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Masahiro KawaiGraduate School of Public Policy
University of Tokyo
Second Ministerial Conference on Regional
Economic Cooperation and Integration
Organized by UN ESCAP and ADB
Bangkok, 21-23 November 2017
The Role of Mega Regional FTAs
in the Age of Uncertainty
• Global uncertainty: Lack of progress on WTO
DDR, US President Trump’s policy, Brexit
• Slow growth of trade relative to GDP
• The role of mega-regional FTAs has become
increasingly important
• The Asia-Pacific region has seen some
successes and on-going negotiations of mega
regionals ASEAN Economic Community (AEC)
TPP11, Japan-EU Economic Partnership Agreement
RCEP (and CJK FTA)
• How can low and middle-income countries,
particularly small ones, benefit from such a trend?
Outline
2
3
Introduction: Global uncertainty
• Rising sentiments of anti-globalization: Slow
progress of the WTO Doha Round; Brexit;
and President Trump’s “America First” policy
• Brexit: A sudden change in the rule of the
game governing trade, investment and
finance on the part of the UK
• The Trump Administration marking a major
shift of US economic diplomacy A nationalistic "America First" approach with
protectionist and mercantilist flavor
Opposition to multilateral negotiations and
institutions in favor of bilateral negotiations to
maximize US leverage
President Donald Trump’s trade policy
• President Trump wants to make America
great, reduce US trade deficits by: placing major pressures on countries that have
large bilateral trade surpluses with the United
States such as China
withdrawing from TPP
renegotiating NAFTA
renegotiating the US-Korea FTA
• Trump prefers bilateral trade deals to
multilateral ones such as TPP
• What would be the implication of his
policies for Asia?
4
US bilateral trade balances, 2016
(Billion US$)
US Trade
Partner
US Exports US Imports US Trade Balance
Goods Services G&S Goods Services G&S Goods Services G&S
World 1,460 752 2,212 2,210 503 2,713 -750 249 -501
China 116 54 170 463 16 480 -347 37 -310
Euro Area 201 147 348 328 112 440 -127 35 -92
Germany 49 31 80 115 33 148 -64 -2 -68
Mexico 231 31 262 300 23 324 -69 8 -62
Japan 64 45 109 134 31 165 -70 14 -56
Italy 17 9 25 45 11 57 -29 -3 -31
India 22 20 42 46 27 73 -24 -6 -31
Korea, Rep 42 22 64 71 11 81 -28 11 -17
Canada 267 54 322 284 30 313 -16 25 8
Other 760 415 1,176 779 250 1,026 -20 166 149
Source: Compiled by the author from trade data of the Bureau of Economic Analysis, US Department of
Commerce.
https://www.bea.gov/iTable/iTable.cfm?reqid=62&step=1&isuri=1#reqid=62&step=2&isuri=1&6210=1
5
6
Exports and imports of goods & servicesExports of goods & services
(% of GDP)
Imports of goods & services
(% of GDP)
Source: World Bank, World Development Indicators dataset:
https://data.worldbank.org/data-catalog/world-development-indicators
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2010 2015
China Japan Korea, Rep. of
ASEAN United States European Union
World
0
10
20
30
40
50
60
70
80
1980 1985 1990 1995 2000 2005 2010 2015
China Japan Korea, Rep. of
ASEAN United States European Union
World
Trade and FDI in Asia
Global trade slowdown
• The global trade/GDP ratio has been growing slowly or flat since the GFC, with Asia’s trade declining after reaching a peak in 2007-12
• Reasons for slower growth of trade/GDP ratios Cyclical factors: Changes in the demand composition
weak trade finance; a rise in trade protection
Structural factors: Diminishing marginal gains from technology improvements; maturation of global value chains; China's economic rebalancing
• China’s economic rebalancing: A shift away from investment-led growth to
consumption-led growth (toward less trade-intensive growth)
A shift away from manufacturing-driven to services-driven growth (toward less-trade intensive growth)
7
8
Inward and outward FDI stock
Inward FDI stock
(% of GDP)Outward FDI stock
(% of GDP)
Source: World Bank, World Development Indicators dataset:
https://data.worldbank.org/data-catalog/world-development-indicators
0
10
20
30
40
50
60
70
1980 1985 1990 1995 2000 2005 2010 2015
China Japan Korea, Rep. of
ASEAN United States European Union
World
0
10
20
30
40
50
60
70
1980 1985 1990 1995 2000 2005 2010 2015
China Japan Korea, Rep. of
ASEAN United States European Union
World
Rising FDI stock/GDP ratios
• However, the FDI stock/GDP ratios have
continued to rise globally
• The only exception is China’s inward FDI
stock/GDP ratio which reached its peak in the
late 1990s, declined until 2009, and then started
to rise very slowly
• Inward FDI stock and outward FDI stock (as a
ratio of GDP) continued to rise as a trend in
most countries and regions
9
Possible policy responses
• Restoration of economic growth: Growth strategy and productivity increases
Improving business environments for inventions, innovation, technological improvements—investment in human capital, R&D, rule of law
• Expansion of global and regional value chains to other developing countries (South Asia, Sub-Sahara Africa, Latin America)
• Limiting protectionist measures
• Liberalization of trade in goods and services—WTO DDR, multilateral agreements, and mega-regional FTAs
10
Mega-regional FTAs in Asia
• ASEAN Economic Community (2015)
• Formation of ASEAN+1 FTAs completed ASEAN-China (2005, 2007, 2010), ASEAN-Korea
(2007, 2009), ASEAN-Japan (2008), ASEAN-India
(2010), ASEAN-Australia&NZ (2010)
• Following US President Trump’s withdrawal from
the TPP, Japan took leadership in the
negotiation of TPP11 with other TPP member
countries, which reached a broad agreement to
implement it in November
• A broad agreement on Japan-EU EPA reached
• Negotiations on ＲＣＥＰ (and a CJK FTA)
underway11
IV.
Integration
into the
Global
Economy
I.
Singe Market
and
Production
Base
(1) Free flow goods (2) Free flow of services
(7) Food, agriculture and
forestry
II.
Competitive
Economic
Region
(2) Enhanced participation in global supply networks
(1) Competition policy
(4) Freer flow of capital
(5) Free flow of skilled
labor
(6) Priority integration
sectors(Agro-based products; air
travel; automotive; e-ASEAN;
electronics; fisheries;
healthcare; logistics; rubber-
based products; textiles and
apparel; tourism; wood-
based products)
(1) Coherent approach towards external economic relations(includes FTAs and CEPs)
III.
Equitable
Economic
Development
Pillars Core Elements
(3) Free flow of
investment
(2) Consumer protection (3) Intellectual
property protection
(4) Infrastructure development (Transport; ICT; energy; mining; infrastructure financing)
(1) Development of small and medium enterprises
(2) Initiative for ASEAN integration
(6) E-commerce(5) Taxation
Source: ASEAN Secretariat, ASEAN Economic Community Blueprint (2008)
4 pillars of ASEAN Economic Community
Why TPP11?
• TPP11 can be a model for the 21st century trade and
investment rules in the Asia-Pacific region, even though
23 provisions and rules (mostly related to IPR, ISDS) will
be frozen until the US returns
• The US can always come back to the TPP without new
negotiations and all the frozen provisions and rules would
be restored
• There are economic benefits to TPP11, though smaller
• TPP11 countries may acquire a certain degree of
negotiating power against the US if the US proposes
bilateral FTAs
• Once TPP11 is in pace, Japan and China will have
incentives to conclude RCEP Japan regards TPP as a long-term benchmark for RCEP
China has an interest in forging a mega-FTA where it can play a
major role
13
Share of GDP in TPP members’ total GDP
0
10
20
30
40
50
60
Un
ite
d S
tate
s
Ja
pa
n
Ca
na
da
Au
str
alia
Me
xic
o
Ma
laysia
Sin
ga
po
re
Ch
ile
Pe
ru
Ne
w Z
ea
land
Vie
tnam
Bru
ne
i D
aru
ssala
m
60.3
17.7
6.6 5.4 4.6 1.2 1.1 1.0 0.7 0.7 0.60
5
10
15
20
25
30
35
40
45
50
Ja
pa
n
Ca
na
da
Au
str
alia
Me
xic
o
Ma
laysia
Sin
ga
po
re
Chile
Pe
ru
Ne
w Z
ea
land
Vie
tnam
Bru
ne
i D
aru
ssala
m
44.7
16.7
13.711.5
2.9 2.7 2.5 1.8 1.7 1.6 0.2
Case of TPP12:
Including the US
Case of TPP11:
Excluding the US
Note: Data are for 2013 GDP
Source: Computed from IMF, World Economic Outlook database, October 2016
(%) (%)
14
Economic benefits of tariff reductions
under TPP12 and TPP11(% change in real GDP)
15
Source: Compiled by author from: Kawasaki, Kenichi, "Emergent Uncertainty in
Regional Integration: Economic Impacts of Alternative RTA Scenarios," GRIPS
Discussion Paper 16-28 (January 2017).
-1 0 1 2 3 4 5 6 7
Brunei Darussalam
Mexico
Chile
Peru
Australia
Singapore
United States
Japan
Canada
New Zealand
Malaysia
Vietnam
TPP12
TPP11
• RCEP: An ASEAN-centered FTA by the ASEAN+6 Not as ambitious as the TPP in liberalization and rule-setting,
but includes both developed and developing countries,
allowing special and differential treatment for the latter
Focus on goods trade, services trade, investment, economic
technical cooperation, intellectual property, competition policy
and dispute settlement
• Major differences among major economies: Japan wants to achieve a high degree of liberalization and
include a wide range of trade and investment rules (e-
commerce, IPR, competition, government procurement, etc)
China wants to achieve a moderate degree of trade
liberalization in a way that many ASEAN countries support it
India is reluctant to accept even a moderate degree of trade
liberalization due to fear of being exposed to highly
competitive Chinese products ← India could be treated like
CLMV and given longer time to achieve liberalization
Obstacles to the RCEP
16
Economic benefits of tariff reductions
under RCEP(% change in real GDP)
17
Source: Compiled by author from: Kawasaki, Kenichi, "Emergent Uncertainty in
Regional Integration: Economic Impacts of Alternative RTA Scenarios," GRIPS
Discussion Paper 16-28 (January 2017).
0 5 10 15 20
China
Philppines
Austraila
Japan
New Zealand
Indonesia
India
Singapore
Malaysia
Lao PDR
Brunei Darussalam
Korea, Rep. of
Vietnam
Thailand
Cambodia
18
0 10,000 20,000 30,000 40,000 50,000
Cambodia
Myanmar
India
Vietnam
Lao P.D.R.
Philippines
Indonesia
Thailand
China
Malaysia
Brunei Darussalam
Korea, Rep. of
New Zealand
Japan
Australia
Singapore
Per capita GDP of RCEP members, 2016(US$ at current prices)
Source: Compiled by author from: IMF, World Economic Outlook database,
October 2017.
Implications for low- & middle-income
countries
• Low- and middle-income countries, particularly small
ones, tend to be excluded from supply chains and
mega-regional FTAs, with the exceptions of East and Southeast Asia for supply chains (Vietnam and
Laos & Cambodia recently joining supply chains)
TPP (Vietnam, Malaysia), AEC (Cambodia, Indonesia, Laos,
Myanmar, the Philippines, Vietnam) and RCEP
• By joining mega-FTAs, low- and middle-income
countries can benefit through access to large
markets and inward FDI
• Large countries (China, Japan, India, ROK, etc.)
should make efforts to include these developing
countries in mega regionals, for example by
expanding RCEP membership19
Conclusion
• Japan has led TPP11 negotiations: The largest economy among the group
Japan wants to set a high-standard benchmark
Japan can then make some compromises in RCEP
negotiations against China
• RCEP is a natural outcome of ASEAN+1 FTAs as an
extension of AEC
• Large economies (China, Japan, India, the ROK)
should include low- and middle-income countries in
mega regional FTAs, such as RCEP
• In the medium term, it is in the best interest of all East
Asian economies to also join TPP (particularly if the
US returns to it) and eventually forge an FTAAP
• Asia and Europe should also aim to forge an Asia-EU
FTA20
21
WTO membership (Date GATT signed)
China 11 December 2011 --
Japan 1 January 1995 (10 September 1955)
Korea, Republic of 1 January 1995 (14 April 1967)
India 1 January 1995 (8 July 1948)
Australia 1 January 1995 (1 January 1948)
New Zealand 1 January 1995 (30 July 1948)
Cambodia 13 October 2004 --
Brunei Darussalam 1 January 1995 (9 December 1993)
Indonesia 1 January 1995 (24 February 1950)
Lao PDR 2 February 2013 --
Malaysia 1 January 1995 (24 October 1957)
Myanmar 1 January 1995 (29 July 1948)
Philippines 1 January 1995 (27 December 1979)
Singapore 1 January 1995 (20 August 1973)
Thailand 1 January 1995 (20 November 1982)
Vietnam 11 January 2007 --
Chinese Taipei 1 January 2002 --
Hong Kong SAR 1 January 1995 (23 April 1986)
Mongolia 29 January 1997 --
Timor-Leste Observer --
Brazil 1 January 1995 (1 January 1948)
Russian Federation 22 August 2012 --
South Africa 1 January 1995 (13 June 1948)
European Union 1 January 1995 --
United States 1 January 1995 (1 January 1948)
WTO membership
Source: WTO website: https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm
US
Canada
Mexico
China
Korea
Japan
Australia
New Zealand
Chile
Peru
RCEP
TPP
ASEAN
NAFTA
Negotiating countries for TPP & RCEP; FTAAP
Source: Author
Cambodia
Lao PDR
Myanmar
India
Chinese Taipei, Hong Kong SAR,
Papua New Guinea, Russian Federation
FTAAP
Indonesia
Philippines
Thailand
Brunei Darussalam
Malaysia
Singapore
Vietnam
Thank youFor more information:
Masahiro Kawai, PhD Professor
Graduate School of Public Policy
University of Tokyo
