TPP and RCEP: Boon or Bane for ASEAN?
September 9, 2015
2015 is a critical year for the Asia-Pacific region. The Trans-Pacific Partnership (TPP), backed by the U.S. Senate’s recent approval of “fast-track” authority, is now entering the final round of negotiations in Hawaii. Another Asian free trade agreement (FTA), the Regional Comprehensive Economic Partnership (RCEP), is also due by the end of 2015, with a round of substantive talks in August and another to come in October.
With TPP spearheaded by the U.S. and RCEP led by China, there has been a lot of attention lately on how the two countries are using the FTAs to benefit themselves and keep each other out of their respective regional economic arrangements. Meanwhile, the Association of Southeast Asian Nations (ASEAN) and its member states are also playing an important role in the future of trade arrangements in the Asia-Pacific. As its economic cooperation and integration efforts have reached a crucial stage, ASEAN is concerned not only about the welfare effects of TPP and RCEP on its member states, but also about their impact on the development of ASEAN as an economic community.
The Impact of TPP and RCEP on ASEAN
One of the most widely recognized benefits for ASEAN of these high-level regional agreements is to calm the “noodle bowl” effect of small, overlapping FTAs. As common frameworks, RCEP and TPP are expected to help unify the trade standards in ASEAN’s other FTAs. However, recent studies, including a working paper from the Asian Development Bank, have expressed concerns that the two FTAs may affect ASEAN solidarity and hinder its internal economic cooperation and integration.
The current TPP talks include just four ASEAN member states: Brunei, Malaysia, Singapore, and Vietnam. Some ASEAN members have shown reluctance to join the talks because of the demanding requirements for regulatory convergence in areas such as intellectual property rights (IPR), state-owned enterprises, and competition. Moreover, strict entry requirements make the agreement less attractive. For example, newcomers will have to negotiate with all incumbents on a bilateral basis before they can join, which will significantly prolong the negotiation period and increase their negotiation costs.
The absence of six ASEAN member states from the TPP talks poses a possible threat to the internal economic integration of ASEAN. For example, within the TPP there is the issue of ASEAN’s regulatory coordination of IPR. Due to large development gaps among its 10 members, harmonizing the IPR provisions is a tough task for ASEAN. TPP’s demanding requirements could not only put a burden on the four ASEAN signatories, but also pose a challenge to cooperation within ASEAN, as it is likely to further widen the gap in IPR regulation among member countries.
Moreover, some scholars argue that TPP’s welfare effects on ASEAN are unpredictable. Recent studies show that the agreement favors the four ASEAN members already engaged in the current TPP talks. But the ASEAN economies that have not yet joined TPP talks, such as Thailand and Indonesia, will gain only modestly, or even experience some loss, as current trade partners like the U.S. and Japan divert some of their trade to TPP members such as Vietnam and Malaysia for preferable tariff and regulatory treatment.
It is also likely that TPP will influence the global value chain of some specific industries and sectors. For example, according to Chiou’s estimates (RIETI, 2014), Vietnam and Malaysia are likely to benefit from new electronics supply chains under TPP. But these benefits may come at a cost to other ASEAN members. Electronics sectors in Cambodia and Laos are expected to experience slower growth, or even some losses, as American and Japanese companies move their assembly lines to TPP members in Asia and Latin America. Moreover, Cambodia and Laos, two of the fastest-growing economies in Asia, may miss some chances to improve manufacturing productivity and advance sustainable development by participating in global supply chains.
Because ASEAN is unlikely to exert much influence as an economic community on the current TPP talks, it has focused most of its efforts on the RCEP talks. RCEP is perceived as an expansion of the five FTAs that already exist between ASEAN and its six partners – China, India, Japan, South Korea and Australia, and New Zealand. Based on these five existing ASEAN-centered FTAs, ASEAN has sought to attain “functional centrality” in RCEP, whereby it would act as a platform for cooperation and have stronger negotiating power to secure its own interests in the talks. One of ASEAN’s goals is that RCEP take a more pragmatic approach to accepting less-developed ASEAN members. In this way, ASEAN expects that RCEP negotiations will support its efforts to improve ASEAN internal economic cooperation and integration. Compared to TPP, RCEP is expected to bring income gains that are more balanced among ASEAN member states.
To realize those gains, however, negotiations must yield results beyond the five existing FTAs between ASEAN and its six trade partners. But here the talks face challenges from both ASEAN members and non-members. For example, with huge differences between the existing FTAs, the tariff elimination coverage of RCEP is currently targeted at 90 percent, with all five FTAs to be adjusted accordingly. However, if India, with the lowest commitment to elimination (78.8 percent), cannot meet this objective by the end of 2015, the RCEP talks will likely lower the target to achieve consensus. This will reduce ASEAN’S economic gains from RCEP, because the tariff elimination coverage will not significantly improve the current FTAs for ASEAN.
There are other divergent interests within ASEAN, among which security concerns about China are the most significant source of division over RCEP. With the escalation of South China Sea disputes between China and several ASEAN members over the past decade, the deterioration of diplomatic relations has put a strain on ASEAN and China’s joint efforts at economic integration.
ASEAN’s Role in FTA Negotiations
In general, the outcomes of both FTAs will largely depend on the quality and breadth of negotiations by ASEAN as a unified group. Regarding the TPP, ASEAN should voice its preference for a more inclusive approach for future TPP talks. Including all ten ASEAN member states in the talks will help narrow the development gaps among ASEAN members and facilitate the future efforts at ASEAN economic integration. To strengthen its negotiating power in the RCEP talks, ASEAN’s priority should be to improve its own institutional structure to unify interests and actions among member states. In addition, ASEAN should be an active coordinator between the two regional initiatives, facilitating the co-existence of TPP and RCEP and paving the way to a larger-scale trade framework in the Asia-Pacific region.
Jingyang Chen is a 2016 masters candidate in international finance at Johns Hopkins University, and a recent intern with The Asia Foundation’s Economic Development Program in Bangkok. She can be reached at email@example.com. The views and opinions expressed here are those of the author, not those of The Asia Foundation.
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