Creating Pathways for Trade Integration in the Asia Pacific

Amid regional strategic competition, open trade, including the long-promised Free Trade Area of the Asia Pacific, remains a desirable and achievable goal, writes Kristen Bondietti.

While it is a challenging time for regional integration, it is also an exciting time to think about shaping it for the future. Meaningful cooperation and creative ideas are a good place to start. A Free Trade Area of the Asia Pacific (FTAAP) can be an end goal.

A challenging time for regional integration

Interest in the longstanding vision of regional integration has waned in recent years. It has been disrupted by several developments, many of which have emerged from the success of globalisation. Within economies, the interests of communities have diversified. There is more interest in the distribution of the benefits of integration, in responding to climate change, in dealing with the risk of pandemics and in constructing more resilient economies, than in trade and investment liberalisation. The benefits of integration are being willingly put aside as other domestic agendas are pursued.

Relationships between economies have also changed, particularly China and the United States. This has complicated the relationships between others in the region. The US has backtracked as the leader of open trade and regionalism. It is instead now focused on internal pressures, including a process of strategic ‘de-risking’ or ‘de-coupling’ from China. China has stepped up engagement on trade in the region. As well as being a member of the Regional Comprehensive Economic Partnership (RCEP), it is seeking to join agreements including the Comprehensive Progressive Trans-Pacific Partnership (CPTPP) and is upgrading its trade agreement with ASEAN.

Many economies, including Australia, have responded by diversifying their trade and investment relationships. Some, such as those in Southeast Asia, have benefited both from increased foreign investment and from more intense trading relationships with major traders. However, this has also created challenges; for managing trade and security interests among competing ‘blocs’, for adapting supply chains to geopolitical realities, and for generating economic growth.

New issues are also affecting trade, such as digitalisation, sustainability and inclusion. There are many initiatives emerging to address them, but no agreed global rules or frameworks. This is creating a new ‘noodle bowl’ of diverging arrangements with potentially trade-distorting effects.

We are operating in a more complex environment, where there are multiple objectives, divergences of views and increasing economic fragmentation.

Regional integration for the future

Present challenges provide an opportunity to shape regional economic integration for the future. What trade frameworks do we want to see in the longer term? How do we arrive there?

First, we can re-engage in a conversation about the benefits of regional integration and why it remains important. The region is still highly integrated. For example, Asia Pacific’s intraregional share of trade has grown over the last two decades - to over 58 percent in 2021 -  and continues to deepen.

Economic modelling shows there are benefits to be obtained from all economies in the region coming together to reduce barriers. The wider the membership and the deeper the agreement, the bigger the economic effects. The main gains are in addressing regulatory controls rather than tariffs, which have already been successfully reduced through regional cooperation efforts.

As well as identifying benefits, there also can be more discussion about the costs of moving away from integration and of using trade policy to push resources towards sectors that may not be the most efficient. And there can be greater consideration of how markets and open trade can help solve some of these shared challenges. For example, policy makers focused on tackling climate change often don’t see markets as part of the solution.

Further, we can cooperate with willing partners to create new pathways. This includes working together to create open plurilateral trade agreements where there are shared interests, building on the pathfinder approach pioneered by APEC, like the APEC Business Travel Card, and outcomes such as the Environmental Goods List. Sustainable trade, carbon pricing, digitalisation of services and inclusive trade are all areas where a pathway for agreed frameworks could be pursued.

Creative thinking can add value to the various existing agreements and other bilateral and private sector initiatives that cut across issues and regions. So, too, can adopting a long-term view that focuses on how to handle the complex issues in the coming decades; for example, using the pathfinder approach to move incrementally toward a Free Trade Area of the Asia Pacific (FTAAP). This is being considered by PECC and the Australian APEC Study Centre. An FTAAP remains part of APEC’s agenda.

We must continue to collaborate to build trust. We can harness the value of APEC and other institutions in providing the engagement and interaction between researchers, government and business that underpins the relationships needed for effective solutions.

Kristen Bondietti is Program Director, Trade Policy and Research at the Australian APEC Study Centre at RMIT University, and is a member of the Australian Committee of the Pacific Economic Cooperation Council (AusPECC).