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Vietnam’s EU trade deal fails to inspire COVID-hit neighbors

Nikkei Asian Review - 25 September 2020

Vietnam’s EU trade deal fails to inspire COVID-hit neighbors
By David Hutt

Southeast Asian countries facing the daunting challenge of kick-starting economic recoveries from COVID-19 are showing little interest in a step that could help — fast-tracking free trade talks with the European Union.

Four regional states that had already started negotiations with the EU before the pandemic began have made hardly any discernible progress this year. They appear unmoved by expectations that Vietnam, which has already ratified such a pact, will recover the fastest in the region thanks in no small part to the promise of tariff-free exports into European markets over the next few years.

In some cases, the talks remain hung up on differences over human rights or the environment, as well as a nagging perception that the EU applies double standards in its dealings with various countries.

The potential gains are no secret: Vietnam’s government last year estimated its FTA would almost double exports to the EU bloc by 2025, adding 4.6% to gross domestic product growth within five years.

Likewise, a joint study last year by Thailand’s Trade Negotiations Department concluded that a deal with the EU would boost GDP growth by 1.63 percentage points each year, while driving up annual exports by 3.4% and investment by 2.7%.

With this in mind, Auramon Supthaweethum, director-general of the Trade Negotiations Department, told local media in August 2019 that Bangkok had given the green light to "revive FTA negotiations with the EU," which had stalled after the military coup in Thailand in 2014.

Last week, however, he said his department was only now close to wrapping up a study on whether to restart the talks.

The EU is also weighing whether to reopen the process, according to a source at the European Commission. "It is important to ensure, ahead of the negotiations, that the EU and Thailand share the same level of ambition in terms of the scope of a future deal," the source said.

Aside from Thailand — and its existing deals with Vietnam and Singapore — the EU has explored free trade pacts with the Philippines, Malaysia and Indonesia. All appear to be going nowhere.

Talks with the Philippines went through two sessions before stalling in February 2017, apparently due to European concerns about President Rodrigo Duterte’s brutal "war on drugs." The campaign had left 5,810 people dead as of July, according to the Philippine Drug Enforcement Agency’s probably conservative estimates.

"The EU’s trade agenda cannot be implemented in isolation from its values and broad foreign policy," the European Commission source said.

As an alternative, Brussels has focused on engaging with Manila through the EU’s Generalized Scheme of Preferences Plus scheme, which grants many Philippine exports tariff-free access to Europe. But just this week the European Parliament called for Manila’s trade privileges to be rescinded until there is "substantial improvement" in the country’s human rights situation and its government’s cooperation with Europe.

Cambodia lost similar trade privileges with the EU in August due to democratic backsliding, as did Myanmar years ago for mass human rights violations.

The talks that have progressed the furthest are with Indonesia. They began in 2016 and are set to enter their 10th full round later this year.

With the Indonesian economy forecast to contract by at least 1.6% this year, according to the Economist Intelligence Unit, Jakarta should be keen to fire up trade. But there is a major sticking point in the EU’s discussions with both Indonesia and Malaysia: palm oil.

Indonesia brought a complaint against Brussels to the World Trade Organization in late 2019, with Malaysia also party to the consultations, over the EU’s plans to phase out palm oil imports. Europe regards palm oil as an unsustainable and environmentally dangerous product. Indonesia is the world’s top producer, while Malaysia ranks No. 2 and said in July that it plans to take its own legal action.

No one is budging. "There will be no deal with Indonesia until this issue is resolved and there will be no reopening of negotiations with Malaysia until this issue is resolved," then-EU trade commissioner Phil Hogan told the media in February.

Indonesia’s and Malaysia’s governments have pledged to stick to their guns — and to each other — in this dispute. They believe the EU’s palm oil policy is really about protecting European vegetable oil producers from competition.

Beyond palm oil, Indonesia, Malaysia and other Southeast Asian governments share a sense that Europe needs to rethink its approach to the region, according to Bridget Welsh, a political analyst at the University of Nottingham Malaysia. In their eyes, Brussels "has to get off its high horse and see itself as an equal to Southeast Asia, and needs Southeast Asia even more than Southeast Asia needs Europe," she said.

Ari Kuncoro, an economist at the University of Indonesia, agreed. In the current pandemic crisis, he said, "the EU needs our market more than we need theirs. Their economy is in deep contraction while our economy [has] potential for a fast recovery."

While Indonesia’s GDP contracted by 5.3% on the year in the second quarter, the EU bloc saw an 11.7% plunge. Kuncoro suggested Indonesia could use the EU’s tough situation as "leverage" to pressure Brussels to "relax the discrimination towards palm oil."

"The EU is an important market but we must not lower our standards for a commodity as strategic as palm oil," the economist added.

Despite the spat over palm oil, respect for the EU does run deep in Southeast Asia.

In a survey for more than 1,000 policy experts across the region, the EU ranked first as a trusted global leader in "maintaining the rules-based order and upholding international law" and was a close second in terms of "championing the global free trade agenda," according to the latest "State of Southeast Asia" report from the ASEAN Studies Centre at the ISEAS-Yusof Ishak Institute.

Yet, the ratio of respondents who thought the EU was the most influential economic power in Southeast Asia dropped this year, from 1.7% in 2019 to just 0.6%. Trust that the EU would "do the right thing" in terms of peace, security and governance also dipped, from 41.3% to 38.7%.

By most measures, the EU trails way behind Japan as the region’s preferred "middle power" between the U.S. and China.

Some in Southeast Asia take exception to the way the EU takes a harder stance on certain countries.

While Brussels has penalized Myanmar and Cambodia, the two FTAs Brussels already has in Southeast Asia are with less-than-perfect states. Vietnam is a one-party communist regime with a track record of repression, while Singapore has been ruled by one party and mostly one family since the city-state’s founding in 1965.

Still, Europeans may feel aggrieved that their efforts to improve relations with the Association of Southeast Asian Nations bloc tend to be either rebuffed or ignored. The EU has provided $946 million in relief to ASEAN states during the COVID-19 pandemic to date — more than China and the U.S. — only to receive little coverage.

Either way, the pandemic has left the two sides where they were — struggling to overcome their differences to strike deals that look good on paper. If anything, Indonesia and Malaysia feel an even greater need to protect their palm oil sectors during the COVID-induced economic crisis, further dimming the prospects for trade pacts with Europe.

Additional reporting by Ismi Damayanti.

 source: Nikkei Asian Review