TPPA and RCEP: test of solidarity for the ASEAN

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Will it be the TPPA or RCEP? Although presented with the opportunity to access the world’s most prominent markets, the two trade pacts are coming at various costs, one of which lies at the core of the ASEAN – its integration as a strong regional bloc, says Angelican Buan in this report.

Two of the world‘s economic superpowers, the US and China, have carried their rivalry over to global trade through enforcement of the the US-led Trans-Pacific Partnership Agreement (TPPA) and the China-backed ¬Regional Comprehensive Economic Partnership (RCEP), picking the Association of Southeast Asian Nation (ASEAN) bloc, or some of its members, as partners in widening their regional clout.

Why ASEAN? In general, the ten-country bloc composed of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam collectively represents a market of more than 600 million people, with a combined GDP of about US$2.6 trillion.

It is home to Asia’s emerging economies, which for the past global economic crisis have remained resilient and even provided the affected regions the buffer to recoup against the recession and losses.

Historically, both the US and China have extensive political and economic ties with countries in the region, which is also a strategic-geographic zone for the security interests of the two economic giants.

Via the wide-scope trade pacts, the breadth of influence of China and the US will be game changers for ASEAN’s trade policies and yet at the same time challenge the regional bloc’s alliances to the respective world powers.

TPPA: a gateway to major markets

The Trans-Pacific Partnership Agreement (TPPA), ratified on 4 February this year, has under its wing 11 countries from Asia Pacific and other regions (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam). In combination, these countries account for 40% of the global economic output and drives 26% of total world trade. TPPA covers an estimated 800 million population with a combined GDP of US$30 trillion. It has excluded the world’s two most populous nations and Asia’s strong economic fortresses: China and India.

TPPA member-countries are important markets for the US. Fostering an extensive trade agreement such as the TPPA will be beneficial for US manufacturers as well as those of the signatory countries leveraging on the Asian markets.

According to the Department of Commerce- International Trade Administration, the agreement will eliminate tariffs as high as 25%, and thus, US manufacturers can gain duty-free access into the TPPA countries.

Also, among its key highlights are standards for protection of foreign investment and intellectual property; as well as customs and trade facilitation, electronic commerce; government procurement, labour, environment, and other such measures that will ensure competitiveness. Some ASEAN members have resisted joining the TPPA due to the stringent requirements and compliances to intellectual property rights (IPR), stateowned enterprises, and competition.

Nevertheless, the TPPA body affirms that the benefit is mutual. For example, Malaysia is forecast to boost its petroleum, chemical, rubber and plastic products output by easily tapping into overseas markets.

Vietnam, which under the TPPA has to eliminate almost all of its tariffs on plastics within four years or less, is also bidding for exports sustained through the TPPA. The country also intends to bank on free trade opportunities as it builds its parts and materials industry to cater to various companies including automotive makers, apparel and electronics manufacturers.

For the US, its rebalance in its Asia strategy can be effectively carried out if its engagement with the ASEAN broadens. It is not a difficult feat since the US has long engaged with ASEAN as a dialogue partner since 1977, according to the Office of the United States Trade Representatives (OUSTR). Since the early 1990s, both parties’ development cooperation also grew through the various economic programmes on trade and investment, technology transfer, and education.

ASEAN is an important market for the US, the OUSTR said, stating that its goods and services trade with ASEAN countries was valued at US$241.7 billion in 2013. Exports reached over US$100 billion and imports topped the figure with more than US$141 billion, thus making the ASEAN as the fourth export partner for the US for electrical machinery, machinery, aircraft, mineral fuel and oil, and optic and medical devices.

The Department of Commerce, US Goods and Services cites that exports to ASEAN supported an estimated 499,000 jobs from the goods and services exports segments in 2013. In 2015, US trade in goods with ASEAN increased by 55%.

RCEP: a melding together of Asian FTAs

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement FTA) proposed between the ASEAN and the six countries, including Australia, China, India, Japan, South Korea and New Zealand, which the regional bloc has existing FTAs with. ASEAN members that have been weighing their options to join the TPPA are also being urged to join the RCEP instead, which is expected to be more inclusive and less restraining.

Spearheaded by China, RCEP is expected to have more liberalised provisions for basic issues such as services, trade and labour. Over and above RCEP, countries in the ASEAN have historic, geographic, and geo-economic ties with China, and have been its largest trading partner since FTAs were implemented.

RCEP also begets as the world's largest free-trade agreement – an objective, which pits it head on with TPPA. But RCEP vouches on the strength of its 3.4 billion population-strong economic bloc with combined GDP of US$21 trillion.

The partnership aims to consolidate the existing ASEAN FTAs and tie-ups with the other six partner economies, and promises to be a mutually beneficial economic partnership agreement among the ASEAN member countries and ASEAN’s FTA partners.

Under the RCEP, a 65% tariff cut has been agreed on, with the percentage likely to increase to 80% within a decade. Among other key features in this pact, other issues to be covered include trade in goods and services, electronic commerce, investment, economic and technical cooperation, intellectual property, competition, legal and institutional matters.

According to the Manila-based Makati Business Club (MBC), the RCEP ushers in the Asia Pacific Economic Cooperation (APEC)’s long-time prospect of creating a Free Trade Area in the Asia Pacific (FTAAP).

Talks on RCEP have been fast tracked especially since TPPA has already been ratified, and it is expected to be concluded by the year end. Salient to the discussions are the tariff reduction, which during the first stage, will be dismantled for some 65% of 9,000 trade goods; and within ten years it will be extended to another 20% of the trade in goods with zero tariff, with the fate of the 15% of the remaining goods, considered as sensitive products, to be further negotiated on.

While RCEP could succeed in encouraging participation from ASEAN members that are sceptical about joining the TPPA, at least as yet, it is the ongoing security tussle with China, specifically the escalation in the South China sea territorial claims, that is putting some strain on the confidence of the economic integration effort.

ASEAN: to deal or not to deal?

The so-called “noodle bowl effect”, which is the projected outcome of all these overlapping FTAs may become more pronounced or subdued when the two monumental agreements are already implemented. According to the Asian Development Bank (ADB) working paper published in 2015, it stated that such an effect could challenge the integration and economic cooperation within ASEAN.

The TPPA, while getting the flak for a number of its constraining provisions is said to benefit countries like Vietnam, Malaysia, and Japan. Vietnam is expected to reap a 10% economic boost by 2030, to be fuelled by its textiles and apparel industry that will find higher exports to the US and other key markets. By 2030 also, Japan’s economic growth could rise to an additional 2.7% and Malaysia could increase by 8%, according to World Bank data.

These growths would come at the cost of nonparticipating ASEAN countries, which would have limited access to those markets. It could also be hitting value chains of slower growth economies like Cambodia and Laos, which will lose out to TPPA members that are shifting bases to co-member countries. In a similar vein, the absence of six ASEAN members in the TPPA poses concern to the economic integration within ASEAN.

Thailand, Asia’s top automotive hub, could face tighter competition from other major automotive hubs like Japan. But analysts say that it is unlikely that companies with bases in Thailand would likely relocate their production to TPPA-member countries if Thailand will not decide to join the US-led pact. Still, if Thailand does not sign up with TPPA, its exports could slide, in favour of ASEAN neighbours Malaysia and Vietnam that are members to both agreements.

Indonesia is also mulling joining the TPPA. An analyst from the Hong Kong-Shanghai Bank Corporation (HSBC) suggested that it is beneficial for the country to enlist since the agreement will not be focusing on commodities and this will augur well for Indonesia to develop more value-added non-oil and gas exports through TPPA.

For some observers, RCEP is expected to provide ASEAN a stronger negotiating power to push forward its interest, compared to the TPPA.

The Philippine Institute for Development Studies states that the Philippines, a non-TPPA member will score economic gains under the RCEP, spurring Foreign Direct Investments (FDIs) and benefitting its export industry. Based on the ten-year projection data from 2014, an estimated US$2.4 billion increase in FDIs will be in the offing for the country by 2023. Further, the study projects that the total exports by RCEP members to the region will increase, while exports to non-RCEP areas will drop as tariffs are reduced, thus effecting a real GDP growth for the Philippines. Over that period, the country is expected to become the third biggest exporter to RCEP, after Vietnam and Indonesia.

It can be gleaned that both agreements have the common goal of strengthening international trade, alleviating financial trade costs and ultimately setting a level playing field for the ASEAN within the regional markets. Yet, there are underlying costs that TPPA and RCEP could generate.

In any case, such conflicting issues can only be resolved if the ASEAN stands its ground as one community with one goal.

(PRA)