RCEP vs. TPP: Choice between China and America?

Chinese Premier Wen Jiabao (8th L) and other leaders hold hands during the launching ceremony of the Regional Comprehensive Economic Partnership (RCEP) Negotiation, in Phnom Penh, Cambodia, Nov. 20, 2012. ASEAN and its partners including China, Australia, India, South Korea, Japan and New Zealand on Tuesday launched negotiations for the RCEP. <Xinhua/Zhang Duo>

Editor’s note: A trade talk for the Regional Comprehensive Economic Partnership(RCEP) is scheduled to open from May 9 to 13 in Brunei. The RCEP covers more than half of the world’s population involving 16 countries in the Asia-Pacific region. It aims to become a platform for the integration of trade and investment in Asia and the rest of the world.

The main objective of the pact is to strengthen ASEAN’s bilateral free-trade agreements. This includes all trading partners and but the United States which has been initiating a rival agreement called the Trans-Pacific Partnership(TTP).

The information on both free trade zones is tangled and confused. The US-led TPP takes the “elimination of all exemptions on tariffs” approach while the ASEAN-led RCEP is assumed to take a more Asian approach of gradual liberalization. The rise of the RCEP is in fact due to the many concerns Asia has about the TPP.

Are the RCEP and TPP really competing for members and agenda items? Edmund W. Sim, Professor at the National University of Singapore, and partner at Appleton Luff law firm, explains the issues, politics and impacts revolving around two free trade talks.

With the start of the RCEP talks expected on May 9, observers have raised repeated concerns about whether the RCEP represents a challenge to the TPP free trade talks that have been ongoing since 2008. Some are concerned that Asian countries will have to choose between the two sets of talks, a mutually exclusive choice between a China-centric trade agreement in the RCEP and a US-centric trade agreement in the TPP. Others posit that countries can make that choice based on tactical concerns and progress in negotiations.

The two agreements do have some broad similarities. The TPP encompasses 12 countries with a total GDP of $20 trillion, but notably without the participation of China. The RCEP encompasses 16 countries with a total GDP of $17 trillion, but notably without the participation of the United States. Brunei, Malaysia, Vietnam, Australia, New Zealand, Singapore are participating in both the TPP and RCEP.

Yet most of the concerns regarding competing and incompatible FTAs are based on fundamental misunderstandings of both the breadth and depth of the two sets of talks. The RCEP is really a means for the ASEAN and its bilateral trading partners to harmonize the existing ASEAN FTAs with Australia-New Zealand, China, India, Japan and South Korea.

The substantive scope of these FTAs varies widely; most cover goods, services and investments, but some don’t. The ASEAN-India FTA notably only covers trade in goods, with a services chapter having taken years to negotiate and investment not covered at all. The specific rules contained in these agreements also vary significantly, such as the rules of origin which determine which goods qualify for preferential tariff rates.

Furthermore, just as the RCEP provides an opportunity for ASEAN to harmonize its terms of trade with its trading partners, the RCEP also provides an opportunity for ASEAN’s trading partners to harmonize its terms of trade with the ASEAN members. The various ASEAN FTAs are actually framework agreements for bilateral FTAs; for example, the ASEAN-China FTA is actually a Brunei-China FTA, a Cambodia-China FTA, and so forth.

Yet although the terms of such agreements may be consistent with the main framework agreement, their implementation by individual ASEAN members may not be consistent. Just as vexing is that implementation may be inconsistent not only with the ASEAN bilateral FTAs, but with the intra-ASEAN agreements themselves, such as the ASEAN Trade in Goods Agreement.

Thus the RCEP is focused more on harmonization of existing rules and their application within the various ASEAN FTAs. This is much less ambitious than the TPP’s agenda, which covers many items not covered by the RCEP, such as intellectual property rights, environmental protection, labor, financial services, technical barriers and other regulatory issues. Yet given the inconsistencies that currently exist in the various ASEAN FTAs, even this harmonization of existing obligations is no less important. In fact, the external influence provided by the ASEAN trading partners may even supply the discipline and rigor needed for ASEAN to implement the ASEAN Economic Community by the end of 2015.

The RCEP is primarily focused on measures imposed at the national borders and how to harmonize those measures. The TPP, on the other hand, is a much more ambitious negotiation in terms of scope because it covers a wide variety of barriers to trade and investment which occur beyond national borders. The TPP also covers issues that ASEAN countries have not yet covered in their intra-ASEAN agreements, such as labor, environment and intellectual property. Hence the TPP presents countries with a different set of issues than the RCEP does, meaning that the two negotiations are not conceptually incompatible.

However, post-border issues are necessarily linked to border issues, but not necessarily vice versa. What that means is that the issues involved in the RCEP are more critical for countries wishing to negotiate in the TPP. In other words, if a country is not able to deal with the RCEP issues, it will not be able to deal with most of the TPP issues. Hence Indonesia and other ASEAN member states looking to participate in both RCEP and TPP need to prioritize RCEP issues.

Finally, the negotiating dynamics and timing of the TPP and RCEP also impact how ASEAN members approach the two sets of talks. The TPP talks are supposed to be completed this year, but with the impending addition of Japan, no one seriously expects that to happen. The substantive and procedural issues related to Japan’s joining the TPP talks means a delay in TPP’s finalization until perhaps the end of the Obama administration in 2017-18.

The RCEP, in contrast, is supposed to be completed by the end of 2015, which coincides with the initial AEC deadline. Hence Indonesia can complete its RCEP negotiations, and if it deems itself ready to join the TPP, it still can, although the complication would be that the TPP talks would be in their closing stages and Indonesia would have to accept whatever consensus agreements had already been reached.

How ASEAN members approach the RCEP and the TPP therefore does not depend on political-security matters with regard to China and the US. More prosaically, the practicalities of trade negotiations mean that ASEAN members will have to give priority to their RCEP issues before considering the TPP.

ASEAN members such as Singapore, who have already done this, will find it easier to “walk and chew gum at the same time,” to use an American aphorism. Those that haven’t, will need to follow another American aphorism of “learning to crawl before they can walk.” Either way, the work necessary to square these circles has to begin now.