The long and frustrating quest for free trade in Asia

 A defanged TPP and an undercooked RCEP make for a murky future

| 27 April 2017

SINGAPORE It was a punch in the gut for Jenesis (Shenzhen) when the U.S. called it quits on the Trans-Pacific Partnership. Just like that, the contract electronics manufacturer's very raison d'etre was thrown into question.

Jenesis, which supplies electronic devices to Japanese retailers and other companies in the service industry, set up the unit in the southern Chinese city of Shenzhen to slash expenses by capitalizing on the ample availability of parts and dies there.

But the collapse of the multilateral trade agreement has "undermined our attempt to cut development costs," lamented Junichi Fujioka, the company's executive general manager.

Securing the technological compliance approval needed to do business in Japan and the U.S. can be prohibitively expensive for smaller companies like Jenesis. By taking advantage of Shenzhen's competitive environment, the company has "pared costs for developing hardware to the bone," said Fujioka. "Something we could not control was the cost of receiving approval for technological compliance."

That burden could have been eased if the U.S. and Japan unified the approval standards under the TPP, which calls for lowering technical barriers to trade. At the stroke of a pen, the cost of developing products for export to Japan would have plummeted.

PANIC IN THE BOARDROOM Jenesis is hardly alone in its disappointment. Touted as "a trade deal for the 21st century," the TPP sought to remove tariffs on more than 99% of all items traded among Japan, the U.S. and 10 other countries by unifying rules across a range of areas, including technological compliance, intellectual property, labor and e-commerce. The deal was designed to not only eradicate trade barriers, but also benefit companies investing and operating in the 12 countries.

U.S. President Donald Trump's decision to reject the TPP has done more than put boardrooms into panic mode; it has thrown the future of trade for the entire Asia-Pacific region into confusion.

If the deal is dead, what, then, will shape the global trade order? There are two competing forces: One is the group formed by the 11 remaining TPP member countries, which are looking to find a way forward without the U.S.; the other is the Regional Comprehensive Economic Partnership, a multilateral trade framework involving China, India and 14 other countries.

Clues as to which one has the edge may emerge on May 20 and 21, when trade ministers from countries in both groups will meet in Hanoi for the Asia-Pacific Economic Cooperation forum.

Every year, the APEC meeting plays host to a tug of war over how to realize an ambitious plan it has been discussing for a decade: the creation of a Free Trade Area of the Asia-Pacific. An addendum to the leaders' declaration issued at the APEC summit in Lima in November 2016 included the phrase, "We reaffirm our commitment that the FTAAP should be built upon ongoing regional undertakings, and through possible pathways, including the TPP and the RCEP."

While the wording is bureaucratese, the statement merits attention for the simple fact that it gives equal weight to the TPP and the RCEP.

ADVANTAGE: RCEP At the moment, as far as the APEC secretariat is concerned, the RCEP appears to have the upper hand. Members of the "TPP 11," worried that the RCEP will increasingly be seen as the gold standard for regional trade deals, plan to hold a ministerial meeting on the sidelines of the Hanoi conference to reaffirm their solidarity.

But with the exit of the U.S., which accounts for around 60% of the combined gross domestic product of the original 12 TPP players, the TPP has lost much of its appeal, dampening the enthusiasm among some of the remaining members.

The numbers speak for themselves. Before the U.S. withdrawal, the 12-member trade regime accounted for 38% of global GDP. Take the U.S. out of the equation and the figure plunges to just 13%. The same goes for trade volume, with the number falling from 26% of the global total to a mere 15%.

Malaysian International Trade and Industry Minister Mustapa Mohamed made his disappointment clear in mid-March, when he told parliament, "The withdrawal of the U.S. from the TPP makes the trade deal less attractive for Malaysia to continue with negotiations, as it does not satisfy the need or objective of the country's participation."

ON SECOND THOUGHT Similar uncertainty is found among companies, too. Businesses that had planned to export their products to the U.S. and other member countries under the original TPP are now thinking twice.

"We see all free trade agreements as good opportunities, but never put all your eggs in one basket," said Le Quang Hung, chairman of Vietnamese garment company Garmex Saigon.

In the race to seal an agreement, the RCEP also appears to be ahead. The 10 member states of the Association of Southeast Asian Nations, which are among the 16 countries involved in negotiations for the RCEP, are eager to wrap the talks up this year. A big reason for that is because 2017 marks the 50th anniversary of ASEAN, and its members are keen to use this landmark occasion to show their commitment to further liberalizing trade.

Another landmark occasion will come this autumn, when China will undergo a leadership reshuffle at the National Congress of the Communist Party, held once every five years. For President Xi Jinping, who said the world "must remain committed to developing global free trade and investment ... and say no to protectionism" at the annual World Economic Forum meeting in Davos, Switzerland, in January, wrapping up negotiations on the RCEP would be an excellent way for his country to demonstrate its leadership to the international community.

We see all free trade agreements as good opportunities, but never put all your eggs in one basket

Garmex Saigon Chairman Le Quang Hung

But rushing things risks yielding an agreement with far less substance than the TPP. So far, the 16 RCEP members have reached accords on only two of the 15 areas covered by the deal. Hitting the target date -- the end of 2017 -- will likely require excluding ambitious, quality agreements.

"My immediate response is simply don't TPP-enize this RCEP," Iman Pambagyo, trade negotiating committee chief for the RCEP, reportedly said at a forum in Singapore on March 22. "Be focused. This is our homework. We have to complete this before we talk about other zoos."

One massive sticking point is e-commerce. Many companies would benefit from common rules that ensure security in this rapidly expanding sector. But China, for example, opposes the idea of banning rules that force foreign companies to disclose their source codes and set up databases in countries in which they operate. Furthermore, no agreement has been reached on lifting tariffs on cross-border software trade.

All three of those issues are included in the TPP. Without them, the RCEP will hold little appeal for e-commerce companies.

Companies would also welcome an arrangement that helps push goods through customs swiftly. Food companies, for instance, would enjoy more export opportunities if they were certain that shipments of fresh goods would promptly clear customs and be sent on their way to their final destinations.

But here, too, the RCEP falls short, with only a few important agreements in sight for facilitating trade. And it is not even close to setting rules on intellectual property.

Furthermore, even if the countries reach an accord, it does not necessarily mean markets will be thrust wide open.

In Thailand's telecommunications sector, for example, "we could see more foreign companies showing up at spectrum auctions, but telecom operators will need bank guarantees from local banks, which could be difficult to obtain," said Thapana Panich, an analyst at Deutsche Tisco Investment Advisory in Bangkok.

SIMPLE IS BEST? Still, many observers say simply removing tariffs, rather than establishing a grand trade plan for a new era, would be more effective anyway.

But with RCEP member India skittish about opening its markets, the deal will likely yield comparatively few tariff waivers, as major free trade agreements go. "It seems India's strategy is to reach an agreement as soon as possible so that negotiators will have less time to nail down the details over market-opening measures," a negotiator for one of the 16 countries said.

Talks on the deal have been gummed up by big differences in trade philosophies.

For starters, not all members see eye to eye on how forward-looking trade rules should be. While Japan and New Zealand, which are also both members of the TPP, want transparent, far-reaching trade rules, many RCEP participants that belong to ASEAN see that approach as unrealistic given the wide disparity in economic conditions among the members. Meanwhile, Brexit and the U.S. pullout from the TPP have fueled a view within ASEAN that the Western approach will ultimately not work.

LATERAL THINKING Another difference thwarting unity in the Asia-Pacific region is how the countries approach FTAs; some favor multilateral deals, and others prefer bilateral accords.

Under Trump, the U.S. has shifted its priority toward bilateral agreements. That was especially evident when U.S. Vice President Mike Pence, after his April 18 meeting in Tokyo with Japanese Deputy Prime Minister and Finance Minister Taro Aso, said the new Japan-U.S. economic dialogue may develop into a bilateral FTA between the two countries.

The 21st century has seen the emergence of multilateral FTAs because bilateral accords proved ineffective in dealing with cross-border corporate activity. Had the TPP gone through as initially planned, the trend toward multilateral trade deals would have become firmly entrenched; instead, we appear to be reverting to the old ways.

Some countries, like Australia, are flexible, willing to accept both multilateral and bilateral deals as long as they help expand trade. "The cooperation between China and Australia showcases to the region and the world our determination to defend trade liberalization and advocate the benefits of free trade," Australian Prime Minister Malcolm Turnbull told a packed forum in Sydney in March that was also attended by Chinese Premier Li Keqiang. The two leaders have agreed to reinforce their bilateral FTA and cooperate in wrapping up negotiations for the RCEP.

One country that could serve as a unifying force for Asia-Pacific trade is Vietnam, thanks to its role as the 2017 APEC chair.

Vietnam had pinned huge hopes on the TPP as a way to shore up its economy. Although the U.S. withdrawal came as a big disappointment, the country remains keen on using highly liberal trade agreements to promote domestic economic reforms.

"The majority of Vietnamese companies that provide outsourcing services depend on cheap labor, which will not help them glean the main benefits of free trade agreements, especially high-level ones like the TPP," said Bui Quang Vinh, former minister of planning and investment. "Vietnamese companies have to improve their products and services to meet the standards of advanced markets."

There are many competing views within the country on what kind of trade accords to pursue. As negotiations for both the TPP 11 and the RCEP gain momentum, how Vietnam finally chooses to lead its fellow APEC members could serve as a compass for the future direction of a new global trading architecture.