Asia Integration Leaves U.S. Behind

December 10, 2012

You can’t blame them for trying. U.S. trade negotiators have been at it for years but conclusion of the Trans-Pacific Partnership (TPP) keeps receding over the horizon. A June deadline was floated and then passed quietly by. The end of 2012 came next (here and almost gone). Japan and possibly even Korea thought of joining when news broke that Mexico and Canada, already NAFTA members with the U.S., were signing up. Neither has committed.

Meanwhile, Asia is moving ahead with its own far less stringent version of free trade in two proposals: the Regional Comprehensive Economic Partnership (RCEP) launched at the annual ASEAN gathering in late November; and a trilateral China-Japan-South Korea free trade agreement announced in May (negotiations started in November.)

Holding a press conference and successfully completing negotiations are, of course, two very different animals. No doubt recent regional tensions over disputed islands in the East and South China Seas involving mostly China, Japan, Vietnam and the Philippines make any agreement extremely difficult to achieve. Still, all countries involved appear to be forging ahead despite the obstacles in their way.

Asia has taken a decidedly different approach regarding free trade in the region from the U.S. Starting with the lowest common denominators (goods) and through successive agreements working their way up the value-added ladder (limited, then expanded services, broader non-tariff barriers to trade, rules of origin, etc.) This incremental approach, especially when economies at significantly different levels of development are involved, has worked especially well for both China and South Korea in their agreements throughout the region.

The U.S. on the other hand seeks “high standard” agreements encompassing a variety of non-tariff barriers to trade, intellectual property rights protections and labor and environmental standards, all in one comprehensive Free Trade Agreement (FTA).

These are noble goals and of particular interest to U.S. companies who have an enormous number of laws regulating their business at home and abroad. For many with extensive intellectual property to protect the graveyard of international business is littered with the remains of products that have been copied and sold at lower prices. To truly level the playing field they need the additional protections offered in high-standard FTAs.

The problem lies in strategy, not substance. This all-or-nothing approach leaves potential deals on the table while U.S.-based firms continue losing out to their counterparts based in Asia. U.S multi-nationals are increasingly incentivized to locate production overseas where they can source and sell within a tariff-free zone. Even a few percentage points off duties can have a tremendous effect on profitability.

No solution to this problem is in sight. U.S. trade policy has focused almost exclusively on the TPP and purely defensive measures (e.g. WTO cases to remedy unfair trade practices). Asia meanwhile forges ahead. When RCEP comes to fruition India, China, Japan, South Korea, Australia, New Zealand and the ten countries of ASEAN would become one integrated free trade zone. If current strategy doesn’t change soon (or the TPP keeps being delayed) the U.S. won’t even be on the map.

 

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Photo: Yang Shan Deep Water Port, China.