Who will write the rules for Asia-Pacific Trade?

Peter A. Petri
Non-resident Senior Fellow with the East-West Center
Professor of International Finance at Brandeis University

Republished from the East West Center

(This analysis originally appeared in the Honolulu Star-Advertiser on Oct. 16, 2011 as part of a monthly series on regional Asia Pacific issues leading up to the APEC leaders’ meetings in Honolulu in November)

In the last half century, world trade has grown twice as fast as output and helped to lift the majority of the world’s people from poverty—a feat unimaginable a generation ago. When APEC leaders meet in Honolulu next month, they will represent countries that account for half of world trade. Can APEC help to keep the engine humming for another half century?

The trade engine is more important than ever, but the rules that govern trade are less certain. Efforts to strengthen global rules—the World Trade Organization’s Doha negotiations—have collapsed. Beset by domestic concerns, the United States and Europe have retreated from leadership on trade. And the new Asian giants have yet to step up.

This vacuum undermines investment and growth worldwide. For better or worse, it is now up to the United States and China, along with partners in the Asia-Pacific, to write the next chapter in the history of the world trading system—starting in Honolulu in November.

APEC itself may announce agreements that make it easier to trade “green goods,” such as wind turbines, and ease regulatory barriers. But APEC is not a negotiating body—it can only suggest voluntary guidelines.

On the sidelines of APEC, however, two efforts are underway to write binding rules. One is the Trans-Pacific Partnership (TPP), a possible trade agreement among eight small Pacific-rim countries and the United States. The members hope to announce a preliminary agreement in Honolulu next month.

Another negotiation is underway in Asia. It builds on trade agreements among 10 Southeast Asian countries and other Asian partners. It is still missing an agreement among China, Japan and Korea, but a “CJK” accord is now in discussion.

These groups will write different rules—each trying to please its members at the expense of excluded countries. Asian rules, for example, will avoid liberalizing agriculture and services, which are important U.S. exports. The TPP rules will protect, for example, branded U.S. pharmaceutical products against Asia’s generic drugs.

This competition makes observers nervous. U.S. business worries that Asian rules will divert exports away from American companies. Asians worry that the U.S. will use the TPP to isolate China, or as one journalist put it, as “a kind of economic warfare in the region.”

So what will be the effect of these negotiations? Are we drawing “a line down the middle of the Pacific,” or avoiding one, as Secretary of State James Baker pleaded we should when the United States joined APEC in 1989?

A new study we’ve done at the East-West Center suggests a subtle, positive scenario. It shows that the U.S.-led TPP will generate benefits for its participants and create incentives that bring in more members, including perhaps Japan, Canada, Mexico, Korea, Thailand and the Philippines.

The study also shows that the Asian-led discussions may lead to an “East Asian Free Trade Agreement” and generate large benefits. And policies by both groups are likely to cause little damage to excluded countries.

The most interesting finding involves the endgame. As the two groups grow, most Asia-Pacific economies, except for the United States and China, are likely to join both. So in the end the two giants will be left among the very few countries without preferential access to both of their huge markets.

The United States and China will then have great incentive to consolidate the groups into a region-wide or global agreement. That end result, in turn, would generate benefits at least as great as those that could have been produced by the failed Doha Round.

It might take a decade or more to reach this cooperative endgame and, in the meantime, competition will rule the day. Competition is part of economic life and should not be interpreted in apocalyptic terms. Paradoxically, competition will increase the value of cooperation to the United States and China.

Our two countries will compete on roughly equal terms for many decades, in trade and other spheres. But we are also fundamentally interdependent and need to keep cooperation in sight. Economics favors Asia-Pacific economic integration, and the TPP and Asian tracks both provide dynamic, complementary pathways toward it.