Live Mint | 14.8.2012
Whither the Asian FTA?
East Asia may be on its way to stitch a regional trade agreement. This will be at the cost of an Asia-wide deal
In recent weeks, leaders of the 10-member Association of Southeast Asian Nations (Asean) have made overtures to India to join the Regional Comprehensive Economic Partnership (RCEP) that Asean members have agreed to pursue. At the conclusion of their last summit meeting in Indonesia, the leaders agreed that RCEP would be an Asean-led process under which Asean would “engage interested Asean free trade agreement (FTA) partners in establishing a RCEP agreement and, subsequently, with other external economic partners”.
RCEP is aimed at establishing the centrality of Asean in the economic dynamics of Asia. For more than 15 years, since the decision by Asean member states create an FTA, the grouping has sought to position itself as the hub in the Asian region. In order to realize this objective, the grouping adopted a carefully crafted two-pronged strategy. The first was to engage in a process of regional economic integration, the culmination of which will be the formation of FTAs with all the countries in its immediate neighbourhood; India, Japan, China, Korea, Australia and New Zealand. In a way, the grouping had succeeded in forming the hub and spoke structure by reaching out to all its major partner countries. There was, however, one major weakness in this structure—the level of economic integration was not even. While with China, Korea, Australia and New Zealand, integration was fairly deep for it included not only the goods sector, but services and investment as well. With India and Japan, the integration was rather shallow: very little progress beyond a FTA in goods has been achieved.
For RCEP to materialize, several challenges will have to be overcome. The most significant being the proposed trilateral free trade agreement between China, Japan and Korea (CJK-FTA). The CJK-FTA will be the third largest FTA next to only the North American Free Trade Agreement (Nafta) and the European Union (EU), and which according to some estimates, would cover a population of 1.5 billion and would represent 70% of the Asian economic aggregate.
The feasibility study for CJK-FTA was completed at the end of last year, which recommended the formalization of a comprehensive and a high-level agreement covering goods, services and investment, besides a host of other issues such as non-tariff barriers and intellectual property rights. Although the formal negotiations for CJK-FTA will begin towards the end of this year, leaders of the three countries took a major step some months back by signing an agreement on promoting, facilitating and protecting investments. This agreement on investment is not just the first agreement among these three countries; it establishes the institutional arrangements for the three countries to encourage investment flows. But perhaps more importantly, the investment agreement could provide the much needed political impetus that could put CJK-FTA negotiations on a fast track. And, if CJK-FTA does proceed quickly, the future of RCEP could be uncertain.
On the other hand, a successful RCEP could deal a body-blow to a more comprehensive regional economic integration that the East Asia Summit (EAS) members had initiated towards the middle of the past decade. This grouping, which brings the Asean members together with the “plus-6 countries”, viz. India, Australia, New Zealand, China, Japan and Korea had agreed to forge a Comprehensive Economic Partnership for East Asia (CEPEA). The feasibility study for CEPEA was concluded in 2009 and this proposal was immediately accepted by the leaders in their summit the same year.
When it was mooted, CEPEA could have made a significant impact on at least three counts. The first was that it brought together some of the most rapidly expanding economies, which had considerable presence in the global economy. Just less than one-third of the global merchandise trade was being conducted by countries supporting CEPEA. In the commercial services trade, the share of these countries was consistently rising, aided by the performance of two of the largest countries in the developing world, viz. China and India. In terms of foreign direct investment, the Asean+6 members accounted for more than one-fifth of the inflows and were contributing more than one-sixth of the total outflows. A second factor that made CEPEA important was that forging of close ties between the strong and resilient economies could have given the global economy a much needed support, using which it could have overcome the weaknesses that it faces. A third factor was that CEPEA was truly the “second-best” solution to further the process of global economic integration, given that the “best solution” provided by the World Trade Organization (WTO) was headed nowhere. In the decade-long pursuit for finding multilateral solutions for economic integration between its member states, WTO has witnessed disagreements galore. CEPEA could have provided the much needed signal that countries can and do negotiate to further their economic engagements.
Despite its pluses, CEPEA has remained in the back-burner. With the impending threat of the region being sliced out into overlapping and competing FTAs, leaders of the member countries must take effective steps to implement CEPEA.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.