The Diplomat - 29 October 2021
The Asia-Pacific’s Free Trade Disagreements
By Joseph Cash
“Everything is on the table” may be a popular opener among trade negotiators worldwide, but it is seldom true. More often than not, relatively little is on the table and interests almost always extend beyond those present in the negotiating room. Yet, in a new era of great power competition, when an increasing number of multilateral trade blocs are emerging and the WTO is stuck in a geopolitical funk, the expression is starting to have a ring of truth about it.
Nowhere is this more evident than in the Asia-Pacific, where free trade agreements (FTAs) that follow an American model, those that are closer to how the EU does things, and those with Chinese characteristics are all vying to come out on top.
Let’s start with the most extensive. When the EU negotiates an FTA with an Asian economy, the talks are far-reaching and delve into discussions beyond the exchange of goods and services. The 2019 EU-Vietnam FTA was Brussels’ most recent foray into growing European trade ties in the region, and that deal saw Vietnam commit to overhauling its labor practices, improving its environmental standards, and allowing the EU Commission to go through its books if it suspects Vietnamese firms are receiving unfair subsidies. More recently, these tenets of EU-style values-based trade also appeared in the now-frozen EU-China Comprehensive Agreement on Investment.
Owing to the size and attractiveness of the Single Market, Brussels can afford to be bullish when negotiating, venturing beyond areas other actors would include in a traditional trade deal. While this leaves the other party with little room for negotiation, and can at times give the impression of European overreach into their economic affairs, access to the EU’s massive Single Market is a glittering prize and can also incentivize reforms at home. However, that the EU and Vietnam needed five years to ratify their deal perhaps reflects a wider issue here: Whatever the specifics of any final deal, the other market is usually left implicitly accepting they are going down a path of closer integration with Europe and following Brussels’ way of doing things.
An EU-style FTA is not the only game in town in the Asia-Pacific, though. With the inking of the Regional Comprehensive Economic Partnership (RCEP) agreement in 2020, the 10 markets of the ASEAN Free Trade Zone were “stapled” to five of the bloc’s major FTA partners, resulting in an agreement encompassing 30 percent of global GDP and the biggest trade bloc in history. Being based on a U.S.-style trade policy formulation, it is a shallower agreement than those the EU pursues, and does not seek to address issues concerning labor regulations, human rights, or environmental sustainability within its provisions. This state of affairs seems to suit Beijing, which likely appreciates the lack of scrutiny afforded to the role of state-owned enterprises in member states’ economies, as well as provisions that contain just the right amount of free trade to satisfy Chinese economic planners.
To add to the smorgasbord of acronyms, much of the latest FTA talk in the Asia-Pacific has centered on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in many ways the most innovative trading arrangement in the region. Initially proposed as the Trans-Pacific Partnership (TPP) by the Obama administration, and sometimes viewed as containing deliberate barriers to entry for protectionist economies (read: China), the Trump administration’s decision to pull the U.S. out took the remaining aspiring members in a different direction. Building on what they had come up with and improving on it by reaching into Brussels’ liberal trade policy toolbox, the re-monikered CPTPP became a hybrid of an EU- and U.S.-style FTA featuring some of the most forward-thinking trade policy on offer.
While competition among FTA styles can drive innovation, it does present a key problem for non-super-sized economies: knowing which one to adhere to. For all the new ideas they offer, the various deals available within the Asia-Pacific are often inconsistent and cannot exist comfortably side by side. True, the CPTPP appears to offer the most ambitious vision of the region for this decade and beyond, and there is clearly determination among its 11 members to ensure that their shared designs for global trade emerge on top, but victory is not a given and they may yet succumb to trade along shallower American or Chinese lines.
One such economy that has been pondering these issues of late is the U.K. The country’s politicians have placed much stock on the importance of FTAs with both the Asian markets and the U.S., viewing them as central to securing long-term economic prosperity outside the EU. Mutual incompatibilities between these deals could see that mission falter, though.
For example, should the U.K. wish to sign an FTA with the U.S., it would likely find that Washington would demand terms that would disqualify it from pursuing an FTA with the Asia-Pacific’s biggest economy, China. Within the terms of the U.S.-Mexico-Canada Agreement (USMCA) and the U.S.-Japan Trade Agreement (USJTA) – both ratified in 2018 – U.S. trade negotiators included rules allowing them to terminate the arrangement should the other parties sign an agreement with a non-market economy, such as China.
The remaining FTAs the U.K. is pursuing within the Asia-Pacific are equally complex. Australia and the U.K. have agreed on an FTA in principle, but Canberra has demanded that London make several changes to its domestic legislation before the deal can move to ratification. One reason is that Australia has already adopted animal welfare standards in line with the provisions of the CPTPP, meaning that the most efficient way for its powerful agricultural sector to incorporate the U.K. market is for London to adopt the same standards. These sanitary and phytosanitary measures find their root in the parts of the CPTPP that align more closely with the United States’ science-based approach to animal welfare regulation than the EU’s precautionary principle model. As a result, they are incompatible with the requirements British farmers must adhere to when exporting into the EU, and may well cause further difficulties for the operation of the Northern Ireland Protocol agreed during the Brexit negotiations.
Conversely, on the issue of Rules of Origin (RoO), the U.K. finds itself entangled in an aspect of the CPTPP that aligns more closely with the spirit of EU trade policy formulation than that of the U.S.: the scope for flexibility concerning where parts originate from in exported goods. European FTAs and the CPTPP are more flexible with their content thresholds than the deals the United States is now striking. For example, during the USMCA negotiations, Washington negotiated hard to exclude content not originating from Canada or Mexico in cars imported from either market. The CPTPP, on the other hand, provides one set of RoO that allows content from all member states to be cumulated, and the EU’s FTAs usually contain room for specific accommodations where the other party has pre-existing RoO frameworks in place with a third market that also maintains an FTA with Brussels.
It is still too early to tell how these deals will play out as the global economy moves beyond the COVID-19 pandemic. For the moment, regulatory divergence is the reality of great power competition in trade policy formulation, but whether that is sustainable as more countries seek to join the action remains to be seen. As trade negotiators are increasingly discovering, just because everything is on the table does not always make it easier to get what you want.