TPP: An Important First Step in the Process of Asia-Pacific Economic Integration

 • June 17, 2015

By Shinichi Isobe

Source: CSIS External Relations.

Although congressional authorization of Trade Promotion Authority (TPA) is in limbo now, the House decided to take up the Trade Adjustment Assistance (TAA) bill again by the end of Julyand kept the window of opportunity open. The TPA bill passed the House on June 12 but the TAA bill failed. Both are bundled as one package of a bill, and thus TAA needs to pass the House for the president to sign it. Once they are signed into law, the United States and Japan may conclude bilateral trade talks and that will lead to the conclusion of the Trans-Pacific Partnership (TPP) negotiations. Joint participation in TPP presents a significant opportunity for both countries to assume a leadership role in shaping the rules and norms for trade in the Asia Pacific, but TPP is one step in a long process of regional economic integration that will unfold in the years to come.

In fact, there are many economic frameworks are under consideration in the region such as the Regional Comprehensive Economic Partnership (RCEP), a China-Japan-Korea free trade agreement, and the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC), just to name a few. Further, members of the Asia Pacific Economic Cooperation, or APEC, forum have agreed that regional economic activity should ultimately fall under one framework known as the Free Trade Area of the Asia-Pacific (FTAAP).

On June 9, CSIS and Japan External Trade Organization (JETRO) hosted an event to discuss the future of economic integration in this region and the role of the United States and Japan. The experts’ comments suggested that both countries will continue play a key role in this field.

TPP was initiated by only four countries in 2005 but now consists of 12 negotiating countries and accounts for about 40 percent of world GDP. TPP’s economic and strategic significance was amplified when Japan, the third largest economy in the world, decided to join in March 2013. JETRO Chairman Hiroyuki Ishige pointed out in his keynote speech that TPP would provide a high-standard business platform in Asia and that the gravity of trade and investment in the region is already shifting gradually toward TPP countries with the business community anticipating its conclusion.

JETRO Conference on Asia-Pacific Economic Integration and the Role of the United States and Japan

But on the other hand there are several challenges TPP has to face in the future including how to involve other major economies, which derives from another challenge: how to achieve uniform standards for trade liberalization. Supply chains in the Asia Pacific are spreading across borders but the TPP doesn’t cover the whole region; it doesn’t include China, Korea, Taiwan, India and some ASEAN countries, for instance.

One reason those economies are not in TPP is the level of standards. TPP is described as a “21st century agreement” covering 29 chapters including new issues like labor and the environment, investment and state-owned enterprises . But for most of the developing economies these standards are difficult to achieve. Zhang Jianping, director of the department of international economic cooperation at the Institute for International Economic Research of the National Development and Reform Commission in China, indicated that countries like China and Indonesia may not feel comfortable with TPP because the rules and standards are too strict and added ,“that’s why now we are making efforts to promote RCEP,” as an alternative regional framework for trade. (RCEP does not include the United States.) Generally speaking, RCEP is considered less ambitious than TPP in terms of rule-making.

It seems like there is a serious dilemma: the higher the standards are, the fewer countries that could participate. But there are some measures the United States and Japan can take to promote high standards for regional economic integration with an eye toward an FTAAP.

First, capacity building will be crucial. Ishige said, “economic integration can be realized only if we address soft and hard infrastructure. Without these it would be a pie in the sky.” He emphasized the need for human resource developments ensure compliance with the rules and adequate infrastructure to facilitate business activity. According to a recent JETRO survey, Japanese-affiliated firms in Asia face multiple challenges such as complex administrative procedures and tax systems and an unpredictable regulatory environment. These could be improved by capacity building support from the United States and Japan, which have resources and experience in developing the foundations for a vibrant business environment. Kathy Santillo of the U.S.-ASEAN Business Council stressed the importance of incorporating small and medium enterprises (SMEs), which comprise upwards of 96 percent of enterprises in ASEAN.

Part 2: JETRO Conference on Asia-Pacific Economic Integration

Second, the United States and Japan can show their leadership in international forums like the G20 and APEC to generate consensus on the rules. For example, since China took the initiative to establish the Asia Infrastructure Investment Bank (AIIB), many recognize the need for additional capital to fill the so-called infrastructure gap, but there is no international consensus on the principles that should govern infrastructure investment. Matthew Goodman, Senior Adviser for Asian Economics and Simon Chair in Political Economy at CSIS, suggested the G20 could be an appropriate forum to discuss this issue and referenced APEC, where initiatives are non-binding, as a useful framework in “incubating a lot of the discussions of regional economic integration efforts.” Kurt Tong, Principal Deputy Assistant Secretary of State for Economic and Business Affairs, also echoed the importance of U.S.-Japan outreach to ASEAN, multilateral development banks and the private sector to facilitate regional economic cooperation.

Finally, integrating regional FTAs would be the ideal path to FTAAP. Yorizumi Watanabe, professor of Keio University, emphasized the importance of coherence in rule-making and convergence of so-called mega-FTAs. And he described Japan as a pivotal center between TPP and RCEP because Japan participates in both efforts. TPP takes a rule-oriented approach and aims for a high-standard agreement, whereas RCEP takes an integration-oriented approach and even includes least developed countries like Cambodia, Laos and Myanmar. “Altogether that will bring us to the FTAAP,” he said.

JETRO Conference on Asia-Pacific Economic Integration and the Role of the United States and Japan

Thus TPP is not necessarily the only way to integrate the Asia Pacific economically. And as Senator Cory Gardner (R-CO) emphasized in his keynote speech, “successfully concluding the Trans-Pacific Partnership is just the first step in the process,” to unlock the Asia Pacific’s economic potential.

Mr. Shinichi Isobe is Visiting Fellow with the Japan Chair at CSIS from the Japan External Trade Organization (JETRO).

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