at the global level through conclusion of the Information Technology Agreement in the WTO) and more recently in immunising environmental goods from trade restrictions are important contributions to global trade outcomes. It is a legacy, of the primacy of multilateralism over exclusive and preferential trading, that should continue to inform APEC’s approach to the global trading system.

Bali will host another important meeting in December: the WTO Ministerial. It will be very important to conclude the Doha Round (even in a significantly reduced form) so that attention can be focused on fixing what is wrong with governance of the world trading system, hopefully at the G20 Summit that will be held in Brisbane in November next year.

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