The race is on between the United States and China to dominate the rules-setting game for trade by being the first to be able to announce plans for a free trade area in the Pacific Rim.
China hopes to use its position as this year's chair of the Asia-Pacific Economic Cooperation (Apec) forum to propose a feasibility study on a Free Trade Agreement for the Asia-Pacific (FTAAP), first mooted in 2006. In other words, negotiations toward an FTAAP would commence, for all practical purposes.
But if the Trans Pacific Partnership (TPP) can be concluded, or substantial and credible progress demonstrated so that an impressive announcement can be made at the Apec meeting in Beijing, the US would steal the thunder from China. If such an announcement is not forthcoming or not credible, China will likely announce a "Beijing Road Map" for a free trade agreement (FTA) of the Pacific Rim, building on Apec rather than the TPP. Billions of dollars in trade are at stake.
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. The US has succeeded in leaving the door slightly ajar for the TPP to play a future role by blocking reference to a deadline for completion of the FTAAP by 2025. Although deadlines can be missed, as the TPP itself demonstrates, setting one implies it is not just a vision but a plan bounded by a timeframe. The fear is that pursuing the FTAAP could derail the TPP by dispersing attention.
But will the FTAAP be any easier to conclude than the TPP? If too much diversity among its members (and therefore in negotiating positions) is restricting progress in the TPP, then Apec will face an even greater challenge. Apec has more diversity than the TPP because it has an additional nine members. But the large membership has its positives, too. Apec may be the more inclusive choice to build an agreement in the Asia-Pacific because unlike the TPP, Apec includes China, and, unlike the Asean+6 Regional Comprehensive Economic Partnership (RCEP), it also includes the US.
Apec's goals are also not as elusive as the high standards set by the TPP. To some extent, the less ambitious nature of the proposal may offset the constraint imposed by greater diversity in membership.
Given the way that the TPP negotiations have struggled — and based on the information exposed by WikiLeaks — it appears that if the TPP is to be concluded anytime soon, it will likely be in a highly compromised form. If so, can it still form the basis of a Pacific Rim agreement? It boils down to a question of credibility, a bit too much of which may have been lost in the eagerness to reach an apparently premature conclusion. The improved prospects of US President Barack Obama receiving fast-track authority from a Republican-controlled Senate will help, but it is unlikely to make a big difference now.
What then can we expect?
Apec and its Beijing Road Map appears most likely, assuming that the one report in the Wall Street Journal this week suggesting China has been bullied into junking the proposal is misguided. Although Apec's achievements since its inception in 1989 may be modest, 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.
An FTA for the Asia-Pacific, whether steered by the US or China, cannot be the end-game though. It would still mean a world trade system that is fragmented: The TPP, FTAAP or RCEP would merely be the largest of the fragments. Looking further ahead, and short of resurrecting the WTO, unilaterally multilateralising 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 moving toward the FTAAP by continuing the process preferred by Apec of joint but non-binding unilateral actions.
Because almost two-thirds of all trade liberalisation has come from unilateral action, this approach offers hope. The political economy suggests that the resistance from FTA partners toward multilateralisation decreases as the number of FTAs increase, due to preference erosion. It is not only the sensible way forward, but a practical one too.
Jayant Menon is lead economist at the Office of Regional Economic Integration, Asian Development Bank, and adjunct fellow at the Arndt-Corden Department of Economics, The Australian National University.