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Global Trade: The Asian Century


By Tax-News.com Editorial
January 29, 2013


Progress towards the completion of the Doha Round of world trade talks remains stalled, and the World Trade Organization has warned of a lurch towards protectionism. However, the world’s major trading powers do not appear to have given up on expanding free trade, and while Doha lays dormant, the Asia-Pacific region – widely tipped to lead the next phase of global economic growth – is playing host to an emerging trend towards the conclusion of multilateral free trade groupings.

Back in July 2012, the World Trade Organization (WTO) warned of the emergence of a longer-term trend towards trade protectionism, with governments increasingly prepared to resort to protectionist measures in order to achieve national economic objectives. According to a report issued by the WTO at that time, 182 new measures that restrict or can potentially restrict or distort trade had been recorded since the previous October, impacting 0.9% of global imports. Nevertheless, it can also be concluded that the dire prophecies of a descent into “beggar thy neighbor” trade polices sounded at the height of the global financial and economic crisis have not come to pass – at least not yet.

Recent evidence suggests that in actual fact the contrary is taking place, at least as far as the major trading powers are concerned. In their eighth report to leaders of the G20 nations, the Organization for Economic Cooperation and Development (OECD), the WTO and the United Nations Conference on Trade and Development said that advanced nations have largely kept their promise to keep markets open by resisting trade protectionism amid high unemployment rates and the weak economic recovery.

We can also deduce this from an apparent switch in strategy by certain influential trading nations towards tying up regional trade deals rather than expanding national free trade treaty networks piecemeal with individual countries. This is a trend that is obvious in Asia and the Pacific Rim, and here we summarize some of the major free trade initiatives taking place, and progress made over the last few months.

The Trans-Pacific Partnership (TPP)

Rapid progress has been made towards the expanded Trans-Pacific Trade (TPP) agreement. When the TPP was originally concluded back in 2005, it consisted of just four, relatively small, countries,  Brunei, Chile, New Zealand and Singapore. By 2011, a number of other countries were negotiating to join the group, including the United States, and by the end of 2012, 11 countries were involved in the talks towards an expanded TPP, including Australia, Canada, Malaysia, Mexico, Peru and Vietnam.   

In November 2011, the leaders of the nine TPP countries then discussing an enhanced agreement agreed to a broad framework which committed participants to achieving five aims designed to make the TPP “a landmark, 21st-century trade agreement.” These include: comprehensive market access through the elimination of tariffs and other barriers to goods and services trade; a fully regional agreement to facilitate the development of production and supply chains among TPP members; cross-cutting trade issues, to build on work being done in APEC and other fora in the areas of regulatory coherence, competitiveness and business facilitation, SMEs and development; trade promotion and investment in innovative products; and a “living agreement” that can be updated to address trade issues that may arise in the future.

While most observers remarked that progress towards the conclusion of the enhanced Trans-Pacific Partnership (TPP) remained slow during the 15th round of negotiations in New Zealand in December, which included Canada and Mexico for the first time, the United States Trade Representative (USTR) said that participants were pleased to report further solid steps forward in closing the remaining gaps between them. During the 10-day round, it was reported that the 11 delegations "concentrated on finding pragmatic and mutually-beneficial outcomes to remaining issues under consideration, while isolating the outstanding challenges to be addressed in the months ahead." The delegations were said to have furthered their efforts to close the outstanding legal texts of the 29 chapters of the agreement covering all trade and investment-related issues between them, making progress across the agreement. Further steps forward were made on government procurement during this round, while the delegations continued to advance their work to develop the tariff packages on industrial goods, agriculture and textiles, as well as on rules of origin promoting the development of supply chains. In addition, they discussed their respective market-opening commitments on services and investment. However, the USTR confirmed that they have recognized that further work is needed to meet the goals for a high-standard result in market access negotiations, and were able to set timetables for inter-sessional work that should ensure additional progress at the next round.

Back in November 2011, it was announced by then Japanese Prime Minister Yoshihiko Noda that Japan intended to begin consultations to join the TPP. However, Japan has needed to receive the support of all nine TPP countries to do so, and, while Brunei, Chile, Malaysia, Peru, Singapore and Vietnam have said that they will support Japan's participation, discussions with the others – Australia, New Zealand and the US – have remained inconclusive. Above all, acceptance by the US of Japan's application to take part in the TPP talks, which would be crucial, has never been a foregone conclusion, due in large part to the fears of US manufacturers, particularly the auto industry, that a tariff reduction would only increase the already-large trade deficit with Japan, as, it is said, Japan's complex non-tariff trade barriers would remain.

Although the US’s participation was far from certain after Barack Obama became President in 2009 and sent out mixed messages with regards his attitude to free trade, it is not difficult to understand why Obama’s US eventually decided to throw its lot in with the TPP. According to the Office of the US Trade Representative’s own figures, TPP countries comprise the fourth largest goods and services export market of the United States. US goods exports to the broader Asia-Pacific totaled USD775bn in 2010, a 25.5% increase over 2009 and equal to 61% of total US goods exports to the world. America’s small- and medium-sized enterprises alone exported $171 billion to the Asia-Pacific in 2009, according to the latest available data. Obama also made clear early on in his presidency that the key to American’s political and economic interests now lies over the Pacific, rather than over the Atlantic.

The ASEAN 6 Regional Economic Partnership Agreement (RECP)

Meanwhile, another momentous decision that could harness Asian trade growth took place last November when it was agreed that talks should begin on a new regional trade treaty between the Association of South East Asian Nations (ASEAN) and its six free trade agreement partners.

Currently, ASEAN consists of 10 member states - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – and its six FTA partners include Australia, New Zealand, China, India, South Korea and Japan. Thus, if achieved, a new trade treaty encompassing all 16 countries would link an integrated market comprising over 3bn people with a combined gross domestic product of some USD20 trillion. The link up was first mooted at the 19th ASEAN Summit in November 2011, when leaders of the ten ASEAN member states adopted the Regional Comprehensive Economic Partnership Agreement (RCEP) framework setting out the general principles for broadening and deepening ASEAN’s engagement with its FTA Partners, and signaled ASEAN’s commitment to play a central role in the emerging regional economic architecture. A year later, at the 21st ASEAN Summit in Cambodia, It was said that the significant progress made through ASEAN’s FTAs with its six FTA partners has put the countries in a position to bring their economic partnership to a higher level by negotiating a comprehensive, high-quality agreement. If completed, the RCEP would be the largest regional trading arrangement to date.

“With the region accounting for more than half of the global market and about a third of the global economic output, there is no doubt that a successful RCEP would significantly contribute and boost global trade and investment,” said Surin Pitsuwan, ASEAN’s Secretary-General.

RCEP negotiations are expected to commence in 2013, and the Summit also endorsed the ‘Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership,’ adopted by ASEAN’s Economic Ministers in Siem Reap in August 2012.

Based on those Guiding Principles, the RCEP – although to be negotiated initially by ASEAN and its existing FTA partners – would allow the region’s economic partners to eventually accede to the agreement. The RCEP is also expected to include provisions for economic and technical cooperation that would allow all parties, regardless of their level of development, to maximize the opportunities made available by deeper and broader economic engagements.

In the meantime, ASEAN is also going forward to set up its ASEAN Economic Community (AEC) in 2015, and has urged all of its member countries to take the necessary internal measures to realize the AEC’s objectives of regional integration.

Other Asian FTAs

Asia’s trade negotiators it seems have hardly been able to pause to draw breath in recent months. In December, India and ASEAN concluded a free trade agreement to include trade in services and investments, to add to their existing FTA on trade in goods. The agreement was reached ahead of a two-day summit to mark 20 years of dialogue between India and the ASEAN trade bloc. It is anticipated that all the nations will have completed their necessary legislative procedures by the first quarter of 2013, allowing for the agreement to be formally signed in August 2013.

Talks to expand the scope of the existing agreement began in the second quarter of 2010, and it was initially hoped that the nations would conclude these negotiations by the end of that year. Notably, the agreement will liberalize conditions for individuals undertaking foreign contracts, and will be particularly beneficial for Indian and the Philippines given their sizable outsourcing industries. The new agreement builds upon the existing free trade pact, which under a phased approach will eliminate tariffs on 80% of goods by December 31, 2016.

Following the commencement of negotiations on a trade treaty with Indonesia, the South Korean government indicated in July 2012 that it was looking to negotiate additional treaties with other countries within ASEAN, starting with Vietnam. Total trade between South Korea and Indonesia has increased significantly as a consequence of the ASEAN FTA, reaching almost USD30bn in 2011. However, while Indonesia is now South Korea's tenth biggest trade partner and its second largest in ASEAN, the two countries believe that a further bilateral trade treaty could provide additional benefits. A target has been set to achieve total trade between the two countries of USD50bn by 2015, rising to USD100bn by 2020, and the first round of talks began on a Comprehensive Economic Partnership Agreement (IK-CEPA) on July 12.

It is planned that the IK-CEPA talks will cover goods, services, investment, rules of origin, and customs and trade facilitation. It is expected, for example, to extend the range of products included, and reduce the tariffs more quickly on the sensitive items contained in the ASEAN FTA, while it should also improve the investment protection language within the latter to further encourage South Korean investment in Indonesia.

In addition, the comprehensive bilateral free trade agreement between Malaysia and Australia, a complement to the existing regional agreement between Australia and ASEAN, of which Malaysia was one of the original members, entered into force on January 1, 2013. Negotiations on the FTA commenced in May 2005 but paused in 2006 to enable both countries to focus on the ASEAN-Australia-New Zealand agreement, and resumed only in August 2009. Negotiations were intensified following an undertaking in March last year by Australia’s Prime Minister Julia Gillard and Najib Tun Razak, the Malaysian Prime Minister, to complete negotiations within a year. After 11 rounds of negotiations, the FTA was concluded on March 30, and signed on May 22 last year.

The agreement should open up opportunities for exporters and investors across most sectors, as it will guarantee tariff-free entry for 97.6% of current goods exported from Australia to Malaysia, rising to 99% by 2017. For Malaysia, the FTA will allow the same tariff-free entry to Australia as is currently enjoyed by Singapore. The FTA should also help to diversify the trading relationship by opening Malaysia's services sector to Australian companies. Malaysia has committed to allowing majority Australian ownership of service providers in a range of industries, including telecommunications, insurance, investment banking, education, tourism, research and development, accountancy and mining-related services. The agreement also provides a framework to further facilitate cross-border investments between Malaysia and Australia through commitments on non-discrimination as well as the protection of investors and investments. This enabling environment should encourage further two-way investments between the two countries.

Momentum has also increased towards the conclusion of another potential huge FTA, involving China, Japan and South Korea  – three of the region’s economic powerhouses. On September 27, a third preliminary working-level consultation was held in Seoul on the ways to move forward prospective negotiations on the proposed trilateral FTA, and with three rounds of such consultations already completed, it was disclosed that the three countries will start to undertake their respective domestic procedures to determine whether to launch negotiations for a trilateral FTA.

Trade between the three countries was said to have grown to some USD690bn last year. While China is the main trading partner for both Japan and South Korea, Japan and South Korea are China’s fourth and sixth trading partners, respectively. However, it has also been recognized that the issue of sensitive goods and services could be challenging for all three countries and, while Japan and South Korea are competitors in the supply of many manufactured and technological goods to China, tariffs on the import of agricultural products from China would be also be a problem for both those countries.

EU Renews Interest in Asian Trade Deals

After abandoning its previous attempt to strike a free trade deal with the ASEAN bloc, the European Union (EU) has also upped the tempo of its trade negotiations in the region, having decided to conclude separate FTAs with ASEAN member states.

Negotiations on one such agreement were concluded with Singapore on December 16 last year by EU Trade Commissioner Karel De Gucht and Singapore's Minister of Trade and Industry Lim Hng Kiang. The deal is designed to create new opportunities across a range of services sectors. In particular, the Commission says that the services chapter "is set to become a new benchmark in services negotiations." Both sides will now undertake a far-reaching liberalization of their services markets, and apply new disciplines on non-discrimination and transparency. The treaty will also offer better access to public tenders and reduce non-tariff barriers in key industries. A high level of intellectual property rights protection was agreed to, and the principles of sustainable development in trade will be enshrined in the FTA. Comprehensive rules will be introduced on competition and state aid, along with a new regime to tackle barriers to trade and investment in renewable energy generation.

Singapore is the EU's 13th largest goods trading partner and its largest trading partner in the ten-member Association of South-East Nations (ASEAN). This FTA is the EU's first with a member of ASEAN, although it is also negotiating deals with Malaysia and Vietnam, with a longer-term objective of a region-to-region agreement. In 2010, the existing stock of bilateral investment between the EU and Singapore reached EUR190bn (USD250bn).

Also in 2012, prospects for a European Union (EU)-Thailand partnership cooperation agreement (PCA) and free trade agreement (FTA) were central topics during European Commission President Jos Manuel Barroso’s discussions with Yingluck Shinawatra, Prime Minister of Thailand; earlier in the month, President of the European Council, Herman Van Rompuy confirmed that the EU was looking for a rapid conclusion of a new FTA with Vietnam, following progress made in the first round of negotiations from October 8-12. The EU is one of the largest foreign investors in Vietnam with investments worth around USD1.8bn, representing more than 12% of Vietnam's total committed foreign direct investment last year.

Conclusion

As the title to this article suggests, many predict the 21st century to be the ‘Asian century,’ a period when the region’s major powers are expected to take the lead from the West in matters of politics and economics. The region’s growing appetite for trade liberalization should help to facilitate its growing influence on the global economy. But it remains to be seen whether there is the political will on all sides to conclude ambitious regional FTAs like the TPP and the RECP, or whether the differences between such a diverse range of economies will be too wide to bridge.  


 

Tags: Chile | Canada | Philippines | Peru | Thailand | Brunei | United States | tariffs | India | New Zealand | Indonesia | trade treaty | China | Singapore | Vietnam | services | Malaysia | Japan | Australia | investment | trade

 

 

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