Trade partnership competition: TPP vs RCEP
16 Apr 2013|

In the world of strategic affairs, competition is almost always a bad thing. Be it jostling over territory, contesting freedom of navigation or an outright arms race, strategic competition tends to be both costly and risky. In other domains, however, competition can be a very good thing. For example, in a market economy such as ours, competition leads to innovation and efficiency. What’s to be avoided between China and the United States is to be encouraged between Apple and Samsung.

In still other areas, competition is neither wholly good nor bad, but rather a complication to be managed. Asian trade diplomacy is such an area, where beneath the surface of the jumbled alphabet soup of Asia-Pacific regional forums there are competing agendas for trade liberalisation.

From the United States under the auspices of APEC, we have the proposed Trans-Pacific Partnership (TPP). From the East Asia Summit (EAS), with ASEAN in the lead, we have the proposed Regional Comprehensive Economic Partnership (RCEP). Those countries presently involved in negotiations on each are listed below.

It’s not simply that the two proposals involve different sets of countries; they also take very different approaches. The TPP aims to be a high quality preferential trade agreement with few exemptions and extensive regulatory alignment is in areas such as labour law, environmental protection and intellectual property rights. The RCEP, on the other hand, sets the bar low and accepts that countries will reduce trade barriers at different rates—especially among less developed members—and also makes limited demands for regulatory harmonisation.

The TPP is open to new entrants already, as will the RCEP be in the future. More importantly, neither agreement restricts participants from joining other trade groupings. Nonetheless, it’s hard to ignore the fact that the China-supported RCEP does not presently involve the United States and the US-led TPP negotiations don’t presently include China. And while China isn’t excluded from the TPP in principle, the regulatory emphasis of the arrangement makes them less likely to join.

Although the two agendas aren’t mutually exclusive, there’s undeniable geopolitical competition between the ASEAN and US proposals. Much like machinations surrounding the creation of the EAS, the RCEP was a compromise between China’s narrow view of regionalism based on ASEAN+3 and Japan’s wider vision based on ASEAN+6. Once again, we have Japan to thank for keeping the door open for us. The TPP, on the other hand, is being promoted heavily by the United States as part of its ‘pivot’ to Asia, which is unambiguously a response to China’s rise.

The TPP has been criticised, including by Australian trade specialists Peter Drysdale and Shiro Armstrong. There are concerns on two fronts. The first concern is that the TPP is simply a poor approach to free trade. Concerns include its incomplete regional coverage, onerous (and possibly inefficient) regulatory imposts, and the likelihood of complicating exemptions—thought the latter surely applies equally to the RCEP.

The second concern is that the TPP is politically divisive. To quote Peter Drysdale, the TTP ‘would drive a wedge down the middle of the Pacific, not only or mainly economically but also politically—between the United States, its partners and China.’ Jagdish Bhagwati goes further, describing the TPP as ‘a political response to China’s new aggressiveness, built therefore in a spirit of confrontation and containment, not of cooperation’.

But how worried should we be? Is competition between the TPP and the RCEP ‘good’ or ‘bad’ competition? While it’s true that the TPP could see some trade diverted away from China, it not going to be of a scale to materially damage their economy. Similarly, the risks to the US economy posed by RCEP are slight at worst.

More importantly, I’d be loath to see the Asian free-trade agenda reduced to its lowest common denominator, with China or the United States having veto on any regional agreement. Where opportunities exist for countries to do a deal to their mutual benefit, they should grasp those opportunities. If other countries are unable or unwilling to make the concessions and domestic adjustments needed, bad luck. The TPP might well be imperfect, but its success or failure should depend on the balance of costs and benefits it delivers, rather than on the perceived affront its existence gives China.

Of course, in a perfect world we’d have a single coordinated approach which took the most efficient path to freer trade. But for the moment at least, there’s no agreement on what that path is. We have to work with what we’ve got.

Apparently the Gillard government agrees, having signed up to both the RCEP and the TPP. Now comes the hard part. The low-lying fruit of freer trade have long ago been harvested—which is why trade negotiations seem to take indeterminably long to conclude. Much of what remains will require countries to open up in sectors where the adjustments will be painful and politically difficult.

At least with two proposals under negotiation we have twice the opportunity to make a deal to our benefit. And who’s to say?—perhaps the competition between the two proposals will encourage countries to open their markets more than they would otherwise. Let’s hope that’s the case.

Mark Thomson is senior analyst for defence economics at ASPI.