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Monday, May 9, 2016

Political Implications of Leadership in Multilateral FTA Negotiations

Darson Chiu
Table 1 is the most updated tariff profiles retrieved from the WTO website. They are “simple average most favored nation applied tariffs” of members associated with the Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP), and Transatlantic Trade and Investment Partnership (TTIP). The table will explains a lot regarding what has been going on among members of those mega FTAs.


Table1. Tariff Profiles-Members of TPP, RCEP, & TTIP%


RCEP
TPP
Members
Total
Ag
Non-Ag
Members
Total
Ag
Non-Ag
Australia
2.7
1.2
3.0
Australia
2.7
1.2
3.0
New Zealand
2.0
1.4
2.2
New Zealand
2.0
1.4
2.2
Japan
4.9
19.0
2.6
Japan
4.9
19.0
2.6
Brunei
2.5
0.1
2.9
Brunei
2.5
0.1
2.9
Malaysia
6.0
8.9
5.5
Malaysia
6.0
8.9
5.5
Singapore
0.2
1.4
0.0
Singapore
0.2
1.4
0.0
Vietnam
9.5
16.2
8.3
Vietnam
9.5
16.2
8.3
China
9.9
15.6
9.0
USA
3.4
5.3
3.1
India
13.5
33.5
10.2
Peru
3.4
4.0
3.3
Korea
13.3
52.7
6.8
Canada
4.2
15.9
2.3
Indonesia
6.9
7.5
6.7
Chile
6.0
6.0
6.0
Philippines
6.3
9.9
5.7
Mexico
7.9
19.7
5.9
Thailand
11.4
29.9
8.3
TTIP
Laos
18.7
19.2
18.7
Members
Total
Ag
Non-Ag
Myanmar
5.6
8.6
5.1
USA
3.4
5.3
3.1
Cambodia
10.9
15.2
10.3
EU
5.5
13.2
4.2
Taiwan
6.0
16.0
4.5


Source: WTO Tariff Profiles 2014.



This is also one way to show how protected a particular country can be. Of course, we know that protection can come from the tariff and non-tariff dimensions. And most of the time, non-tariff barriers could be a much larger obstacle for trade liberalization.  Many studies show that more benefits can be acquired by reducing non-tariff than tariff barriers. However, it is more complicated and more difficult to actually quantify non-tariff measures. And it is sensible that when a particular country has a high tariff protection tends to also have heavier non-tariff measures. Therefore, it is assumed that for all countries listed on the slide, their levels of tariff protection and NTM are consistent in a way. The intention is to rule out the unlikely case that one nation has high tariff protection and low NTMs or the other way around.


On the subject of TPP, negotiations of the first round members were concluded in early October this year. And also there’re many studies and reports stressing that the US has been leading the TPP. As the US President Barrack Obama mentioned that the US intends to set the trade rules in the region. However, if one country wants to be the leader of a trading bloc pursuing the goal of liberalization, that specific country must fully embrace liberalization itself besides its economic size. And it is very obvious that Australia, New Zealand, Brunei, and Singapore are more liberalized or less protected than the US (see table 1). Actually, 3 out of the original P4 members are less protected than the US economy. However, as we have all witnessed that the US has been dominating the TPP negotiations. Therefore, may we conclude that political power has been dominating economic liberalization in the case of multilateral FTA negotiation?


Many stressed that Taiwan’s participation to the TPP would be a must. And Taiwan’s government officials have approached the US counterparts many times seeking the opportunities of joining TPP as a member. The response from the US side would always be that they’re not sure if Taiwan’s ready. Question from the US counterpart: Is Taiwan ready for the TPP? And they urged Taiwan to get ready despite the fact that TPP announced that it would welcome all APEC members. And Taiwan is an APEC member with the title, “Chinese Taipei”.


After the final text of TPP released on November 5th, the Taiwanese government stressed that it would start to improve relevant regulations and other measures and make them more TPP standard consistent. However, both Vietnam and Mexico have higher tariff protection than Taiwan, and Chile and Taiwan have the same level of overall tariffs on average. Also, the Japanese agricultural sector is obviously more protected compared with Taiwan’s; however, Japan was formally invited by the US to join TPP negotiation in 2012 and finally decided to join in the year after. Again, we may conclude that this would be the other evidence proving that political power has been dominating economic liberalization in the TPP.


So far we cannot be certain if it’s a right decision for Taiwan’s government to work on deregulation and liberalization with respect to TPP benchmarks before the entrance application being approved. After all, it’s actually not about whether or not Taiwan is ready. Otherwise, certain countries shouldn’t have been there. If the US intends to set the trade rules, it is more interested in adopting the rules to regulate bigger guys like China instead of Taiwan. That means we cannot be certain that the US will actually receive Taiwan in the second round negotiations before receiving China.


As for RCEP, RCEP is a combination of 5 ASEAN-plus-one FTAs, which are: ASEAN plus China, ASEAN plus Japan, ASEAN plus Korea, ASEAN plus Australia and New Zealand, and ASEAN plus India. None of those 5 sets of ASEAN plus one FTA can be considered as a high quality FTA. Therefore, how can we expect a combination of them be a high quality one? Second, the RCEP region is by comparison more protected compared with the TPP region in general (see table 1).  That means it will be more difficult to go rigid.


And also we have heard a lot or read even more from all kinds of studies or reports claiming that China has been leading RCEP. However, such statement has always been denied by scholars or experts from Southeast Asia. They argued that RCEP would be more of ASEAN centered, and RCEP was not led by China.


First, we can see that China is still a highly protected market. How can a highly protected country lead a bloc that is pursuing trade liberalization? Second, RCEP is a combination of 5 ASEAN-plus-one FTAs, and all 5 of them are associated with ASEAN.


For people who believe that China is leading RCEP must try to apply the model of TPP on RCEP. Because the US is not the most liberalized economy, it’s leading TPP with its political influence. By the same token, they assume that China must be leading RCEP, since China is supposed to have more political power and influences than others in this region.


ASEAN experts believe that ASEAN 10 members are jointly leading RCEP, because ASEAN appears 5 times and China only appears once among those 5 sets of FTA.  How can we make China appear more than once? If RCEP can be a combination of 5 ASEAN-plus-one FTAs and cross-strait ECFA, that will do. Anyway, because China is not leading RCEP, concluding ECFA or a good trust-building between both sides of Taiwan Strait is only one of the many sufficient conditions for Taiwan to be included in RCEP.


As for TTIP, Taiwan has no role whatsoever. It’s difficult to conclude, because striking a deal between the most advanced economy and the most integrated region is not supposed to be easy. And high standard with the TPP as a benchmark can be expected. Nevertheless, the European Union (EU) already concluded a FTA with South Korea and recently wrapped up another treaty with Vietnam. If tariff barriers are an issue, it is easier for EU and Taiwan to strike a deal (see table 1 again). However, we simply cannot rule out the China factor; the political matter matters.


(Dr. Darson Chiu is Director General of CTPECC and Deputy Director of Macroeconomic Forecasting Center, Taiwan Institute of Economic Research.)

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