The US and the Pacific: toward a new regional integration model?

As Europeans were trying to resolve their debt crisis at home, world leaders from another part of the world gathered in Hawaii (at the APEC summit meeting of November 10-12) to outline the future of the “Asian Century”. And, despite consensus among decision-makers that the best US policy towards China should be one of constructive engagement, skirmishes between the United States and China were not lacking. President Obama failed to resist “China bashing” by pointing fingers at the artificially low value of the renminbi and the lack of protection for intellectual property rights in China. The US president, faced with the continuing economic crisis at home, had no choice but to blame China. He spoke to the heart of Americans who think they have lost their jobs because of lower wages and unfair competition from the largest emerging economy.

Despite this grandstanding, however, events in Honolulu did also reinforce the awareness that America must work with China towards a better future.  Indeed, a pivotal systemic shift towards Asia is in the making, as indicated by the Trans Pacific Partnership (TPP) negotiations at the APEC summit. Furthermore, Obama’s strategic visit to Australia and his first participation in the East Asia Summit in Bali further support this view. While it might be easy to conclude that these gestures are simply a balancing exercise against China’s rising influence, the United States recognizes the extent of its long-term economic and strategic interests in the Asia-Pacific region, and is working to protect them.

The APEC gathering in Honolulu resulted in an agreement to expand trade in the region by lowering tariffs for green technologies (like wind turbines and solar panels), and by reducing inefficient fossil-fuel government subsidies. Supposedly, APEC economies will make a list of environmental goods next year and reduce tariffs to no more than 5% by the end of 2015.  This decision comes at a time when China’s tariffs on American products and state subsidies for its own green-technology sector are a source of controversy between the two nations. This is especially true as some Chinese companies are starting to overtake US firms in terms of global environmental competitiveness.

As the power struggle between the United States and China continues, APEC is yet another institutional arena in which Washington pushes to establish economic standards to guarantee a peaceful and norm-based transition in East Asia. In fact, the TPP framework agreement negotiated in Hawaii is of greater significance than the accord made in the green-sector. In the long run, the TPP is to become a model for a larger Free Trade Area of the Asia-Pacific (FTAAP), liberalizing the trade of goods, services, and investment, and regulating safety standards, among other things. Measures to improve production and supply links to small- and medium-sized enterprises are also foreseen. Although such a comprehensive pact is probably still a decade away, the relevance of the TPP must be evaluated against an existing “noodle bowl” of bilateral trade agreements in Asia and the proposed trade area between China, Japan, South Korea and the ASEAN members (ASEAN+3).

The TPP came into existence in 2006 through a joint declaration among Brunei, Singapore, Chile and New Zealand – small, liberal countries with modest trade figures. In 2009, the Obama administration announced it would support a regional pact, drawing in Australia, Peru, Vietnam, Malaysia and possibly Japan.

Although US economic interests are aligned with most of these countries – it already has bilateral free trade agreements with Australia, Chile, Peru, Singapore and, soon, Korea – the TPP could provide a competitive platform from which to engage China in parallel economic reforms. Rules to stop government subsidies of state-owned companies and government procurement, to favor the protection of workers and intellectual property and to encourage innovation, will all likely be part of the next TPP negotiations.

The prospects of such reforms have been met with a mixed response from key players like Japan. The Japanese, with their cautionary indecisiveness and apparent politeness have yet to take a clear stance on the TPP. Japan’s agricultural sector is particularly adverse to reforms as it depends on state subsidies for products such as rice, wheat and dairy. The agricultural lobby insists that small Japanese farmers will be globalization’s next great victims. Whether this is true remains to be seen; meanwhile, South Korea – with a similar economic structure – will likely ratify its free trade agreement with the US (KORUS FTA) by the end of the year, leaving Japan behind.

The regional trade situation amongst East Asian countries is extremely complex. The most relevant agreement remains an ASEAN+3 track, which envisages the creation, by 2015, of an East Asia FTA (EAFTA) with the free flow of goods, services, foreign direct investment, unskilled labor and capital among its members. This type of agreement exemplifies Beijing’s pragmatic foreign policy, which is centered on economic integration. It also demonstrates China’s willingness to limit American influence in the region by diverting trade and investment from the US.

Overall, the TPP can be interpreted as a strategically competitive economic integration model for Asia. Supported by the United States, it clearly aims to curb China’s own ASEAN efforts.

The TPP is an open agreement, however, and China is also invited to join, as long as it complies with the agreements therein. As the framework includes measures such as the protection of intellectual property rights and labor standards, it is highly unlikely that China will be joining any time soon; however, trade negotiations have no quick fix and China is a rapidly changing country. The Chinese may surprise us yet.

At the end of the day, which economic integration model will win out in Asia – or, indeed, whether they will blend into a single architecture – remains the key question, and a resounding test of the times to come.