The US is Winning the Asian PTA Race

With political instability in the Middle East and North Africa, and uncertainties in South America, it seems that among developing regions, only Pacific Asia continues to boast strong growth and relative stability. The region should account for over 35 percent of world economic growth in the next seven years, with a growth rate never falling under 7 percent according to the International Monetary Fund.

Worries about China’s mounting influence, however, could alter the area’s internal economic dynamic. Strategic contention in the China Sea and an increasing reliance on Chinese demand and investment, particularly in the fast-growing ASEAN countries of Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, have incited the trading partners to look for counterweights to Chinese dominance. Only the EU and the US could suffice.

Both the EU and the US are well aware of the benefits of closer ties with Pacific Asia. Besides their complementary economies and the opportunities for their respective firms, it is in everybody’s interest that the region remains open, as opposed to being increasingly China-centered. With two large and interested contestants and important first-mover advantages, the question becomes: Who will get there first?

The Europeans have aggressively entered the race, but it is unclear how effective their strategy will be. The 2011 Preferential Trade Agreement (PTA) with Korea was the first such agreement the EU signed with an Asian country, and the competitive gains, both relative and absolute, have exhorted Europe to repeat the experience. The EU drafted a Free Trade Agreement (FTA) with Singapore last December, to be signed before the end of the year. Negotiations with Malaysia are about to resume, while talks with Japan, Thailand and Vietnam have also commenced.

However, negotiations for an EU-ASEAN PTA had been launched in 2007, as had negotiations with India, and both have stalled. Moreover, the EU is only picking up the low-hanging fruits. Singapore already has an openness rate of 300 percent, while Malaysia has one of 130 percent, and both the latter and Thailand are looking to compensate for the loss of their privileges under the Generalized System of Preference in 2014 and 2015.

Europe’s problems go beyond stalled talks, however. Beyond the difficulties of reaching satisfactory agreements with these countries, the bilateral strategy Europe has traditionally favored is limited. Gains in individual agreements are small: the Europeans resist concessions. Therefore, this strategy will have difficulties in competing with multi-party, comprehensive liberalization.

On the other hand, the US favored a bolder move, and it looks like it has found a way to get ahead. The Transpacific Trading Partnership (TPP) represents an extremely ambitious project. At its core lie the signatories of 2006, the “Pacific 4” 2006 – Chile, New Zealand, Singapore and Brunei. But the 2008 entry of the US, Australia and Peru has fostered a whole new dynamic. Malaysia and Vietnam joined in 2010, and Canada and Mexico followed in 2012. Instead of new entrants slowing negotiations, the partners actually concluded 19 negotiation rounds between March 2010 and August 2013, with no sign of slowing down.

Two features of the negotiation process enhance the prospects for success. First, any country aspiring to join needs to accept all terms previously agreed upon, and therefore entrants can never cause setbacks. Moreover, bilateral talks complement multilateral ones to avoid obstacles down the road, as active bilateral US-Japan discussions preceding the Japanese entry show.

With the TPP, the US could manage to do several things at once. Using the two-track approach, the US can still use its bargaining power to extract concessions from aspiring members. Bolstered, by the TPP’s appeal, these go beyond what it could achieve bilaterally. The Japanese concessions in the automobile and insurance industries lend support to this claim, while the impact on foreign investment from the sole expectation of a TPP conclusion in Vietnam attest to the agreement’s appeal.

Moreover, a recent study by the Peterson Institute considering different liberalization scenarios highlights that, although the US’s absolute gains from the agreement are modest, the TPP should yield large relative gains for the Americans by diverting business away from China. By the same token, it would successfully address the Asian unease about China’s economic omnipresence.

Beyond relative gains vis-à-vis competitors, other aspects of the deal would have far-reaching implications for the future of preferential trade agreements. The TPP’s peculiarity lies in that it tackles issues previously ignored by both regional and multilateral negotiations. As such, it sets a strong precedent. Not only does it cover traditional WTO issues, but it also includes some that are unaddressed by multilateral negotiations – such as competition, environmental and labor policy –, and entirely novel issues such as public enterprises, e-commerce, small and medium enterprises, and norm harmonization. In that regard, it truly is a “21st century agreement”.

Developed economies are reaching out to fast-growing regions, and in Pacific Asia they have found an ideal partner. The flip side is that the US and the EU are now facing off against each other to position themselves favorably in Asian economies. The TPP, particularly following Japan’s entry, has an unprecedented scale and scope, and its dynamism and power of attraction seem to point at a successful conclusion.

Even though it might not be finalized before the end of the year – the ambitious deadline set by the US – a conclusion in the near future is likely. With the TPP, the United States would manage to contain China’s influence, get ahead of Europe, and offer its own firms a significant competitive edge, while introducing important norms and standards for international trade in the 21st century.

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Categories: Economics, Pacific Asia

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  1. TPP agreement delay as US auto makers push for currency clause | Global Risk Insights - November 28, 2013

    […] The US is Winning the Asian PTA Race […]

  2. WTO gets back to work, providing trade increase of $1 trillion | Global Risk Insights - December 10, 2013

    […] The US is Winning the Asian PTA Race […]

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