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Southeast Asia: will markets and geography trump the TPP?

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In Brief

There hasn’t been much to cheer about in global trade these last few years.

The Doha Round of multilateral trade negotiations is comatose, if not dead. So the Trans-Pacific Partnership (TPP), a recent initiative to deepen trade relations among the countries bordering the Pacific, has been greeted with much applause and welcome relief as a step in the right direction.


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But while the TPP should be recognised and applauded for what it will be — an agreement providing increased rules-based certainty in trading relations among TPP members — it does not include China, the world’s second-largest economy, and largest exporter and manufacturer. For Southeast Asia, that is important.

China is Southeast Asia’s largest trading partner, and the TPP will probably not change the fact that, as the last 20 years have shown, markets and geography are the principal factors behind Southeast Asia’s economic integration with China. After all, trade and investment agreements can only facilitate market forces, not fight them.

The TPP now includes 11 countries, with Japan and South Korea considering participation. If they do join, the TPP countries together would account for 40 per cent of global GDP and 28 per cent of world trade. The hope is that the TPP will eventually expand to include all APEC members and become the FTA of the Asia Pacific.

What makes the TPP unusual is its ambitious scope. It aims to confront barriers to trade and investment that operate at — and behind — national borders, not just by tackling tariff, non-tariff and technical barriers but also by addressing intellectual property rights, the policy environment for state enterprises, investor–state dispute settlement arrangements, labour rights and environmental protection, to name a few. The only trade agreement of similar scope is the South Korea–US FTA, which no doubt serves as an important reference point for the TPP negotiators.

China’s absence in the TPP is conspicuous. True, the TPP’s open architecture allows entry of any country willing to sign up to its high standards, and it is possible that at some point China may do so. But that is unlikely to be soon.

China may not be part of the TPP, but it is increasingly central to trade in Asia. China replaced the US and the EU as Southeast Asia’s largest trading partner, and the pace of trade integration between China and Southeast Asia shows few signs of slowing.

The bulk of Asia’s trade expansion is in intra-industry trade, reflecting the rising importance of regional production networks in which different stages of the production process are undertaken in different countries. This allows firms to specialise, achieve scale economies and locate their activities where conditions suit them best. At the same time, geographical proximity helps keep transport and communication costs low.

The TPP will certainly not derail Asia’s intra-regional trade integration for a number of reasons. First, Asia is likely to be the fastest-growing region in the world for the foreseeable future and will increasingly provide the bulk of incremental global demand. Intra-Asian trade will continue to outpace trade with the rest of the world.

Second, countries in the region have recently emphasised investments in transport infrastructure to better connect Southeast Asian economies with each other and with China. This will further reduce the economic distance between Asian economies, especially in mainland Southeast Asia.

Third, real wages and land prices in China are rising and the renminbi’s real exchange rate is appreciating. These trends will drive labour-intensive Chinese firms to eventually relocate to labour-abundant Southeast Asian economies, further contributing to integration through trade and investment flows.

And finally, given China’s current external account surplus, pressure is building for Chinese firms to increase outward foreign direct investment. Much of that investment is likely to be directed to neighbouring Southeast Asian countries.

This deepening integration of trade and financial flows will undoubtedly need further policy support. But the answer is not more FTAs. Arguably, the ‘noodle bowl’ of FTAs in the region is becoming more of a hindrance than a help. Administering myriad bilateral and multilateral rules and regulations adds to administration costs, hinders the efficient transit of goods across borders and possibly even promotes corruption. Moreover, when constrained by FTAs, governments have resorted to behind-the-border policies to protect industries.

For Asia, then, the answer lies not only in fashioning a comprehensive regional trading arrangement that eliminates the need for multiple bilateral and multilateral FTAs, but also in ensuring that such an arrangement lowers behind-the-border trade barriers. This will help shape and facilitate the vitality of markets and the power of geography in a vibrant and rapidly growing regional economy. And it will provide the platform for gradual convergence with the parallel evolution of the TPP.

Vikram Nehru is Senior Associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace. The author is grateful to Navtej Dhaliwal for research assistance.

An earlier version of this article was first published here by the Carnegie Endowment for International Peace.

One response to “Southeast Asia: will markets and geography trump the TPP?”

  1. This article makes an important point that it is the real economic imperatives as opposed to the formality of some agreements that are most important to enhance nations’ economic efficiency and welfare.

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