SHARE >>>  
/// PUBLICATIONS
cptpp

Asia’s Trade Spaghetti Bowl -TPP11 and RCEP

By Dandan Wan

6 April 2018

Dubbed the TPP-11, the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) was signed by the remaining 11 TPP members on 8 March in Chile exactly one year after President Trump’s withdrawal from the agreement. Although the US exit reduced the size of the deal, which originally represented 40 percent of the global economy worth US $28 trillion[1], the new agreement strikes a blow against protectionism and reaffirms the members’ commitment to greater trade liberalization and regional integration in the Asia-Pacific.

 

The CPTPP aims to reduce tariffs and foster trade among its 11 members- Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, which together represent 13.5 percent of global GDP worth $10 trillion. With 500 million people it is larger than the EU’s single market (but not nearly as comprehensive).

 

22 of the original TPP’s provisions have been suspended in the new deal, mostly over intellectual property originally inserted by the US, financial services, copyrights, telecommunication and government procurement.[2] Despite the suspensions, it will “establish a new standard for other regional economic integration agreements, and even for future negotiations in the WTO and in APEC”, said Chile’s foreign ministry.[3] It’s still an ambitious, next-generation comprehensive treaty dealing with all the most modern topics of international trade: labour rights, environmental protection, state-owned enterprises, and good governance.

 

Member states will now begin their domestic ratification processes and the pact will come into force 60 days after it is ratified by at least six members. [4] Japan, one of the deal’s main supporters, is expected to be the first to ratify the CPTPP, thus building momentum for further ratifications.

 

Japan’s leading role

 

Japan, Australia and Singapore have been the key drivers and flag-bearers of the deal after Trump’s exit. Japan has been active in resolving rifts and major concerns such as protection of cultural industries in Canada and labour rights legislation in Vietnam to keep the deal alive.

 

A regional trade agreement is in line with Japan’s Prime Minister Shinzo Abe’s economic strategy-Abenomics, which regards access to foreign markets as a way to breathe new life into its languishing economy. According to the Peterson Institute for International Economics, on average the economies of the CPTPP members will be 1.7% larger than they would have been by 2030.[5] In addition, Japan hopes to strike a blow for multilateralism instead of bilateralism. The signing of CPTPP is expected to increase Japan’s bargaining power to help mitigate Washington’s forceful requests in terms of a bilateral FTA with the US under Trump’s “America First” principle.

 

Equally important for Japan is the geopolitical consideration. The US withdrawal from TPP created a power vacuum in Asia-Pacific that worked in China’s interests. Worried about the loss of influence in the region, Japan has been lobbying hard to keep the deal aliveand hopes to see a revived TPP as a counterweight to the China-backed RCEP.

 

US rethink?

 

As indicated by the negotiators, the CPTPP is an inclusive agreement that welcomes anyone who is willing to accept the terms and win the support of all existing members. The door has been left open for the US to rejoin the pact. Trump has hinted in January this year that he might rejoin if the US could strike a “substantially better deal.” He did not define what a “better deal” might look like.[6]

 

However, his latest unilateral, trade restrictive measures are not encouraging. On the same day the CPTPP was signed, Trump issued two proclamations to levy a 25 percent tariff on importers of steel and 10 percent tariff on aluminum, arguing it was necessary for national security. Amid the clash on the issue of tariffs, White House’s chief economic advisor Gary Cohn- an advocate for free trade and opponent on the tariffs- resigned being replaced by Larry Kudlow-a television pundit and Trump supporter. The chances of Trump reversing his unilateral moves before November’s midterm elections are slim, thus making it difficult for the US to return to the CPTPP table.

 

RCEP

 

As a potential alternative of the CPTPP in Asia-Pacific, the RCEP-a multilateral deal that is backed by China but led by ASEAN was officially launched in 2012. It is an FTA scheme of 10 members from Association of Southeastern Asian Nations (ASEAN) and its six FTA partners -Australia, New Zealand, India, China, Japan and South Korea.

 

 

Together, prospective RCEP members encompass roughly half of world’s population with $49.4 trillion GDP in 2017, approximately 39 percent of the global economy. [7]Once concluded, it will be the most populous, diverse and sophisticated agreement ever negotiated among so many Asian economies. However, negotiating deadlines were missed three times in 2015, 2016 and 2017. With developed economies like Japan and developing countries like Laos, the delays were primarily attributed to the huge economic and development disparity and conflicting interests.

rcep

Recently India is the main member that appears to drag its feet on low tariff concessions. Compared to the 92 percent free trade tariff line, India has offered only 80 percent with a deviation of 6 percent either way. As a labour-intensive exporter that is similar to ASEAN and China, India is ambivalent about the advantages it could gain. In the meantime, most members remain reluctant to India’s proposal to open up services market especially in information technology sector. For now there is growing clamour for India to either exit RCEP or resist its early conclusion.[8] The target to sign the deal during the ASEAN summit in Singapore this November is likely to be missed again. Given the uncertainties arising from several states election in 2018 and a general election in 2019 in India, doubts still remain as RCEP inches closer to conclusion.

 

China has been regarded as the driving force behind RCEP and has firmly supported it since 2012. The US was excluded from RCEP since a prerequisite for joining is a free trade agreement with ASEAN. China has pledged to work for a quick conclusion of RCEP with much interest in market access and lower tariffs,  while countries like Japan and Australia would like to incorporate the high-quality trading terms into the deal. The actual outcomes depend on the negotiations and bargains between different forces in the bloc.

 

Compared to the CPTPP, RCEP is a less ambitious deal with a limited positive list approach in services, weaker tariff reductions, few improvements in terms of labor rights, intellectual property and environmental protection.

 

From Spaghetti Bowl to Jigsaw Puzzle

 

Although RCEP is a far shallower agreement, both RCEP and CPTPP are aimed at boosting trade and facilitate regional integration in Asia-Pacific region. They are regarded as the building blocks of a multilateral trade area- Free Trade Area of Asia-Pacific (FTAAP) pursued by Asia-Pacific Economic Cooperation(APEC).

 

No matter the CPTPP or the RCEP, the emergence of mega-regional trade agreements reveals that the Asia-Pacific is transforming from the “Spaghetti Bowl” to the “Jigsaw Puzzle”. Jagdish Bhagwati described the entanglement of many crisscrossing FTAs with various rules and arrangements as a “Spaghetti Bowl”.[9] Under this circumstance, the overlapping FTAs with discriminatory trade liberalization would add to the business cost and reduce the FTA welfare.

 

The past two decades have seen the rapid proliferation of FTAs in East Asia. By the end of February 2016, 133 FTAs existed in East Asia and 79 were in effect.[10] One way to rectify the mess is to consolidating bilateral FTAs into a regional bloc, thus creating a regional “Jigsaw Puzzle” considering the different shapes and sizes of bilateral FTAs. [11]The CPTPP and RCEP actually offer a framework to integrate the region’s different FTAs.

 

Conclusion

 

Spearheaded by Japan after the US’s withdrawal, the CPTPP, as a high-quality, next generation trade agreement, strikes a blow again protectionism. Although the door is still left open for the US, the chances are small for the US to rejoin the pact under Trump’s administration. The absence of the US did not reduce the CPTPP’s appeal to other potential members, and many countries have expressed their willingness to join including Indonesia, Philippines, South Korea, Thailand and even the UK.

 

As CPTPP’s alternative, RCEP is a less ambitious pact with limited scope. For now the RCEP is stuck on India’s low tariff concession. Uncertainties still remain as it inches closer to conclusion this November.

 

Overall, the emergence of mega-regional FTA sindicates that the Asia-Pacific region is transforming from a “Spaghetti Bowl” to a “Jigsaw Puzzle”, thus building momentum for regional economic integration.