Fantasizing about a free trade area of the Asia-Pacific (FTAAP)

The diplomatic calendar in Asia gets extremely busy in November.  Over the years, officials have expanded the number of meetings attached to the Leader’s Meeting of APEC.

Last week in Manila, the leaders of APEC economies gathered and wore fancy hand embroidered shirts for this year’s “family photo.” In addition to the various meetings for APEC itself, some of the leaders also met on the sidelines for a review of the Trans-Pacific Partnership (TPP) and the Pacific Alliance (PA).  In between, many of the leaders also held bilateral meetings.  Finally, officials met in Kuala Lumpur over the weekend in a host of meetings associated with ASEAN including the East Asia Summit (EAS). 

These meetings addressed more than just economics.  But in trade, three things stood out.  As APEC chair, the Philippines consistently promoted small and medium enterprises (SME) across the overall agenda.  Small companies form the backbone of most APEC economies and a year of focus on their needs was helpful.  Second, ASEAN leaders celebrated the forthcoming launch of the ASEAN Economic Community (AEC) at the end of the year.  Finally, the APEC Leader’s Declaration highlighted the importance of achieving broad goals of free and open trade and investment.

This commitment reiterates past statements by APEC about the importance of the eventual Free Trade Area of the Asia Pacific (FTAAP).  APEC was launched in 1989 as a non-binding, advisory trade body that currently includes 21 member economies.  Economic benefits from sustained, regional trade liberalization would be enormous.  Member economies now account for 40 percent of the world’s population, 55 percent of the world GDP and 44 percent of world trade.

Starting in 2010, leaders agreed that the plans to get to an FTAAP could take different formats.  APEC would provide “leadership and intellectual input into the process of its development, and [play] a critical role in defining, shaping and addressing the ‘next generation’ trade and investment issues that an FTAAP should contain.”  In 2014, China pushed for a comprehensive study on how a 21 member economy agreement might take place.

Officially, leaders have endorsed several pathways to reach FTAAP.  APEC currently has no ability to negotiate directly, so the institution requires an outside mechanism to reach a deal.  Two of the officially sanctioned pathways to reach the FTAAP are now in play:  the 12 party Trans-Pacific Partnership (TPP) and the 16 party Regional Comprehensive Economic Partnership (RCEP). 

The hope of FTAAP backers has always been to allow both tracks to merge in the end to create an APEC-wide package of commitments.  In general, these hopes are likely to be dashed for several reasons.

Economies that have negotiated a “high quality” agreement in the TPP will prefer everyone to simply sign on.  From the earliest days of the TPP, membership has been opened to all APEC economies.  Not all have chosen to join and many of the remaining APEC economies are not eager to sign onto TPP-level commitments, including opening nearly all goods--and particularly agricultural trade--at (mostly) zero tariffs, new and expanded openings in services and investment markets, new rules on intellectual property protections, opening of government procurement markets, signing up for labor and environmental protection provisions in a trade agreement, and so forth. 

If economies outside the TPP are reluctant to step up to this deal, perhaps RCEP could serve as a better vehicle for moving ahead with trade liberalization inside APEC.  It is not clear how ambitious RCEP might become, but early signs suggest a significant gap in enthusiasm for market opening between the two deals.  For example, on goods trade alone, RCEP may see a “tiered” approach with different percentages of commitments forthcoming from some members to other members.  Services and investment provisions will likely have less opening and fewer protections.  While the negotiating agenda is expanding in RCEP it is unlikely to be as deep or broad. 

Hence, allowing RCEP to become a defacto platform for FTAAP would also require TPP member countries that are outside RCEP (including all of the Americas) to agree to fewer protections and less market opening.  The practical consequences of doing so would be modest, as most firms would likely opt to use the broader, more comprehensive TPP provisions if at all possible, rather than the shallower commitments in RCEP/FTAAP.

Merger of TPP/RCEP also contains some additional problems.  Not all APEC members are included in either agreement.  Four are currently left out of both: Hong Kong, Papua New Guinea, Russia, and Chinese Taipei. 

While some theoretical literature speaks eloquently about “multilateralizing regionalism,” in practice, this is devilishly difficult to do.  RCEP itself can be seen as an attempt to follow exactly this prescription—folding five different ASEAN +1 agreements (with China, South Korea, Japan, India, Australia and New Zealand) into one.  But officials have struggled to even exchange market access offers for one another in goods, despite two years and 10 rounds.  What countries offer to one partner may, or may not, be something they are ready and willing to offer to another. 

Converting RCEP into an FTAAP could contain similar challenges.  The nine excluded partners from RCEP (Canada, Chile, Hong Kong, Mexico, Papua New Guinea, Peru, Russia, Chinese Taipei, and the United States) might have dramatically different ideas about what should/should not be folded into FTAAP.  In addition, whatever commitments RCEP members have made to one another might be altered with the addition of new participants, as RCEP members could be quite uncomfortable making the same offers to a new grouping.

RCEP also contains non-APEC economies (Cambodia, India, Laos and Myanmar). Converting the agreement into FTAAP may mean bringing non-members into APEC or somehow cutting these participants out of the future, larger agreement.  Either option could prove tricky in practice.

In short, it is unlikely that a satisfactory FTAAP agreement can be created by merging RCEP with TPP or by morphing one or the other into a new agreement in the future.  Hence, if APEC wants to create an FTAAP that contains all members or gives all 21 member economies the option of joining, it should start from the beginning with all 21 members.