South-east Asia needs a reset on trade deals

Since the early 2000s, countries in South-east Asia have seen a plethora of trade pacts.

Singapore signed a bilateral Free Trade Agreement (FTA) with New Zealand in 2000. Soon, others like Malaysia and Thailand got in on the act.

In 2003, the Asean 10 resolved to turn their trade agreements of the 1990s on goods, services and investments into the Asean Economic Community (AEC), a major advance in regional economic integration.

While Singapore increased its number of bilateral trade deals with each passing year, less developed countries in the region, like Laos and Cambodia, became part of FTAs through the regional institution of Asean that undertook trade pacts with China, Japan, South Korea, India, Australia and New Zealand.

FTAs, both bilateral and regional, became popular with these small countries as they realised the importance of market access in a global context of Europe and the United States integrating with their neighbours as the multilateral World Trade Organisation (WTO) process stalled. China's rise was another factor, as it meant more competition for investments.

For many of the region's export-oriented economies, it became important to ensure their trading partners remained open and followed trade rules. All countries of South-east Asia sought Foreign Direct Investments (FDI) for their own growth and development. Hence the FTAs of that era went beyond tariff cuts to include development of services, investment, competition policy, intellectual property rights and infrastructure. That was to ensure countries undertook domestic reform to attract FDI and inculcate a culture of policy certainty.

Cargo being unloaded at the Port of Manila. With globalisation, a macroeconomic instability in one country is felt around the world, such as during the 2008 Global Financial Crisis, when South-east Asian countries suffered declines in international trade. PHOTO: EUROPEAN PRESSPHOTO AGENCY

However, the world economy has changed since then. With rising globalisation, any small macroeconomic instability in one country is felt almost throughout the world. That was highlighted during the 2008 Global Financial Crisis, when South-east Asian countries not only suffered declines in economic growth and international trade but also mass unemployment. The crisis brought out the structural imbalances in these countries and discussions on productivity, that is how to produce the same output with less manpower, also came to the fore.

Around the same time, there was a growing realisation that while trade deals were successful in terms of tariff cuts, they were much less so in lowering non-tariff barriers and spurring change in services sectors and for investments. That was also the case in the WTO process.

Change in non-tariff areas and in services and investments often requires domestic reform, which is challenging because it results in "winners" and "losers". Moreover, as many of the non-tariff issues fall within the purview of multiple government agencies, the work of coordination and mustering political will is difficult. These factors slow the pace of domestic reform, which in turn impedes FDI flows.

As the costs of reform sank in, the priorities of countries in the region changed and they became more inward looking. They shifted their focus to domestic concerns, such as the building of infrastructure and institution and improving education. Trade deals took a back seat. Hence the AEC, which came into being last year, is not due to see any path-breaking advances in economic integration until 2025.

The lack of momentum for deeper economic integration also took its toll on the Regional Comprehensive Economic Partnership with participating countries missing the negotiation deadline of end-2015. Around the world, the mood has turned against globalisation with the United Kingdom voting this year to exit the European Union and its common market and America's President-elect Donald Trump making clear his opposition to the 12-nation Trans-Pacific Partnership (TPP).

The current dark climate for trade agreements and regional integration, with national interest taking precedence over regional ones, needs lifting. What South-east Asian countries must do is reset their strategy of international exchange. Instead of only market access, these countries should seek to work on projects of common good and involving shared interests.

These could include aspects of physical and institutional infrastructure and the building of human capital over the long term for different value chains of economic activity.

Countries should also keep their eyes open for new developments in the global economy and consider how to collaborate on building a common platform to benefit from the trend. For example, the size of the digital market is set to grow from US$31 billion (S$44 billion) in 2015 to US$200 billion by 2025 for South-east Asia. That is an opportunity waiting to be exploited.

Most importantly, countries need to improve understanding of how trade deals work among their own people. That does not mean only the aggregate benefits of a deal, but also its distributional consequences. Governments need to take the lead in speaking more openly about winners and losers from regional integration and convince losers that they will benefit over the long term, as will their children. They need to work on redistribution policies to transfer wealth from the winners to the losers.

Political leaders can also come together with their counterparts to discuss the building of a regional mechanism to reduce income inequality and distribute benefits more widely across populations. That, of course, is no easy task.

If countries are unable to rise to the challenge, the mood on trade agreements is likely to further sour. It is time to seriously acknowledge that all economic actions have political dimensions.

  • The writer is fellow and lead researcher (economic affairs) at the Asean Studies Centre of Iseas - Yusof Ishak Institute, Singapore. SEA View is a weekly column on South-east Asian affairs.

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A version of this article appeared in the print edition of The Straits Times on November 17, 2016, with the headline South-east Asia needs a reset on trade deals. Subscribe