A deal to reduce tariffs across Asia would make it easier to trade in manufactured goods
Trade was high on the agenda for world leaders at the recent Asia-Pacific Economic Cooperation (APEC) Summit in the Philippines – and the discussion was timely. Asia today has the opportunity to lead the most ambitious push for free trade since the creation of the World Trade Organization 20 years ago.
The Trans-Pacific Partnership (TPP), the ASEAN Economic Community and the Regional Comprehensive Economic Partnership are important efforts to liberalise trade and investment. But these overlapping agreements point to a grander project: one comprehensive agreement to create a free-trade zone spanning the entire Asia-Pacific region.
With global economic growth at its slowest since the financial crisis, there is an urgent need to help businesses by boosting trade. It is not too soon to start gathering support for a region-wide pact, even as we wait for an APEC study into the practical issues that would need to be overcome. Experience shows it will take time to align thinking on what a pact should look like, and more time again to negotiate it.
The TPP is just one of three trade agreements in the region demonstrating that politicians have the will to promote free trade
The best way to understand the potential benefits is to look at the most ambitious agreement underway – the TPP, which is awaiting ratification by its 12 members.
The TPP encompasses 870 million people in a diverse group of 12 Pacific Basin countries that extend from New York to Singapore and from Tokyo to Santiago de Chile. The combined gross domestic product of its members is USD28 trillion, and together they account for more than 25 per cent of global trade.
The core of the deal is a reduction in tariffs, which will allow smoother trade, especially for those countries that are reliant on manufactured goods for export. It also covers 21st century issues such as e-commerce and regulatory reform.
Vietnam will benefit from the implementation of the TPP, with HSBC research pointing to a potential 14.3 per cent gain in the country's GDP by 2025. Its exports of apparel and electronics will receive a boost. And over the long term, its manufacturing sector could become more sophisticated, while state-owned enterprises will be challenged to reform as they face increased competition.
The whole region may benefit from the liberalisation of services under the TPP. Barriers to trade in services have traditionally been high in Asia. Reform could promote development not only through growth in the sector but also through improved quality of inputs from services for use in manufacturing and agriculture.
The TPP will also provide rules to facilitate international commerce – covering intellectual property protection, government procurement and dispute settlement, among other issues. Investor-state dispute settlement, for example, provides a fast and relatively cost-effective process for corporations to settle disputes with governments. Although this is a cause of concern for some people, it will reassure investors that they have recourse in the event that an agreement is not respected. We expect that this will result in capital being invested in some previously under-invested areas.
Looking to the future, the TPP is a living agreement that is able to change as circumstances demand, with the potential for more countries to join. Indonesia did not join at the beginning – nor did China, the Philippines, Thailand or South Korea – but each has expressed interest in potentially taking part later.
This ability to grow is a key strength, and it opens up the possibility for the TPP to include a greater number of Asia's major economies. As that happens, it will come closer to becoming a deal that captures the region in its entirety; something that would cement Asia's central position in the global economy.
The TPP is just one of three trade agreements in the region demonstrating that politicians have the will to promote free trade. Now is the time to capitalise on the huge strides underway and think on an even greater scale.
A version of this article appeared in the Nikkei Asian Review on 17 November 2015.