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Toward Asia-Pacific Free Trade

Oct 28 , 2015

Recently, the U.S.-led Trans-Pacific Partnership (TPP) agreement has been greeted with great fanfare by the U.S. foreign policy elite and mainstream media. In typical fashion, the Washington Post has argued that “by knitting the U.S. and Japanese economies together in their first free-trade deal – and binding both of them closer to rising Asian nations – the TPP would create a counterweight to China in East Asia.”

While the creation of the TPP has been a great disappointment in China and resulted in mixed feelings across the Asia Pacific, it is very much in line with Washington’s new and more assertive approach in the Asia Pacific, as reflected by Revising U.S. Grand Strategy Toward China, a recent Council on Foreign Relations report.

In reality, the TPP seeks to expand U.S. geopolitical presence in the Asia Pacific, as deemed by the U.S. Department of Defense and its Joint Vision 2020’s ‘full spectrum dominance” – the aspiration to achieve control over all dimensions of the competitive space.

Where does it all leave Asia? Well, there are good, bad and ugly scenarios. Let’s start with the last ones.

The Iron Curtain scenario

In the “Iron Curtain” scenario, the exclusive TPP contributes to the militarization of the Asia-Pacific, while economic benefits decrease. Instead of unity, fragmentation triggers friction. As economic growth dims, the dream of the “Asian Century” remains just that – a dream.

Following the TPP announcement, the People’s Bank of China’s chief economist Ma Jun estimated that it has potential to reduce China’s GDP by 2.2 percent. Dubbed “ABC” (Anyone But China), the trade deal was about containing China’s rise and polarizing Asia, just as Europe was split through the Cold War. The odd difference is that now Washington is erecting the Iron Curtain.

Ever since the announcement of the U.S. pivot to Asia, the Pentagon has been shifting the bulk of its naval assets to the region by 2020, while increasing military exercises and ties in the region. In the process, territorial and maritime friction in East and South China Seas has steadily accelerated.

Recently, the Upper House of the Diet in Japan passed Premier Shinzo Abe’s highly controversial security bills, which were opposed by 54 percent of Japanese people, as evidenced by the huge, bitter demonstrations in Tokyo. And right after the TPP deal, U.S. Pacific Fleet Chief Admiral Scot Swift warned against “egregious” restrictions in the contested South China Seas, which cynics saw as an effort to provoke a Chinese response.

However, since most Americans do not support further military commitments abroad, the White House prefers free trade rhetoric over the ugly realities of containment. The stakes for the White House to conclude the TPP talks grew higher after the U.S. Defense Secretary Ashton B. Carter said in April that the Obama administration is opening a new phase of its strategic rebalance toward Asia Pacific by investing in high-end weapons such as a new long-range stealth bomber, refreshing its defense alliance with Japan and expanding trade partnerships. The trade pact was “as important as another aircraft carrier.”

Carter’s comments were interpreted as an effort to play down the Asia “pivot” as a mainly military project.

The dead on arrival scenario

The TPP agreement was concluded after multiple rounds of talks, intense lobbying and bitter friction over dairy products, automobile industry and intellectual property rights in pharmaceuticals. Nevertheless, it must still be ratified by all 12 nations. In the “dead on arrival” scenario, the U.S. Congress torpedoes the deal in the short term, or bilateral and multilateral trade deals in the region mitigate the TPP’s discriminatory effects over time.

In the U.S. alone, the TPP faces a tough battle with a divided U.S. Congress, where only some Democrats support Obama’s trade policy and the Republican support is a lot more unpredictable amid contentious presidential campaigns, as evidenced by the stated opposition against the TPP by the leading Democratic candidate Hillary Clinton.

The TPP is not about free trade. In fact, some of its provisions could restrain open competition, while raising prices for consumers, as the Nobel Prize winning economist Joseph E. Stiglitz has argued. From the narrow point of innovation, the TPP sets the bar high for other U.S. trade talks going forward, but for life science sectors negotiators settled on a low bar that will be detrimental to biotech innovation for years to come, as the U.S.-based Information Technology and Innovation Foundation has argued.

Despite all the rhetoric about a “broad pact,” the TPP excludes China, India, and Indonesia, the largest economies in East, South and Southeast Asia, respectively. Initially in 2005, the TPP had a more inclusive free trade vision among Brunei, Chile, New Zealand and Singapore. A far more exclusive vision originates from 2010, when Washington began talks for a significantly expanded FTA, which includes the U.S., its traditional allies (Japan, Canada, Australia, Mexico), Peru and Vietnam.

Consequently, the negotiators had to hammer a deal with nations that represent very different levels of economic development. The living standards in the U.S. are 10 times higher than those in Vietnam, for instance. Accordingly, talks were conducted under extraordinary secrecy, which left environmental movements, labor unions, and cyber security observers frustrated and angry. 

The inclusive free trade scenario

In the “inclusive free trade” scenario, the TPP serves as a foundation for a truly Asia-wide FTA—one that has room for China, the U.S., and 21st century currency arrangements. In this scenario, China and the U.S. conclude their bilateral investment treaty (BIT). Growth accelerates and economic relations broaden across South, East and Southeast Asia. It is the only scenario to sustain the promise of the Asian Century.

After the conclusion of the TPP agreement, this aspiration was reflected by the Ministry of Commerce’s diplomatically-worded statement that China welcomes the TPP agreement and hopes it can facilitate talks on other regional free trade deals to push economic growth in the Asia-Pacific region.

The idea of regional free trade has been around since at least 1966 when Japanese economist Kiyoshi Kojima advocated a Pacific Free Trade agreement. The actual talks began with the Asia Pacific Economic Cooperation (APEC) forum, which was created in January 1989. Practical measures ensued during the 1994 meeting in Bogor, Indonesia, when APEC leaders opted for free and open trade and investment in the Asia Pacific.

In 2006, C. Fred Bergsten, then chief of the Peterson Institute for International Economics, an influential U.S. think-tank, made a forceful statement in favor of the Free Trade Area of the Asia Pacific (FTAAP). If the agreement could be achieved, he argued, it would represent the largest single liberalization in history. After all, the APEC represents 40 percent of the world’s population, almost 60 percent of the world economy, and nearly 50 percent of world trade. Instead, the Obama Administration set it aside to focus on the TPP talks, which were assigned to Michael Froman, a former security and Soviet Union expert who now has now become the new U.S. Trade Representative.

Certainly, Beijing can circumvent most of the TPP’s constraints by taking advantage of its existing bilateral and multilateral trade arrangements and those to be concluded in the near future. Beijing can also gain similar benefits through free trade in the Asia Pacific (FTAAP) and regional economic partnerships (RCEP) — trade agreements that link the economies of China, Japan, and India along with Southeast Asian countries.

What Asia Pacific really needs is an inclusive bloc, however. No sustainable free trade agreement in Asia can ignore either China, or the United States, or both.

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