What could expanding trade zones mean for the Asia-Pacific?

If the global business landscape has profoundly changed over the last couple of decades, given economies have become increasingly interdependent, the economic conditions created have provided a further push for trade liberalisation.

One economic consequence is that supply chains have become genuinely global. This had led in turn to demands for even greater trade liberalisation – largely out of the economic self-interest of those in the corporate sphere. Globalisation of the supply chain has led to the formation not only of regional trade zones but also bilateral, multilateral and global ones.

ASEAN’s regional integration process is very different to Europe’s and the EU is facing difficulties in negotiations because of the heterogeneity of ASEAN as a group

Asia, like other regions, has long been economically plugged into the global economy – principally through the World Trade Organisation (WTO), which has overseen much of the underpinning of this liberalisation. Yet the WTO ‘template’ has proven no guarantor of a smooth path towards further liberalisation, as Doha (the WTO’s latest negotiation round) has shown. While its objective of lowering trade barriers globally has been little different to its predecessors’, negotiations on further liberalisation have been stalled since July 2008 (save for a multilateral ‘trade facilitation’ agreement reached in December 2013 that could cut global trade costs by 10 percent, according to the OECD) over issues such as agricultural import rules and industrial tariffs that have been raised by the EU, US, Japan and China among others.

On a macroeconomic level, business costs – largely the resulting increases in wages, property values and reflecting currency fluctuations that have negatively impacted costs in US dollar terms – have put Asia’s low-cost export model at risk. Higher costs have affected profit margins and, while prices have remained relatively stable, production costs have increased in many instances.

Such a loss of competitiveness has economic implications, given shrinking trade balances put pressure on current account balances. This in turn increases the likelihood of currency depreciation and/or higher interest rates that could potentially lead to a dampening of demand, lower exports and lower imports.

Ease of doing business
While the Doha negotiations have largely remained stalled, states have continued economic reforms and remain committed to establishing or furthering inter- and intra-regional structures. As the World Bank noted in its latest annual update, 15 of the 25 nations in the East Asia and Pacific region implemented at least one regulatory reform in the 12 months to June 1, 2014.

While this may sound piecemeal, the World Bank’s figures also show that, since 2005, the 25 economies in the East Asia and Pacific region have collectively enacted 240 business-friendly reforms. Vietnam implemented the highest number of measures with 23, followed by Indonesia (22) and China (20). Taken in a wider context, these three are among the 50 economies worldwide that have implemented the most reforms over the past decade. Singapore, meanwhile, has the highest global ranking when it comes to the ease of doing business. New Zealand, Hong Kong, China, Korea and Australia are also among the top 10.

If the WTO provides the trading groundwork at the global level, the Asia-Pacific Trade Agreement (APTA, which was previously known as the Bangkok Agreement), offers a regional version. Signed in 1975 at the behest of Economic and Social Commission for Asia and the Pacific, it is the oldest preferential trade agreement among developing countries in the Asia-Pacific region.

APTA’s principal objective has been to foster economic development through the adoption of mutually beneficial trade liberalisation measures that should theoretically contribute to intra-regional trade expansion. A measure of its success can be seen in the agreement reached at the third round of negotiations (which came into force as far back as September 2006) that led to tariff concessions on more than 4,000 items.

Most importantly, APTA is the first plurilateral agreement among the developing countries in the region to adopt common operational procedures for certification and verification of the origin of goods. It is also the only operational trade agreement linking China and India (two of the world’s fastest-growing markets), as well as including other major markets such as South Korea.

Trans-Pacific suspicions
Going forwards, the Trans-Pacific Partnership (TPP) will assume increasing importance. Also including the US, Canada and Australia among others, the TPP is set to establish a free-trade bloc stretching from Vietnam to Chile. The pace of progress in reaching an agreement has been glacial however, principally due to disagreement between the US and Japan over the degree to which Tokyo will open its doors to American farm imports.

Meanwhile, China, which isn’t part of the 12-nation TPP, has been pushing for a separate trade liberalisation framework known as the Free Trade Area of the Asia Pacific (FTAAP). Beijing has long been suspicious of the TPP, fearing it is being used by Washington as a way to either force China to open up its own markets further, or else to isolate it from other regional economies as trade is diverted to TPP signatories.

The TPP is widely viewed as the major economic plank of President Barack Obama’s longer-term strategy of ‘re-balancing’ US exports in favour of Asia. Cynics, however, concur with Beijing, arguing the TPP’s unstated aim – denied by US trade officials – is to counterbalance Beijing’s growing influence in the region by establishing a larger US presence, including military assets.

Further free trade agreements
Also now in play is the Regional Comprehensive Economic Partnership: a proposed free trade agreement between the 10 member states of ASEAN and the six states with which ASEAN has existing free trade agreements (i.e. Australia, China, India, Japan, Korea and New Zealand). This is due to be concluded by the end of 2015.

Looking further ahead, the EU concluded the final negotiations for a free trade agreement with Singapore back in 2012. Its success has subsequently led to bilateral dialogues with other ASEAN countries, such as Malaysia, Vietnam and Thailand, in order to reach the same results. The end game in this case would be to eventually reach a region-to-region approach that would facilitate EU-ASEAN relations. However, ASEAN’s regional integration process is very different to Europe’s and the EU is facing difficulties in negotiations because of the heterogeneity of ASEAN as a group.

In the meantime, China and the US have reported a breakthrough in talks to eliminate duties on IT products; a deal that could pave the way for the first major tariff-cutting agreement at the WTO in 17 years. China will inevitably prove pivotal to regional and global progress. This latest breakthrough – to reduce global tariffs on a range of products including GPS devices and next generation semi-conductors – has major ramifications for Asia as a region. It’s a start, but much work still needs to be done to bring Beijing onside and further expand trade both inside and outside Asia.