Asia Pacific regionalism: the new stage for the state of world trade
“The present agreement does not address satisfactorily India’s outstanding issues and concerns”.
Early November, Narendra Modi was in Bangkok for the ASEAN summit. India is not a member of the Association of South East Asian Nations, but its prime minister was there as a member of the yet-to-be signed RCEP: the Regional Comprehensive Economic Partnership. It is a trade agreement meant to boost trade between countries within the ASEAN+6 zone. Besides ASEAN’s 10 members, China, India, Japan, South Korea, Australia and New Zealand are members. If signed, the free-trade agreement (FTA) would be the world’s largest trade bloc, representing a 40% of global GDP and almost half of the world’s population. India’s reluctance is due to many reasons. Amongst them is its trade deficit with China.
China proposed in April to move forward with the agreement excluding the Indian subcontinent. Yet, ASEAN countries did not want to let China as the only superpower in the deal and were loyal to their principles of not letting anyone behind. They then preferred to wait for the end of the election that was happening in India. Xi Jinping was said to be satisfied with the election’s results, Modi’s reelection could have permitted to follow on with the negotiations and to ratify the agreement in Bangkok.
While the Chinese leader is fighting a trade war with the US, he is rushing to secure a deal. It would secure market outputs for Chinese exports currently facing tariffs imposed by its first importing customer. Also, the deal would provide a framework to Xi’s flagship project: the Belt and Road initiative (BRI). The latter has a dominant Asian dimension and the RCEP would contribute to fostering ties between China and key countries for the project.
ASEAN countries might benefit from the ongoing situation. The association is an economic community itself and provide security to its members. They also have numerous FTAs with the US or the European Union (EU). The relationship between ASEAN and the EU has a particular dimension. Even though essential contrasts are to highlight, the Association is greatly inspired by the political cooperation and its level of economic integration it has achieved. In the long run, the ten member countries yearn to increase connection at these levels.
Also, they are a part of a major trade deal, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The latter was devised by the previous US administration (then known as the TPP) precisely in order to deter China from being overwhelmingly dominant in trade and alienate other Asian countries. As the incumbent administration in Washington has given up on Obama’s “pivot to Asia”, the trade agreement was concluded, without them. Not only are they protected from the spat in-between the two giants, but they are true beneficiaries from it as China is looking for new production sites outside of its borders in order to shun the tariffs and keep exporting to the US. The global value chain (GVC) is set to expand in the region. Yet, ASEAN still has to devise the scope of their partnership with China.
These manifold regional trade agreements are the result of failing international institutions and the collapse of multilateralism. Paradoxically, the US is undermining these very institutions it has contributed to devise. The current Trump administration is a fierce advocate against the Geneva-based World Trade Organization (WTO), which would be biased in its conflict resolutions. Hence, the US president is set to block new judges’ nominations to the Dispute Settlement Body (DSB) in December.
The overall outlook for international trade is mayhem. That is the main reason for driving regional trade initiatives. (I) In Asia, the Chinese predominance is weighing on fair trade. Countries build political structures to harbor them from alienation. (II)
The state of international trade in Asia Pacific
Increased regionalism as a substitution to a functioning global pattern.
Since the end of the Uruguay round and the creation of the WTO, global trade has been struggling to establish a functioning global pattern. The Seattle demonstrations in 1999 showed the beginnings of an altar-globalist movement that was gaining momentum. For twenty years, the WTO has strived to address issues and keep making world trade more fair. The Bali and Nairobi packages are highlights of this policy but also emphasize the Doha round agony.
Several organizations, with various political inputs have appeared as main promoters of globalization. Those focus on a regional scale. Indeed, it is easier to foster growth between two countries or trade blocs. Thus, bilateral and plurilateral trade treaties have soared as a result of increased regionalism. Other forms of economic cooperation have also appeared in order to boost regional trade facilitation and the suppression of non-tariff barriers (NTBs) such as the Greater Mekong Subregion (GMS, 1992), fathered by the Asian Development Bank (ADB) or the Asian Pacific Economic Community (APEC), and many others…
The Regional Comprehensive Economic Partnership
The Chinese trade relationship is only one of the concerns that stopped India from signing at the last minute. The conclusion of an FTA requires unanimous approval amongst its members. Hence, India’s decision stopped the whole deal from being struck. The scope of the RCEP is impressive but its true impact is limited. One of the plights of the seven-year long negotiations was the Investor state dispute settlement (ISDS). It is a mechanism contained in investment and trade agreements that allows an investor of a state party to bring a claim against another state party hosting the investment, in case that state has allegedly breached an agreement standard. The World Trade Organization doesn’t have such a tool: the DSB works with governments filed complaints but corporations cannot do so. ISDS provisions are present in many regional trade agreements (RTAs) but the latest trend is against it. Thereby, RCEP countries has eventually dropped off the initiative. This would have reshaped conflicts resolution in a region where China has taken an aggressive stance. Eventually, the RCEP is more narrowly focused on standardizing tariffs across the region, as well as improving market access for services and investment by addressing NTBs. Yet, the reduction of trade duties that would have occurred would have hurt the Indian economy.
Modi’s wobbling is to be put in perspective. The Middle Kingdom is a big exporting country and would have hurt some foreign currency earning and exporting sectors of the Indian economy since pricing power is in the hands of China. For example, India enjoys a trade surplus in dairy products exports because of high tariffs it imposes on goods such as milk powder and butter. They protect their infant industries and their SME.
It is understandable that Modi is not willing to take the chance and open the Indian milk market to such competition. Tariff liberalization would be socially and politically costly as the BJP support (Modi’s party) would plummet. However, the conclusion of an India-excluded RCEP would let the biggest democracy on Earth on the sidelines of the Asian GVC. Hence, the gap between India and the rest of the region would likely widen.
For now, figures prove the RCEP would worsen this situation for India as there is a major imbalance. India ships about 20 per cent of all its exports to the 15 other RCEP countries, and around 35 per cent of its imports are from these economies. India’s total trade deficit with other RCEP countries, including the ASEAN bloc with which it has an FTA, stands at US$105 billion and its trade deficit with China is the widest any country has in the region (US$53 billion).
It is no surprise that the RCEP is backed by China. A deal in which the country would have such an importance would legitimize its deeds and ambitions. As a matter of fact, the RCEP would entail a framework to the BRI. Xi seeks to secure this strategic project in order to lessen negative impacts from the trade war being waged by the USA.
The trade war and the Belt and Road Initiative
The January 2017 Davos summit highlighted China as the forefront leader in globalization in the wake of Donald Trump election.
According to Xi, “Globalization is a big ocean and China has learned how to swim”.
Quite a paradox, since it was the US that initiated and backed global exponential growth of international trade in goods and services. Now, China wants to promote itself as the champion of globalization. The BRI is a project set to secure outputs for the export relying Chinese economy. It is composed of land and maritime routes designed to link Chinese hubs to other parts of Asia, to Africa and to Europe. ASEAN countries are essential to the realization of this ambition thanks to its geographical central position.
Some ASEAN countries welcome with open arms these big Chinese investments. An important asset for the BRI smooth implementation is the Chinese diaspora. China can use its support in south east Asian countries. Cambodia is known as one of main beneficiaries from Chinese investments and as a diplomatic bridge in the association. The latter has become the main advocate for China within the association. Other countries are more reluctant to Chinese hunger for controlling infrastructures and trade routes. Indeed, there are many downsides to accepting those. Amongst them is the geopolitical risk. The Cambodian economy is now fully reliant on Chinese imports and investments, confiscating completely their sovereignty. Also, the debt trap is a major risk. In order to finance its investments, Chinese lenders offer recipient countries consequential amounts of money. Nevertheless, it is not sure they will be able to reimburse.
Thereby, in the North of Laos, manifold investments in agriculture but also in infrastructures (railway project) left the population dependent and unhappy with this alienation of their resources. Some other countries are aware of the risk and focus on diversifying their customers. In Thailand, BRI related proposed projects had unfavorable terms. Also, Thailand already has infrastructure agreements with Japan (EEC zone).
Chinese haste to move forward with the RCEP is better understandable under the scope of the trade war. China is looking to outsource some industries in southern Asian countries in order to shun US tariffs on sectors such as textile. The region is set to become more integrated, a direct consequence of the US-China economic decoupling. However, complete global decoupling is unlikely as repatriating delocalized industries is not cost-effective. GVC has transformed global competition away from the country-specific paradigm to a far more fragmented supply chain. Low transportation costs and technological breakthroughs in logistics and sourcing, that have come to underpin global economic integration are at little risk of shutting down. The determinant variable is more than ever wages in labour intensive industries. Better trained and better labour costs countries will attract GVC factories and export the labour intensive good. The ASEAN-China Free Trade Agreement (ACFTA, 2002) can be considered as an existing framework for the shaping of the RCEP. The ACFTA is a bilateral trade pact between China and the ASEAN, although the ASEAN consists of 10 member countries. The flexibility of the ACFTA is due in large part to ease concerns of a “China threat” in Southeast Asia and also involve the concerns surrounding China’s WTO accession (2001). However, the ACFTA is a basic trade pact that does little beyond reducing tariffs and origin rules requirements for goods shipments. The RCEP is seen as a major evolution from the ACFTA in the ASEAN-China relationship. It will contribute to ease the foreign direct investment (FDI) making process as well as the repatriation of profits (capital flow). On the one hand, China will encounter cheaper labour than at home (the minimum wage has soared exponentially). On the other hand, ASEAN members will benefit from this internationalization of production and encounter positive spillover. This is an unexpected boon for certain nations. Vietnam and Thailand are set to be two important beneficiaries of Chinese FDI as their exports will consequently grow.
Nonetheless, this is not a real win-win agreement: China is bringing even more hard infrastructures and manufacturing to the ASEAN newly industrialized countries (NIC). The main trap for FDI receiving countries is the middle-income trap. Negotiators must develop provisions in order to boost research and development (R&D) in these countries and prevent them from a stagnating growth, especially in the context of a Chinese run 5G race and the looming technological war with the US.
Type and mode of Chinese investments are just one of the things that needs to be watched closely. (Not) Surprisingly, China now says it is willing to discuss its territorial disputes within the South China Sea. ASEAN also reported progress toward setting a code of conduct (first discussed in 2002 during the negotiations of the ACFTA) with China regarding disputed exclusive economic zones (EEZ). As Vietnam take the ASEAN chairmanship next year it is set to focus on the Chinese threat at sea and territorial disputes.
Counterbalancing Chinese clout: aims and challenges
Former colonized countries are not eager to let a new dominant power take their sovereignty away.
Most ASEAN countries have been colonized by a Western (and/or Japan) power in the past. Nationalistic sentiment has resulted since independence. Hence, a new dominant power is not welcome. Regarding trade, ASEAN is willing to wait for India for multiple reasons. A fifteen-country RCEP would make China having an even bigger role in the trade pact. China is overwhelmingly powerful in regional trade. It is the first trading partner of most ASEAN countries (15%), after ASEAN itself (24%). Also, ASEAN has many trade agreements with other countries/blocs worldwide and benefit from trade security.
Paradoxically, the same nationalist sentiment preempts ASEAN members from building a federal state or true supranational political structures like in the EU. Therefore, what provisions can ASEAN develop to shield itself from a China takeover?
ASEAN: an effective protection?
Just like the EU, ASEAN is heterogenic. Economies have different level of unbundling. They show solidarity with the will of not letting anyone behind: “together we are stronger”. In this regard the Greece payment default can be an example of what European solidarity looks like in case of crises. The EU does not have a similar threat as the Chinese one looming on ASEAN. In the wake of the US administration threatening to impose tariffs on some European exports, the European commission was even reluctant to retaliate by weaponizing trade like Trump with China. Thus, ASEAN won’t find a model in following EU policies. Nonetheless, ASEAN has to build a political project to protect its interests in trade and ensure sovereignty over technology.
Major discrepancies exist that make the European Commission model impossible to implement for ASEAN. The single European Act (SEA) singles out the four freedoms the single market yearns to implement: movement for goods, services, capital and people. The ASEAN strategy for economic integration mirrors the EU’s. Yet, labour mobility remains highly unlikely in ASEAN as a result of attachment to the motherland and inexistent framework. ASEAN countries are reluctant to implement it whereas it is the bosom of the single market in the EU.
In my opinion, there is one thing that the ASEAN could really learn from the EU that is a common agricultural policy. The CAP is known for being an unanimously praised fold of the union policies. Since ASEAN is struggling to boost intra-regional trade, agricultural specialization can be promoted as a way of doing just that thanks to a similar policy. Furthermore, one thing that some European technocrats have been looking to implement but were never successful is a common industrial policy (CIP). Given the outlook of Chinese FDIs flooding in ASEAN, such a policy would highly benefit the region and ensure the spreading of wealth across the Association.
While the RCEP could provide calm amidst the storm of trade tensions between the US and China and reduce ASEAN nations’ economic and geopolitical reliance on the US, ASEAN should develop its own new and innovative economic policies. In the wake of the Trump administration’s “America first” policy, it was likely south east Asian nations would look within their own region for support. In Thailand for example, the issue of human rights abuses in the seafood industry threatens the trade preference the US has granted until now. ASEAN is in a bind between the two giants and seek to develop its partners for more independence.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership
A reason for which the RCEP is set to keep lagging is the presence of seven RCEP countries in the CPTPP agreement (almost half of the sixteen RCEP countries). Indeed, they already possess this framework in order to boost trade with one another. Amongst these seven countries are four ASEAN members. Even if RCEP is set to have a great impact on regional trade, it is not as elaborated as the CPTPP.
When then secretary of state Hillary Clinton detailed new foreign policy guidelines in 2011, it was clear that the US was already “weaponizing” trade in order to fight China. The TPP was a tool meant to contain China’s growing economic clout in the Asia-Pacific region. With the US, the transpacific trade agreement would have gathered 40% of global GDP, even more than a 16 country RCEP. Eventually, the new administration’s protectionist approach to trading scrapped the plan as soon as it got in office.
Yet, countries involved were attached to this wide-ranging trade agreement that permits a diversification in market outputs. The new CPTPP was eventually signed with Japanese leadership without the US requests for intellectual property. With its stricter common standards on labour issues, environmental protection and dispute resolution, it is also seen to be more ambitious than RCEP. Also, CPTPP addresses more specifically norms for services and NTBs for goods than RCEP.
Conclusion
Globalization is failing. Multilateralism is fading.
The WTO stands idly by with US-China trade war and the DSB is in a bind as it is short of judges to hear new cases. In order to keep world trade flowing, nations develop regionalism. In the context of the trade war, China finds shelter in the RCEP FTA and its BRI project. Surprisingly, the Asian global value chain benefits from the situation as economic decoupling is taking place. However, ASEAN remains aware of the risks related to Chinese investments and dependency. Even though supranational institutions are unlikely, ASEAN can increase its political cooperation to better shield itself and diversify its partners. The Association already enjoys a developed framework of FTAs such as the CPTPP. The main challenge ahead is whether ASEAN will turn its strategic position between the US and China in true wealth generation. That relies on its ability to develop innovation and secure an independent access to the platform economy.
