Deal Or No Deal?

Should the United States and ASEAN make a trade agreement?

Lili Yan Ing/The Jakarta Post
Friday, March 10, 2017

Should the United States and ASEAN make a trade deal? First, let’s discuss the facts and trends of the economies. Based on the value added, five out of seven gainers in terms of value added in the manufacturing sector — the ones that have increasing trends of value added — in the last three decades were developing countries. They are China, Korea, India, Indonesia and Thailand.

Based on Purchasing Power Parity (PPP) total output — PPPbased gross domestic product (GDP) — six out of the seven largest economies in 2050 will be today’s emerging economies: China, India, Indonesia, Brazil, Russia and Mexico.

The US economy will be the third largest, after China and India. ASEAN economies, the Philippines, Vietnam, Malaysia and Thailand, together with Indonesia will be among the top 25 largest economies. That is the fact that there has been and will be a shift in terms of economic growth engines from developed to developing countries.

Second, let’s now see the trend in trade deals. After the close of 70 years of trade liberalization, a series of recent events suggest that the tide may well be turning. International trade as a proportion of global GDP has stopped growing in the last decade.

Momentum for trade liberalization at the multilateral level has stumbled (although fortunately the Trade Facilitation Agreement has just recently started to take effect).

Even regional trade agreements, sometimes seen as alternatives to multilateral liberalization, are under heavy attack, now even in the US.

When it comes to regional trade engagements, Southeast Asian economies, ASEAN, has been forward thinking on global value chains and quite progressive in advancing its regional trade agreements. ASEAN established the ASEAN free trade Area in 1992, before the World Trade Organization (WTO) was formed.

ASEAN also developed the ASEAN Trade in Goods Agreement and the ASEAN Comprehensive Investment Agreement in 2009 in responding to a global financial crisis.

These efforts have enabled ASEAN to position itself as a hub of regional production networks in the region. As a result, exports of machinery and parts contributed more than 43 percent of exports of goods in major ASEAN countries in the last decade.

The main challenge for ASEAN now is that ASEAN could be trapped in “a shallow integration.” Intra ASEAN trade increased merely from 22 percent in 2000 to 24 percent in 2015.

The root causes for this modest increase are threefold: Most exported products of ASEAN countries are substitutes instead of complimentary, the rules of origins in the ASEAN and ASEAN+1 FTAs are perceived by businesses as difficult to comply with and non-tariff measures (NTMs).

While the average tariff rates of the 10 ASEAN countries decreased from 10.9 percent in 2000 to 4.5 percent in 2015, the number of non-tariff measures almost tripled from 1,634 to 5,975 measures over the same period. Of the total measures, 29 percent are in the form of sanitary and phytosanitary, 43 percent in Technical Barriers to Trade, 16 percent in export measures and the remaining 12 percent in various forms of measures. A number of NTMs does not necessarily reflect that level of protection, but their transparency does matter.

In addition, unlike Germany’s involvement in East European production networks, even though ASEAN could play a role as a hub in regional production networks, it could not emerge as a self-contained hub. ASEAN still relies on investment, trade and technology from Japan, Korea and to some extent China.

ASEAN realizes this issue and is thus advancing its trade and investment with its main trading partners. ASEAN developed the ASEAN+1 free trade agreements with its main trading partners in the region (China, India, Japan, Korea, Australia and New Zealand). As a result, trade between ASEAN and its trading partners climbed from 31 percent in 2000 to 43 percent in 2015. ASEAN and its six main trading partners are currently in the progress of negotiating the Regional Comprehensive Economic Partnership. That is the trend of the shift in economic growth engines and trade agreements. So back to the main question, should ASEAN strike a trade deal with the US?

Last, considering the facts and trends of the US and ASEAN economies and anti-globalization sentiments, no matter if the US and ASEAN have a bilateral trade pact, or regional trade, the US and ASEAN should start working together in two main areas: improving investment regulations by improving property registration, minority investor protection and enforcing contracts and NTMs.

Volkswagen’s recent cheating with the US emissions test is a wake-up call to everyone on the importance of product standards, which is a kind of NTMs. It is our responsibility, think tank groups, government officials, business society and NGOs, to work together to improve transparency of NTMs and how to design and implement good regulations that manage exported and imported products that serve their purposes to protect health, safety and the environment, but do not deter trade.

The US strategy has been to put “more on trade than aid,” but the current administration’s agenda toward ASEAN (in its “America First” policy) is still not clear.

Whether the US and ASEAN economies have a bilateral, regional trade agreement or not, it is crucial for the US and ASEAN to work together to improve investment and trade regulations in the region, so as to benefit all in overall trade and investment.

Lili Yan Ing is a senior economist at Economic Research Institute for ASEAN and East Asia (ERIA) and founder of The Indonesian Economy. Abigail Ho is a research associate at ERIA. The views expressed are their own.

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