Industry and trade

Moving the Trans-Pacific Partnership forward: what will it take?

Moving the Trans-Pacific Partnership forward: what will it take? The formation of a Free Trade Area of the Asia–Pacific (FTAAP) has been intensively discussed in recent years. However, it is anticipated that such an Asia-Pacific Economic Cooperation (APEC)-wide FTA would take many years to negotiate and involve numerous studies among all the APEC members, currently 21 in number.

The Trans-Pacific Partnership (TPP) could be a viable alternative. It is intended to be a “high-quality, comprehensive 21st century FTA” that will promote economic integration in the Asia-Pacific region. In addition to deep commitments to tariff reductions, it aims to cover services trade, investment, intellectual property, government procurement, competition policy, labor, the environment, and many other issues affecting trade and investment. The agreement is also expected to enforce strict regulation of state-owned enterprises (SOEs) and to produce innovative initiatives to harmonize regulatory systems to free up global supply chains.

The TPP could address the problem of a “noodle bowl” of multiple and overlapping FTAs by simplifying and streamlining customs procedures, tariff lines, and rules of origin through rationalization, adopting coequals, upgrading origin administration, and harmonizing rules and procedures.

To join or not to join?

Since the APEC summit in November 2011, the predominant theme of the TPP negotiations has been the possible inclusion of Canada, Japan, and Mexico in the talks. Consultations between these countries and existing negotiating parties have intensified in recent months. The US has reportedly involved a number of senior officials in the talks, signaling a serious effort to finalize a deal.

Mexico has openly stated its readiness to enter the talks and has urged the current TPP parties to consider its bid to enter the negotiations on a separate track from the other countries so as not to delay its entrance.

Canada has signaled willingness to discuss “all issues at the negotiating table without exception,” including changing several Canadian forest sector policies opposed by US lumber producers.

Finally, Japan has continued information-gathering efforts and begun bilateral consultations with most of the existing negotiating members.

Among these current candidate countries, the TPP poses the most significant challenges for Japan. In particular, the expectation that Japan would need to open its agricultural markets substantially to foreign competition is generating domestic pressure against joining the TPP.

Opening Japan’s agricultural markets is seen by some commentators as undermining food self-sufficiency and damaging local economies involved in agriculture, forestry and fisheries. Japan’s triple disaster, comprising an earthquake, tsunami, and nuclear accident, in March 2011 devastated local communities dependent on agriculture and fisheries, making this issue more prominent and causing a delay in the decision on whether Japan should join the TPP negotiations.

Overall, the sensitive nature of the TPP in Japan has until now not had a visible impact on the ongoing negotiations. On the contrary, Japan’s announcement at the APEC summit in November 2011 of its intention to join the talks generated significant momentum. It remains to be seen what impact Japan and its sensitive agricultural sector will have on the talks.

Several other economies—including the Republic of Korea, the Philippines and Taipei,China—have expressed interest in joining the talks or have been frequently mentioned as possible future parties.

The TPP is unclear about the extent of the expansion of its membership, but there is an assumption that it is open to APEC members who are willing to accept the TPP negotiated text and are ready to undertake its ambitious liberalization goals. At this point, it appears that this excludes Asian and Latin American countries that are not members of APEC. However, APEC membership itself may be expanded in the future, thereby facilitating the possible participation of these new members in the TPP.

The main obstacles to finalizing the TPP text include traditionally sensitive areas such as agriculture (Japan), handling of SOEs (Viet Nam), intellectual property (New Zealand, Peru, and others), investor–state dispute resolution (Australia), and labor and environment provisions. Resolving these will not be easy with as many as nine negotiating parties at the table.

Another potential obstacle is the impact that new negotiating parties (such as Canada, Japan, and Mexico) will have on the negotiations. Existing TPP negotiating parties have rejected the opening up of already agreed legal texts to new entrants. But it remains uncertain whether the new negotiating parties will accept all the texts, which they have not been involved in negotiating. In any case, individual schedules and exceptions on tariffs, services and investment must be negotiated.

As for the PRC, I believe that it should seriously consider joining the TPP. The PRC would be likely to reap many benefits from joining the TPP process. These would include: a boost to trade-led growth internationally by linking PRC-based “factory Asia” with preferential access to the large US market, opportunities to expand inward foreign direct investment and services trade, and further integration with other Asian and Latin American countries.

However, a major obstacle would be the TPP’s ambitious plans to eliminate tariffs and services trade barriers as well as to improve behind-the-border regulatory measures such as intellectual property protection and its enforcement, the large presence of state-owned enterprises (SOEs) in trade and investment, competition policies in general and investment regulations. In addition, the domestic negative sentiment in the US toward lowering tariffs for Chinese products is a significant hurdle, as American competitors do not want to see US markets flooded with Chinese products.

Accordingly, it seems unlikely that the US will allow the PRC to join the TPP process in the short term, and in any case the PRC may not be able to reform its domestic systems in such a way as to make them compatible with TPP requirements within the short term.

Nevertheless, the PRC’s participation in the TPP is highly desirable in the medium to long term, given the economic interdependence of the PRC and the US market. TPP membership would signal to the rest of the world that the PRC is committed to more transparent international trade and investment rules as a global citizen.

A practical approach for the PRC would be to continue to pursue the ASEAN-centered approach of forging an ASEAN+3 (or +6) FTA, and then to combine this with the TPP when the PRC is ready to accept the rules and norms set by the TPP. It would be easier to do this if the ASEAN+3 (or +6) FTA started with significant degrees of trade and investment liberalization, including substantially eliminating behind-the-border barriers to trade and investment. The role of Japan is critical in bridging the TPP and the ASEAN+3 (or +6) processes as it is the only large economy that is a potential member of both.  A harmonious approach would see a convergence between the two processes, which would be a win-win solution for the entire Asia–Pacific community.

Masahiro Kawai

About the Author

Masahiro Kawai is Dean and CEO of the Asian Development Bank Institute (ADBI) and previously served as special advisor to the ADB president on regional economic integration and cooperation. Before joining ADB, he was a professor of economics at the University of Tokyo. Dr. Kawai has published a number of books and numerous academic articles on regional economic integration and cooperation in Asia, including lessons from the Asian financial crisis and Asian free trade agreements, and on the international currency system.
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