Seizing the moment in Asian economic diplomacy

May 2, 2016

Economics, Politics and Public Policy in East Asia and the Pacific

Seizing the moment in Asian economic diplomacy

by  Editors, East Asia Forum

Asia is looking to complete a major economic agreement by early 2017 that offers the chance to lift its growth closer to potential by locking in domestic reform and liberalisation through regional cooperation. The Regional Comprehensive Economic Partnership (RCEP) agreement is Asia’s response to the Trans-Pacific Partnership (TPP) and heralds the next phase in Asian economic cooperation. But RCEP is qualitatively different from past cooperation in Asia — more comprehensive in scope than any of its antecedents — and its delivery will require enormous political will.

Economic cooperation and the growth of economic interdependence in East Asia occurred without preferential regional agreements, unlike in Europe through the EU or in North America with NAFTA. Yet economic integration in East Asia by most measures is on par with that of these other regions. The main drivers have been trade liberalisation (with successful commitments by the major East Asian players to the GATT/WTO) and competitive liberalisation of investment regimes. The WTO International Technology Agreement (ITA), for instance, gave a huge boost to the development of regional value chain production in the electronics sector.

Understanding that opening up to trade and investment is necessary for growth, development and prosperity gained momentum in East Asia over the years. South Asian countries have yet to settle on that consensus. The growing weight of the East Asian economies in the international economy, combined with their proximity and the complementarity of their economies, is why intra-East Asian economic relationships have grown so large. The Japan–China trade relationship, for example, is the third largest in the world. India is gradually joining the pack.

As the East Asian economies have climbed the income ladder — Japan, South Korea, Hong Kong and Singapore are already high income economies — their international economic policy interests have shifted from trade in goods and direct investment to trade in services, investment in production networks and financial market integration through capital account liberalisation. The economic cooperation agenda in East Asia now encompasses all these issues — not just border trade liberalisation but the economic and institutional reform behind the border that is essential to attaining the region’s future economic growth potential.

The diversity of the regional economies and polities, and difficulties stemming from historical and political baggage among them, has shaped the nature of economic cooperation in Asia. Building a framework of shared priorities and trust has allowed rapid catch up through the gains from trade and commerce for growth and development. Most of the action has been through concerted unilateral reform reinforced by global commitments (spectacularly, for example, through China’s accession to the WTO).

With multilateral trade liberalisation stalled and the Doha Round going nowhere, Asia has turned to imitating negotiating preferential bilateral agreements. Free trade agreements have proliferated but have brought neither the large gains proponents claimed nor the damage critics argued they might. Excluding sensitive sectors, already low barriers to trade at the border and the lack of reform behind borders has meant they have brought little benefit nor imposed large costs.

Enter the mega-regional arrangements, TPP and RCEP. They have the potential to exclude or include and carry greater significance for the global system.The TPP includes the eastern Pacific members of APEC — the United States, its NAFTA partners Mexico and Canada plus Chile and Peru — as well as RCEP members Australia, Japan, Brunei, Malaysia, Singapore and Vietnam. But China, Indonesia, South Korea, India and the other ASEAN states, leave a big hole in the TPP donut. RCEP is in part a response to the TPP, driven by Indonesia

As Peter Drysdale explains in this week’s lead essay, ‘the RCEP group is where the global economic dynamism is, and [presents] a massive opportunity for the region’. READ:

Much ink has been spilled about what a large chunk of the world economy TPP represents. The group of countries that comprise RCEP were already larger than the TPP group in real terms by 2007. Given the rise of the Indian economy and China’s continued growth, even at a 5 per cent a year, the RCEP grouping could be double the size of the TPP group in ten or at most 12 years.

RCEP includes less-developed countries in Southeast Asia and others like India that are further behind both economically and in trade and economic reform. The gains from opening up these economies and buttressing national domestic reform through regional reinforcement is huge.

China and India will not be able to join the TPP any time soon and, as Drysdale argues, ‘an ambitious and high-quality RCEP can offset trade and investment diversion from TPP and work to integrate the entire Asia Pacific region.’ Exclusion from the TPP is not just a Chinese and Indian problem. ASEAN members not party to the TPP will also struggle to join in the near future, creating serious fault-lines in progress towards East Asian economic integration. Already some manufacturers are moving from China to Vietnam to take advantage of better access to the US market — a costly exercise that is diverting investment and trade away from non-TPP members.

The TPP is thought by many to be a higher quality agreement because of the new issues it introduced such as stronger intellectual property protections, data flow liberalisation and new dispute settlement provisions. Some of those aspects will help open economies up and provide impetus for reform, but not all.

Distinctively, RCEP will include an ongoing economic cooperation agenda providing regional peer support for domestic institutional reform. As Drysdale says, the ‘economic cooperation agenda sets up RCEP as an important vehicle for building economic and political confidence in effecting the next big structural transformation across Asia, between China, India, Northeast Asia and Southeast Asia’.

The cooperation agenda also means the agreement is not a one-shot game. This is an opportunity for Asia to bring in harder cooperation with binding targets and commitments, combined with its cooperation agenda to help countries define their own paths to prosperity.

The momentum is building among the negotiating corps, though there is a way to go. Failure doesn’t mean that Asia will stumble. But it would mean that we’d be in for a period of distinctly below potential growth from a group of economies more likely to get stuck in the middle income trap. The opportunity is within grasp. All delivery on the RCEP agreement needs is something in short supply: some leadership.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

5 thoughts on “Seizing the moment in Asian economic diplomacy

  1. “Lift growth closer to potential… by locking in domestic reform and LIBERALISATION…blah blah”

    Whenever you hear that L-word you can bet it will end in trouble for whoever that goes down that road… How many more disasters do we need before we get it that that is not the way…

    To the authors of such pieces : please stick to issues you understand…

  2. I believe the future of Asian economy is largely depended on the relationship of China and Japan, which together account for more than a fifth of global output, bigger than the share held by the US or that of Europe. The two economies are deeply complementary, with different levels of industrial and technological capability that generate business and investment on a scale not matched in any other economic relationships, not the China-US nor Japan-US relationship. So far the US has been successful in driving wedge between the two Asian giants, especially in handing the administration of Diaoyu/Senkaku to Japan. I believe Japan is at the cross-road to choose whether to remain dependent on the US and resist China’s rise to dominance of the regional order, or negotiate alternative relationships with China and the US. Equally, China must decide where Japan fits in its own vision of regional order and find a productive way to relate to Japan. Peaceful China-Japan relation is a must for prosperity in Asia.

  3. If long ago Japan had had the humility to express genuine remorse to China about their unwarranted military assault on a peaceful but weak neighbour things might have been a lot different today… and Japan would have had no need to rely on a far away power…

    Be that as it may, Japan can still play a clever hand if it realises that an intimate relationship with China is not only possible but necessary… not only for them but for us Asians… and especially now that the West seems to have decided to commit collective suicide…

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