Beijing, Washington locked in FTA race

There appears to be a race between the United States and China to dominate the rules-setting game for trade by being the first to be able to announce plans of realizing a Free Trade Agreement for the Asia-Pacific. If the Trans-Pacific Partnership can be concluded, in one form or the other, so an announcement can be made at the APEC meeting in Beijing at the end of the week it would steal the thunder from China. But if such an announcement is not forthcoming, China will likely announce a "Beijing Road Map" for an FTA of the Pacific-rim, building on APEC rather than the TPP. Billions of dollars in trade are at stake.[Special coverage]

It will be difficult for leaders from the TPP countries to ignore a declaration endorsing a feasibility study for the FTAAP if they cannot offer an alternative. Reports on whether the US has been able to dissuade China from floating the proposal have been mixed. They have succeeded in leaving the door slightly ajar for the TPP to play a future role by blocking reference to a deadline for completion of 2025. Although deadlines can be missed, as the TPP itself demonstrates, setting one implies it is more than just a vision but a plan bounded by a timeframe. The fear is that pursuing the FTAAP could derail the TPP.

There is widespread confusion about why the TPP is taking so long, and what it may look like when finally concluded.

A useful starting point in explaining the delay is to look at the 12 countries involved, which are a highly diverse group by any measure. They are widely dispersed geographically, with members from four of the world's seven continents, and they are just as economically diverse. Australia's per capita income is 40 times that of Vietnam. The US economy is 1,000 times the size of Brunei's. Finding common ground amid such diversity can't be easy.

Of course, the TPP delays pale in comparison to another struggling proposed trade pact - the World Trade Organization's Doha Round. But although there are fewer countries in the TPP compared to the WTO, diversity is not a simple function of the number of countries involved. Where a group includes countries as varied as Vietnam, Peru and the US, there is not only a lack of commonality in negotiating positions; negotiators may not even subscribe to broadly similar principles. APEC has even more diversity since it has an additional nine members. But then it is not trying to conclude any agreement at present.

Moreover, there is the sense of the TPP being an unfair bargain, as the agenda appears skewed firmly in favor of one party. The carrot being dangled by the US is improved access to its huge market. But as half the TPP members already have an FTA in place with the US and the rest are trying to conclude one, the incremental benefit is likely small.

For these reasons, if the TPP is to be concluded anytime soon, it will likely be in a highly diluted form, significantly compromised compared to the original ambitions.

How then do we move forward? APEC and its Beijing Road Map appear the only alternative. Although APEC's achievements since its inception in 1989 are modest, to say the least, its approach is generally viewed as being consistent with, if not mutually reinforcing of, the multilateral system and the WTO. This is mainly through its support for non-binding, unilateral actions in implementing its action plans. Although this approach has flexibility as its greatest appeal, the temptation of a free ride needs to be resisted. With this approach, it is all about the carrot, there is no stick.

But APEC may be the more inclusive choice to build an agreement in the Asia Pacific because unlike the TPP, it does not exclude China, and unlike the ASEAN+6 Regional Comprehensive Economic Partnership, it does not exclude the US. Its goals are also not as elusive as the high standards set by the TPP. Although its membership is highly diverse, it currently excludes India, a country that may single-handedly derail the WTO's Trade Facilitation Agreement. It also excludes the newest members of ASEAN - Cambodia, Laos and Myanmar - which are already struggling with implementing the five ASEAN+1 FTAs and more, and may benefit from having time to better prepare their domestic regimes. But engaging countries like Russia and Papua New Guinea brings its own challenges.

A Free Trade Agreement of the Asia-Pacific, whether commandeered by the US or China, cannot be the end-game, however. It would still mean a world trade system that is fragmented; the FTAAP would merely be the largest of the fragments. Looking further ahead, and short of resurrecting the WTO, unilaterally multilateralizing the preferences of the FTAAP and the many other FTAs is the only way to address the growing distortions and fragmentation. In a sense, it would involve continuing the process preferred by APEC in arriving at the FTAAP, of joint but non-binding unilateral actions. Since almost two-thirds of all trade liberalization has come from unilateral actions, there is hope.

The author Jayant Menon is lead economist in the Office for Regional Economic Integration at the Manila-based ADB.