President Obama's Asia visit has focused attention on two different and perhaps competing approaches to trade liberalisation: the ASEAN-centred Regional Comprehensive Economic Partnership (RCEP) and the US-sponsored Trans-Pacific Partnership (TPP).
These proposals are the next generation in trade liberalisation, with the Doha Round having petered out at the multilateral level and bilateral preferential trade agreements (misleadingly called Free Trade Agreements, or FTAs) having largely run their course.
If progress is to be made on trade liberalisation, the next stage will comprise two elements. First, agreements will encompass groups of countries, thus overcoming the narrowness of bilateral deals without the interminable squabbling of the disparate members of the Doha Round. Second, these agreements will go beyond tariffs (which for many countries have already been reduced very substantially), to cover 'behind the border' restrictions which inhibit trade and limit the benefits of international specialisation.
Both these elements are, in principle, desirable. To the extent that FTAs resulted in a multiplicity of individual agreements with different conditions, agreements among groups of countries offer the possibility of partially untangling the 'noodle bowl' of overlapping FTAs. This would be especially valuable if done on a regional basis, as it would foster the multi-country supply chains which have become a key part of international trade.
'Behind the border' issues present opportunities for freer international exchange but these are conceptually less clear-cut than tariff reduction.
Whereas the case for reductions in tariffs is universally accepted, many 'behind the border' issues are matters of judgment and balance. Some country-specific quarantine laws are well justified, while others may be de facto trade protection. Different labour and safety laws may, in fact, be part of the legitimate comparative advantage of low-labour-cost countries. Not everyone will agree on uniform environmental protection measures. Intellectual property regulations may not strike the right balance between owners of IP and users. Some will be unhappy with the way investor/state dispute settlement procedures can be mis-used.
The RCEP was an important element of the ASEAN meeting in Phnom Penh this month and the East Asia Summit meeting that followed. It is envisaged that RCEP would cover ASEAN+6 (including Australia); while RCEP does not include America, the US can build its trade relationship via the Expanded Economic Engagement initiative.
The TPP was promoted by President Bush and has been taken up enthusiastically by President Obama, pushing it forward in the APEC context, with around ten countries on both sides of the Pacific already in negotiation and several more in discussion. India has shown no interest so far.
Neither approach has settled on detailed terms yet. Both will cover some 'behind the border' issues. But there is little doubt that the TPP will be a more demanding set of commitments, with fewer opportunities for individual countries to contract out on aspects which don't suit them. This makes the TPP harder for Japan, with its powerful agricultural lobby. It will be impossible for China to sign up to the TPP because the competition clauses are directed at state-owned enterprise business practices. Also, the IP rules may be too slanted to IP owners, rather than users, and investment protocols too favourable to foreign investors rather than the host country.
The RCEP will be more accommodative of individual differences and political constraints. This lessens pressure for wider domestic regulatory reform and lets vested interests off the hook. But it might be a more feasible way forward for some Asian countries. RCEP's geographic concentration is also an advantage in bringing peer pressure to bear.
Australia says it sees no need to choose: like several other countries, it will take part in both negotiation streams. If the TPP moves faster than the RCEP, we might find ourselves party to a high-profile treaty which excludes our main trading partner, China. US Secretary of State Clinton said recently: 'We welcome the interest of any nation willing to meet 21st century standards as embodied in the TPP, including China.' But if this means basic changes to SOE business practices, China might argue that its economic structure seems to have served its purpose well, and that the 2008 financial crisis must leave some concerns about private enterprise.
It is early days for both of these initiatives, with membership of the TPP far from finalised and RCEP following on from years of slow progress on the East Asia Free Trade Area. For our part, it seems sensible to join the RCEP negotiations eagerly, with the objective of getting as 'high quality' an agreement as possible (eg. on agriculture).
At the TPP discussions, our New Zealand brothers are fighting hard on IP issues, and there is a good case for trans-Tasman solidarity on this issue. More radically, we might explore why it is in the interests of the parties to have China de facto excluded on the basis of its economic structure.
Photo by Flickr user Zanthia.