Image by APEC 2013 on flickr.

APEC and the battle of the free trade agreements

10 November 2014

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Jayant Menon is an adjunct fellow at ANU Crawford School of Public Policy.

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There appears to be a race between the USA and China to dominate the rules-setting game for trade, writes Jayant Menon.

The life of a trade negotiator can mean long days and late nights fuelled by strong coffee, tackling increasingly high-stakes and tense negotiations while frantically working towards rapidly approaching and immovable deadlines. But even by those standards, the pace that trade negotiators from a dozen countries worked in Sydney in late October to try to get agreement, even if only in principle, on the Trans-Pacific Partnership shone a light on how urgent the countries involved believe it is.

That meeting was part of a final push for an agreement in time for President BarackObama’s visit to Beijing for the Asia-Pacific Economic Co-operation (APEC) summit. It certainly wasn’t the first meeting on the issue, and partnership negotiations have made little progress; indeed they have already missed three deadlines, so why the rush now?

There appears to be a race between the United States and China to dominate the rules-setting game for trade by being the first to be able to announce plans for realising a Free Trade Agreement for the Asia-Pacific. Australia’s Prime Minister Tony Abbott is welcomed by Indonesia’s President Susilo Bambang Yudhoyono at APEC in 2013.

If the partnership can be concluded, in one form or the other, then an announcement can be made at the APEC meeting in Beijing next week, which would steal the thunder from China. But if such an announcement is not forthcoming, China will likely announce a “Beijing Road Map” for a free trade agreement of the Pacific-rim, building on APEC rather than the Trans-Pacific Partnership. Billions of dollars in trade are at stake.

It will be difficult for leaders from the partnership countries to ignore a declaration endorsing a feasibility study for the Free Trade Area for the Asia-Pacific if they cannot offer an alternative. Reports on whether the US has been able to dissuade China from floating the proposal have been mixed. They have succeeded in leaving the door slightly ajar for the TPP to play a future role by blocking reference to a deadline for completion of 2025. ‎Although deadlines can be missed, as the TPP itself demonstrates, setting one implies it is more than just a vision but a plan bounded by a timeframe. The fear is that pursuing the Free Trade Area for the Asia-Pacific could derail the Trans-Pacific Partnership.

There is widespread confusion about why the partnership agreement is taking so long, and what it may look like when finally concluded.

One reason for the delay is the diversity of the 12 countries involved. They are widely dispersed geographically, with members from four of the world’s seven continents, and just as economically diverse. For example, Australia’s per capita income is 40 times that of Vietnam, and the US economy is 1000 times the size of Brunei’s. Finding common ground amid such diversity can’t be easy.

Of course, the partnership delays pale in comparison to another struggling proposed trade pact – the World Trade Organisation’s Doha Round. But although there are fewer countries in the Trans-Pacific Partnership compared to the WTO, diversity isn’t the only problem. Because the group includes countries as varied as Vietnam, Peru and the US, there is not only a lack of commonality in negotiating positions; negotiators may not even subscribe to broadly similar principles. APEC has even more diversity since it has an additional nine members. But then it is not trying to conclude any agreement at present.

Moreover, there is the sense of the Trans-Pacific Partnership being an unfair bargain, as the agenda appears skewed firmly in favour of one party. The carrot being dangled by the US is improved access to its huge market. But as half the partnership members already have a free trade agreement with the US and the rest are trying to conclude one, the incremental benefit is likely small.

For these reasons, if the Trans-Pacific Partnership is to be concluded anytime soon, it will likely be in a highly diluted form, significantly compromised compared to the original ambitions.

How then do we move forward? APEC and its Beijing Road Map appears the likely alternative. Although APEC’s achievements since its inception in 1989 are modest, to say the least, its approach is generally viewed as being consistent with, if not mutually reinforcing of, the multilateral system and the WTO. This is mainly through its support for non-binding, unilateral actions in implementing its action plans. Although this approach has flexibility as its greatest appeal, the temptation of a free ride needs to be resisted. With this approach, it is all about the carrot, there is no stick.

But APEC may be the more inclusive choice to build an Asia-Pacific agreement because unlike the Trans-Pacific Partnership, it does not exclude China, and unlike the ASEAN+6 Regional Comprehensive Economic Partnership, it does not exclude the US. Additionally, its goals are also not as elusive as the high standards set by the Trans-Pacific Partnership.

A free trade agreement for the Asia-Pacific, whether commandeered by the US or China, cannot be the end-game, however. It would still mean a world trade system that is fragmented; the Asia-Pacific free trade agreement would merely be the largest of the fragments. Looking further ahead, and short of resurrecting the WTO, countries voluntarily extending the preferences of the Asia-Pacific agreement and the many other free trade agreements to non-members is the only way to address the growing distortions and fragmentation. In a sense, that would involve continuing the process preferred by APEC in arriving at the Asia-Pacific agreement, of joint but non-binding unilateral actions. Since almost two-thirds of all trade liberalisation has come from unilateral actions, there is hope.

This piece was published in The Canberra Times:

This piece is based on his article for Asia and the Pacific Policy Studies

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