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Is there an EU-ASEAN trade deal on the horizon?

ASEAN Today - 18 December 2019

Is there an EU-ASEAN trade deal on the horizon?

On November 21, the European Union’s (EU’s) Free Trade Agreement (FTA) with Singapore, the first signed with an ASEAN nation, came into effect. The agreement was approved with a significant majority in the European Parliament and allows European firms to expand their footprint in the region.

A second trade agreement with Vietnam, signed in June, is expected to come into effect by the end of 2019.

Singapore and Vietnam are the EU’s largest trading partners in the region. Together, the pair account for around 45% of the EU’s total ASEAN trade. The agreements will be a boon for inter-regional trade and employment.

The deals eliminate tariffs on imports and exports and aim to dissolve many of the non-tariff barriers in the automotive, electronics, pharmaceutical and textile industries. For European firms, the deals offer an opportunity to gain access to regional telecommunications, financial and information technology markets. Singaporean firms, at the forefront of the fourth industrial revolution, will enjoy unfettered access to European digital markets.

The Vietnamese government estimates that exports to the EU will increase by up to 20% under the agreement, adding an additional 3% to national gross domestic product (GDP) by 2023.

Now multiply these benefits across the entire region

There have been indications that the Singaporean and Vietnamese FTAs could serve as a model for an ASEAN-EU multilateral FTA.

The EU’s 2016 Global Europe Strategy hinted at closer economic and security ties to the Asia-Pacific region and during the announcement of the bloc’s trade deal with Vietnam in June, Cecilia Malmstrom, the EU trade commissioner, hailed the deal as an “important milestone” that could act as a catalyst for deals with other ASEAN nations.

The EU is the largest investor into the ASEAN region, accounting for almost a third of all foreign direct investment (FDI). It is also the bloc’s second-largest trading partner, with total two-way trade standing at US$265 billion in 2018. A region-to-region trade deal would have a profound impact on FDI inflows and ASEAN export volumes.

The EU relaunched negotiations with the 10-nation bloc in 2017 following the US withdrawal from the Transatlantic Trade and Investment Partnership (TTP). The increasingly unstable international economic climate pushed European eyes towards Southeast Asia.

Two years on, negotiations have dissolved. Will the FTAs with Singapore and Vietnam catalyse a multilateral agreement between the two blocs?

The EU sees limited value in a multilateral approach

Two years ago, when the prospect of an EU-ASEAN FTA re-emerged, Trump was already advocating for tariffs on Chinese goods to reduce the US trade deficit. The EU was also dealing with the immediate aftermath of the UK’s Brexit referendum and sought to mitigate the impact of economic turmoil through the negotiation of FTAs.

The EU of 2019 is a very different landscape. A Brexit withdrawal agreement has been drafted, the Sino-US trade war could soon be brought to a close, and the EU and the Mercosur have reached a political agreement for an ambitious FTA.

The EU also now has FTA agreements with its two largest ASEAN trade partners. While there would be significant economic merit in securing tariff-free trade with Indonesia, Malaysia, Thailand and the Philippines, the EU has severe misgivings over an FTA with the ASEAN economic bloc.

Major sticking points make an EU-ASEAN trade deal impossible

The EU would be reluctant to include Cambodia and Myanmar in any FTA negotiations. At the moment, the pair enjoy tariff-free trade with the EU under the ‘Everything But Arms’ (EBA) agreement; however, both have come under scrutiny for their human rights records.

The EU formally initiated proceedings to remove Cambodia from the agreement in July 2018. In August, the EU concluded a six-month evaluation period and issued a damning report on the current state of human rights in the country. Hun Sen’s government has been given until February to improve the situation or face suspended trade privileges.

Human rights in the Philippines are also a barrier to a multilateral FTA. As Duterte’s drug war rages on, and the International Criminal Court (ICC) deepens its probe into extrajudicial killings, the EU has to hold Duterte’s government to the same standard as Hun Sen’s and Aung San Suu Kyi’s.

A dispute between the EU and ASEAN’s major palm oil producers has also intensified in recent months. Following the EU’s decision to ban members states from using palm oil sourced in Malaysia and Indonesia as biofuel, Indonesia filed a complaint at the World Trade Organisation (WTO). Malaysia is expected to register a separate complaint.

The cases could take several years to resolve and will likely dampen EU enthusiasm for tariff-free trade with both nations.

The EU prefers bilateral channels

With such insurmountable barriers to a multilateral approach, the EU will likely continue with its bilateral negotiations.

If the Singapore and Vietnamese FTAs provide a springboard for further trade negotiations, Thailand will be the next to take a seat at the EU negotiating table.

The EU and Thailand initiated talks on an FTA in 2013. They stalled a year later when the military seized power in a coup. In 2017, the EU laid out its conditions for the resumption of talks: a return to democratic governance and political pluralism.

The EU appears satisfied that Prayuth Chan-o-cha has met these conditions. Despite concerns of election rigging and a crackdown on political dissidents, the EU’s high representative for Foreign Affairs and Security Policy, Federica Mogherini, recognised the 2019 election and swearing-in of a cross-party coalition as “important steps” towards restoring democracy and pluralism in Thailand.

The EU’s concerns have made the bilateral route the only viable option. Issues in Cambodia and Myanmar mean ASEAN cannot be the vehicle to tariff-free trade with Southeast Asian nations.

As the sticking points recede, the EU will no doubt push for FTAs with further ASEAN states. But with each bilateral trade agreement, the need for a regional agreement recedes. As each nation opens up to tariff-free trade with the EU, the need for an overarching regional FTA diminishes. Eventually, the EU will effectively negotiate itself out of a multilateral agreement.

The Singapore and Vietnam FTAs offer a model that will facilitate future bilateral trade negotiations with other ASEAN nations. The day will come when Thailand, Malaysia, and Indonesia enjoy tariff-free trade with the world’s largest trading bloc but a region-to-region FTA will have no part to play in bringing that day to pass.

 source: ASEAN Today