In Search of Free Trade in Asia

This is a transcript of a live online chat with ADB trade experts Ramesh Subramaniam and Jayant Menon on Asia’s free-trade agreements.

Karen Lane: Good afternoon and welcome to ADB’s live chat “In search of free trade in Asia”. I’m the moderator, Karen Lane of ADB’s Department of External Relations, and we are talking today with ADB trade experts Ramesh Subramaniam, Senior Director, and Jayant Menon, Lead Economist for Trade, from ADB’s Office of Regional Economic Integration.

Karen Lane: Our first question sent in is: Who would be the winners and losers from the ASEAN Economic Community in 2015?

Ramesh Subramaniam: The purpose of any new arrangement is to improve the welfare for ALL concerned. Viewed over a medium to long period of time, there should only be winners from AEC 2015. However, in the short run, there will be adjustments which inevitably will impact on the people, business entities, and countries in different ways. As a result of open markets and greater competition, individuals as well as companies may have to go through adjustments - possibly major ones, such as shifting to entirely new jobs, acquiring new skills, starting new businesses and so on. I must also note that such adjustments have already been taking place in many ASEAN economies in response to other agreements (e.g. ASEAN-People’s Republic of China FTA). In addition, with support provided by the public sector and through other means to help with the transition, such impacts can be overcome over the medium to longer term. In this regard, we do want to note that smaller countries with less diversified economies may need more support in coping with the transition. In that sense, the costs and benefits of an integrated community for such countries need to be assessed very carefully, and support provided to mitigate or meet the costs.

Di: Hi, what is the chance of an ASEAN Economic Community by 2015?

Jayant Menon: 2015 should not be viewed as a hard target, or a final deadline. The AEC should be viewed as a journey, with 2015 being a target but not a destination. ASEAN's own assessment suggests that not all commitments are likely to be met by 2015, but significant progress would have been made by then

Jennifer Ng: Good afternoon. In your assessment, do you think all member-countries are ready for an Asean Economic Community by 2015?

Jayant Menon: Different members are at different stages of preparation for the AEC. The original ASEAN members are more prepared than the new ones. But all are making progress. There will be some sectors that are sensitive in each country, and the challenge will be to deal with them.

Karen Lane: We had another question earlier: The AEC will only allow free movement of professionals, not of non professional workers, as I understand. What is the impact of this and will it ever change, do you think?

Jayant Menon: Yes, the AEC in its current design deals only with skilled labor movements. Although most labor movement in ASEAN falls within the non-skilled category, there will be impacts with skilled movement. For example, nurses from the Philippines will find it easier to work in Singapore, benefiting both countries. Unskilled labor movement is politically sensitive, and it is likely that individual governments will prefer to handle it nationally. But ASEAN can play a role in coordinating national policies under an umbrella that tries to harmonize.

Jose: Greetings from Bangkok!

Karen Lane: Greetings Jose. Welcome.

Karen Lane: This from Dr. Mahmood A. Khwaja earlier: With enhanced trade and resulting increased demand for products, the industrial production would rise many-fold across the region. With existing weak implementation of environmental legislation and not too environment-friendly technologies and practices in use for production among most of the countries of the region, the already deteriorating environment (particularly air quality) may become alarmingly polluted for human health. Should we still advocate and go ahead for the free-trade/trade enhancement in the region? There is a dire need for a regional (at least air) pollution control treaty, prior to or side-by-side any move towards trade enhancement in the region. Thank you.

Ramesh Subramaniam: Investing in such public goods is critical for the region. The need will become stronger as domestic and regional consumption demand grows and as the size of the middle class grows.

Di: If we have targets for AEC in 2015, do we have data on how far we are from these targets?

Ramesh Subramaniam: There is a blue print, and there is also a score card. Both are published on the ASEAN Secretariat website. Data are available on most, if not all, indicators.

Guest: Hi Karen, When we mention ASEAN Economic Community in 2015, we always think about TPP and RCEP (Regional Comprehensive Economic Partnership), the two bigger Economic Community related to ASEAN as the centre. Is it correct to think that ASEAN is the driver for both TPP and RCEP? I know that TPP is driven by the U.S. but ASEAN is also acting as a major part?

Jayant Menon: Yes, your last line answers most of your question accurately. One important difference between AEC and both RCEP and TPP is that the AEC is well defined, while details on RCEP and TPP are still sparse. We need time to be sure how RCEP will work out, and how much of the highly ambitious TPP will actually happen

Karen Lane: Another one that we got sent earlier is: Is a Doha trade agreement dead?

Jayant Menon: Doha as it was originally conceived - the all or nothing single undertaking covering trade and other issues - looks less and less likely to be concluded. Attention has now shifted to slicing it up into sectoral deals. It is hoped that a multilateral agreement on trade facilitation, expected by the Bali Ministerial meet of the WTO in December 2013, will kick-start the process

Z: Is the AFTA a success? It is reported that 98.6% of total products are already in the inclusion list and that, of this, 93.7% have 0-5% tariffs. But the truth is, this is only for ASEAN-6, and the deadline for this was two years ago (2010). With this, is an AEC still achievable in the near term? And are we ready for a bigger one, the RCEP?

Jayant Menon: Hi - this is a response for Z: I think AFTA's greatest success is that it has remained open, and as you correctly point out, the original members (ASEAN 6) have multilateralized most of their preferences. The newer members, being at a lower level of development, are catching up on implementing commitments. Vietnam is the only new member of ASEAN that is in the TPP. This will be hard for them, at present.

Emilia David: Is the TPP feasible for ASEAN especially as many countries have yet to make advances to enter the agreement?

Jayant Menon: The TPP is even more ambitious than Doha, although unlike Doha, fewer members need to agree to all that's on the table. For example, government procurement is a sensitive issue for TPP members of ASEAN such as Malaysia and Vietnam.

Eddie Yu: A short question please: when we talk about AEC, do we include other countries outside ASEAN but within TPP or RCEP? Thanks.

Ramesh Subramaniam: AEC is only ASEAN-10. It does not include other countries outside.

JC: Would we ever see negotiations in the TPP be concluded any time soon? If not, what seems to be the major obstacles?

Ramesh Subramaniam: As we noted earlier, TPP is even more ambitious than Doha. Agreement on this will take time.

Guest: What is the progress on regional financial integration? How important is it for AEC? How are private sector organisations being engaged in the process? Thanks.

Ramesh Subramaniam: Finance is a key part of AEC 2015. While financial integration lags behind trade, there has been progress. Cross-border asset holdings have been on the rise. There is active engagement of the private sector through ASEAN+3 Bond Market Initiative (ABMI) for example.

L: Is the AEC single market goal achievable without a common currency arrangement at some point? This question is related to the idea that exchange rate pass-through will be incomplete without one.

Jayant Menon: The AEC does not strive to emulate the European model. A single currency for ASEAN is not on the table, nor should it be. The lessons from Europe are that both free labor movements and fiscal consolidation, in an environment where some sovereignty is given up, is required. ASEAN is not ready for, nor is it pursuing, this

florence: How will the governments in Asean which are increasingly going down the populist path deal accommodate domestic invested interest against the need to deregulate to meet the goals of AEC?

Ramesh Subramaniam: Hi Florence, national interests are obviously critical. Inequality is rising, for instance, and governments have to deal with domestic problems. However, AEC is a regional compact, and ASEAN economies have always respected such agreements and work towards common goals. Hence, vested interests will (have to) be dealt with gradually, and compensation may have to be given for those affected in the short-term, in order to meet regional goals (still keeping clearly national developmental interests in mind).

Eddie Yu: Just wondering if the potential EU-India FTA will have negative impact on ASEAN-India FTA? Means the ASEAN-India FTA countries (AEC) will receive negtive impact once EU-India FTA is signed? Thanks.

Jayant Menon: Not directly. The problem is a more general one, of proliferating FTAs, and India is almost on top of the list in negotiating FTAs. This may deter attention from domestic reform issues, which is where the real challenge lies.

Usama: What should be the role of financial services industry in this aspect knowing the fact that many banks will have an opportunity to expand its operations and earn more profits!

Ramesh Subramaniam: Within the realm of finance, banking integration in ASEAN is also under consideration. Yet, this is an area where progress will take time. As banks are allowed to operate across the region, their reach will be larger. Clearly, more important than the profit is how such integration can promote financial inclusion, access, and development.

Karen Lane: We were sent this in earlier by email: Will the 2015 AEC impact supply chains in Asia?

Jayant Menon: The AEC aims to present ASEAN to the outside world as one market in which cross-border movements will be seamless. This will positively affect supply chain investment to ASEAN. However, behind the border reforms that address trade costs should complement the process, and this is where the targets in dismantling non tariff barriers within AEC is critical.

JC: If I interpret that TPP is mostly talk, then wouldn't the same applies to RCEP? If not, why so?

Jayant Menon: It's still a bit early to judge the RCEP, or even the TPP. There is also more than just economics driving each, as is increasingly acknowledged.

Emilia David: Just how important is the AEC in facilitating trade in the region when there are already bilateral agreements made by member countries within the region?

Ramesh Subramaniam: AEC is more comprehensive than just trade. On trade, ASEAN is already doing quite well - the ASEAN-wide FTA is a good model. AEC, when fully operational, could have considerable benefits as long as risks of contagion from integrated markets are managed.

Di: As mentioned, AEC's current design involves movement of skilled labor. Clearly, this would benefit countries like the Philippines that is a major labor exporter. But Singapore is tightening its influx of labor due to domestic issues. How do you reconcile Singapore's immigration policy and the AEC agenda?

Jayant Menon: Singapore is a major recipient of skilled workers, and apart from Malaysia, most are from outside the ASEAN region. Although there is a debate about the future role of immigrant labor in Singapore, their commitment to remaining relatively open is still there. Singapore is unlikely to fail to meet its AEC commitments in this regard.

Karen Lane: From josebcollazo. Come January 1, 2016 (when the #AEC will debut) will things be any demonstratively different than today?

Ramesh Subramaniam: Things will certainly be different in some areas (e.g. tariffs will be eliminated; skilled labor movement should be almost free). For demonstrable progress in other areas, we will need to allow more time.

Jen: Do you think Asean countries are prepared for the AEC?

Karen Lane: Hi Jen. I think we responded to that earlier. However, more work is required in dismantling non tariff barriers and there is a need to involve the private sector more actively in understanding the AEC and influencing its policies.

L: From the AFC and GFC experience, a major concern now is how we can better manage the trade and financial linkages that have formed. How is this concern being addressed in the pursuit of freer trade among the ASEAN economies?

Ramesh Subramaniam: There are more risks from financial integration, relative to trade. The region has put in place (with the +3 countries, i.e. Japan, Korea and People's Republic of China) the Chiang Mai Initiative Multilateralization (CMIM) arrangement. On trade, it is more an issue of how countries adjust to shifts in production, relocation, reskilling etc. These should definitely not be underestimated, but unlike financial crisis, these risks/impacts are known and are being and can be addressed over time.

Giovanni: Considering the limited workforce mobility in the Asia-Pacific, would the poor in the region benefit from FTAs, or are they just instruments that allow free flow of capital and resources across borders, ie something that only the rich can really take advantage of?

Jayant Menon: Free trade may not be fair, but it is mutually beneficial. Although unskilled labor movement is an issue that needs to be addressed, it is politically sensitive in ASEAN. But with increased trade driven by greater investment, production networks will grow and expand, and employment for low and semi-skilled workers will increase more than any other group. The benefits may be indirect, but they are real.

florence: Do you share the view held by some that it is more feasible for RCEP to be concluded than TPP. The rationale is RCEP will embody so-called "Asian pragmatism" instead of the US insistence of setting "gold standards" in the negotiation. thank you

Ramesh Subramaniam: On RCEP versus TPP, the feasibility or prospects will depend on the requirements. The "Gold Standards" have been raised as a constraint. At the same time, "Asian Pragmatism" should not be interpreted as diluting the requirements. As we have stated in the Asian Economic Integration Monitor (AEIM) special chapter, major and emerging economies should work in parallel on multilateralizing trade.

Di: Territorial disputes impede integration. And we have seen these disputes among countries within ASEAN and even within Asia and the Pacific. What is ADB doing to address such issues?

Ramesh Subramaniam: @ Di: It is true that any disputes may impede cooperation and integration. But, from ADB's point of view, we are a development institution, and our mandate is to work on economic and social issues.

Karen Lane: Hi Florence, Just to let you know that ADB put out a biannual report on integration Tuesday with a special chapter on multilaterization versus consolidation of free trade agreements. It's available here: http://www.adb.org/publications/asian-economic-integration-monitor-march...

Karen Lane: This from Karl Wilson earlier. Sorry it took so long, we have been inundated: From Karl Wilson: "Has the WTO got a future as more and more trade liberalisation is now happening outside the WTO, either through unilateral reform or regional trade agreements?"

Jayant Menon: We should always remember that the key function of the WTO is to preserve a rules-based trading system. The WTO binds tariffs, and provides the most effective dispute settlement system that keeps world trade moving with minimal disruption. WTO does not equal Doha, nor should it simply be judged on the basis of developments, or lack thereof, on Doha.

florence: thank you, i will most certainly take a look at it.

Karen Lane: Emilia David sent this: For countries like the Philippines that are still negotiating bilateral trade agreements and entrance into the TPP, what is needed to ramp up trade?

Jayant Menon: There is a lot that can be achieved through domestic reforms in the Philippines to ramp up trade. A lot of behind-the-border issues still impact on trade costs significantly, and require customs reform (eg. Single Window) and reducing red tape, and associated rent-seeking behaviour. Improving infrastructure is badly needed in the Philippines, as in many other countries, and this can play a big part in ramping up trade through reducing transport costs.

Karen Lane: A follow up from Karl Wilson: What impact will the TPP have on Asia considering so many countries now have their own regional FTAs?

Ramesh Subramaniam: What happens to the existing FTAs when a new, consolidated agreement comes into play is critical. There are cases of bilateral or plurilateral FTAs co-existing with regional agreements, as the provisions of the former may be superior to those of the latter. So, the utilization of the multitude of FTAs will depend on what they have to offer. TPP - as it covers many economies outside of the region - may have other benefits in terms of market access etc, and hence countries will weigh those. Same applies for RCEP or other agreements as well.

Karen Lane: We have a question from Frank Fu: How is the current progress for the Philippines to join TPP in the negotiation? What are the barriers that the Philippines has to overcome? Is constitution change a must? What is the prospect for the Philippines to join TPP in the near future?

Karen Lane: Hi Frank. This from Ramesh and Jay - At the World Economic Forum held in Davos just last January, Philippine President Noynoy Aquino continued to express reservations about joining the TPP, primarily since this would require amending constitutionally-enshrined limits on foreign ownership. The Constitution limits foreign ownership to 40 percent in certain key areas, including telecommunications and media.
There are other obstacles to the Philippines joining the TPP. Restrictions on the practice of certain professions would be one of them. Foreigners are banned from practicing in a large number of professions under the Philippines Regular Foreign Investment Negative List. The TPP also sets certain standards on issues like labor and intellectual property rights which the Philippines might not be ready to comply with.
In any case, the government doesn’t seem to be rushing to join the TPP, continuing to cite the need to analyze the costs of benefits of joining such a deal.

Eddie Yu: If the CN-JP-KR FTA is closed by 2015 as they planned, JP & KR will buy more product from CN than it from AEC, so a kind of pressure from outside even if AEC can run smoothly by 2015 within the community (in terms of Trade). Is the understanding correct? Thanks.

Jayant Menon: You have a point, but this is all the more reason that AEC should press ahead with its conclusion, to minimize trade being diverted as a result of external FTAs. It also suggests that the RCEP is worth pushing ahead with, if harmonization can be achieved, and of course multilateralization of preferences eventually, which is the end goal

Karen Lane: We got this through Facebook: Asia is working on the Trans Pacific Partnership. It already has the ASEAN Free Trade Agreement and also in the works is the Regional Comprehensive Economic Partnership. Which is best for businesses to join?

Ramesh Subramaniam: It really depends on businesses; they can choose which provisions to follow. In fact, this is a key reason/factor for our argument to harmonize and multilateralize trade preferences, in order to reduce the transaction costs for businesses (which may inevitably make for costly mistakes, owing to difficulties in weighing the relative benefits of multiple agreements, provisions, rules of origin etc)

Guest: The AEC is based on mutual cooperation and consensus building and progress will be determined to a large extent by its slowest member(s). What is the chance that it never build enough momentum to get really important issues, like alignment of financial market infrastructure and legal/

Jayant Menon: The expansion of ASEAN to include Cambodia, Laos, Myanmar and Viet Nam has posed challenges for sure. ASEAN now has a "Consensus - X" alternative to deal with the weakest members deciding the pace, issue. The newer members also have different implementation schedules. But you are right in that some difficult areas may not be addressed adequately in a regional arrangement- this is where unilateral reforms must play a complementary role.

JC: If all the discussions on the TPP, RCEP and the like take so long to complete, wouldn't it be better for individual countries to channel their limited resources and time on what they can directly make a difference such as domestic reforms?

Karen Lane: Hi JC, thanks for that. That will be our last question.

Jayant Menon: They should be viewed as complementary rather than substitutes, as far as possible. But you are absolutely right that it is difficult when resources and capacity are limited. Laos is a good example, and its recent accession to the WTO is worth noting. Luckily, the multiple FTAs it has to be involved in, through its membership of ASEAN, did not interfere with this process. The time may have come, or may come soon, where more FTAs will not make much sense, if countries have already concluded them with their major trading partners. At this point, the sensible thing to do would be to harmonize and then multilateralize, offering them to all without discrimination. No more need for Rules of Origin, and no trade diversion.

Ramesh Subramaniam: Thank you all for participating and the very interesting questions.

Jayant Menon: Thank you all very much for participating in this live chat, and also to those who sent in questions earlier. I hope you have enjoyed it as much as I have. The quality of the questions has really impressed me, and I hope we have done okay in trying to address them. Thanks and goodbye for now.

Karen Lane: Thank you to everyone who participated. We are now wrapping up our live chat but if you have any follow up questions, please email or contact us via facebook or twitter.