November 24, 2011
For a long time it looked as if the US would take a timeout from trade policy. We were probably mistaken. Although no real progress is being made in the World Trade Organization’s Doha Round, October did nevertheless bring successful US Congressional ratification of free trade agreements with South Korea, Colombia and Panama and the trade adjustment law. And there are moves afoot in the Asia-Pacific region. But what are they exactly?
President Obama hosted the heads of state and government from 21 countries belonging to the APEC (Asia-Pacific Economic Cooperation) Forum in Honolulu from November 12 to 13. Before the state guests watched the world-famous hula hoop dances the president had successfully made the diplomatic breakthrough. For two years his negotiators had endeavoured to generate sufficient momentum in the talks between the nine currently participating countries about forming a Trans-Pacific Partnership initiative (TPP), an ambitious free trade agreement. At the beginning of the APEC talks in Honolulu not only was a framework accord achieved, the number of participating states also increased significantly. This victory for Obama was an important milestone.
Looking back, the first trans-Pacific partnership agreement was signed in 2006 by four small nations (Brunei Darussalam, Chile, New Zealand and Singapore). In 2008 they were joined by Australia, Peru and the United States as negotiating partners. Vietnam and Malaysia have taken part since 2010. In Honolulu, Canada and Mexico also registered their interest, and Japan is very seriously discussing the matter. The Philippines, Thailand, Taiwan and South Korea are also considering taking part.
Whereas the first eight partners of the US account for only 6% of US external trade, the addition of the NAFTA countries, Japan and other Asian countries would bring on board heavyweights and minnows that are responsible for more than half of US external trade. By the end of 2012 negotiations are to be concluded on an ambitious free trade agreement covering not only the usual topics of dismantling trade tariffs on goods and agricultural products, but also the basic freedom to provides services (with a few exceptions), particularly stringent investment protection, a reciprocal opening of public procurement markets, greater regulatory convergence, a system of tariffs and rules of origin geared towards supply chains and strict competition rules for state-owned enterprises. The latest increase in the number of interested parties could cause some slippage in the timetable, but the level of ambition of the project is not to be called into question. For the smaller ASEAN economies in particular there is a lot at stake, as this agreement is also meant to regulate many contentious issues.
Obama is also laying down markers in trade policy with his much more expansive Pacific strategy. The US evidently sees little scope at the moment in the multilateral and transatlantic arenas and is focusing on the dynamic Asian economies and common rules for ensuring smooth commercial transactions.
The targeted liberalisation offensive is a clear riposte to China’s ambitions. In 2010 China already signed a major free trade agreement with the ASEAN states. The latest deliberations about attempting to sign an agreement with Japan and South Korea were probably also a factor. It remains to be seen whether anything will become of that. China already has trade agreements with a raft of Pacific Rim nations (Chile, New Zealand, Peru and Singapore), so it has no reason to be overly fearful of the TPP.
The TPP will, however, completely change the situation for a number of Asian countries. The head of the South Korean government is currently fighting to get the US free trade agreement signed by the Korean parliament, whereas the agreement with the EU has been approved. Japan, China and ASEAN do, however, represent markets that offer profit-making opportunities.
At the ASEAN summit last week a resolution was also passed to establish closer ties between ASEAN and Japan, South Korea, Australia and New Zealand via free trade agreements. Decisions about them are to be made in 2012.
For Japan in turn the TPP constitutes a key milestone. Japan cannot be forced to open up its markets either via WTO negotiations or via purely Asian agreements, but participation in a US-led comprehensive free trade agreement would provide huge opportunities for domestic reforms and anchoring foreign policy in an Asia that is increasingly dominated by the Chinese. Prime Minister Noda has recognised this and with the support of Japanese industry is heading for a confrontation with the economically weaker sectors populated by small and medium-sized firms and the agricultural sector, which would be subjected to adjustment pressures by an agreement. Whether opening up Japan to foreign actors is regarded in the country’s domestic political arena as an opportunity or a threat is currently unclear.
The Europeans will also have to re-examine their strategy. Admittedly, the EU has just wrapped up the agreement with South Korea, is already negotiating with India, Singapore and Malaysia and is in exploratory talks with Indonesia, the Philippines, Thailand, Japan and Vietnam. There is, however, still a long way to go before an agreement is reached and a policy decision about Japan has to be made first in the European Council. A comprehensive agreement with China is completely out of the question given the numerous political obstacles. This may not be diplomatically relevant given that there is probably a very long way to go from a TPP to an APEC free trade zone.
Also, the Europeans will have to ask themselves what options they have in the transatlantic relationship. The work in the Transatlantic Economic Council is progressing sluggishly, and in the US above all there are growing calls to negotiate a comprehensive timetable for dismantling barriers, opening up services and investment, regulatory cooperation and other bilateral issues. After nearly twenty years of passivity the US business sector has rediscovered trade policy and is training its focus on opportunities in the East and the West. It is now up to the Europeans to persuade President Obama to supplement his grand Pacific project with a grand transatlantic project.
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