United States and China need to work out trade deal between themselves. Photo: EPA
by Patrick Low
by Patrick Low

Beijing must take a different route with the US to realise FTAAP goals

China and the United States can look at forging a deal that would not interfere with existing agreements but would lead back to the WTO

Last week's joint ministerial statement emerging from the Beijing Apec meetings finessed but did not resolve big-power trade tensions. Festering disagreement has characterised Asia-Pacific Economic Cooperation-based trade discussions between the United States and China all year over the architecture for trade co-operation.

At the root of the problem is the configuration of country groupings coalescing around a number of prospective "mega" trade deals. These budding agreements are even more central to trade while the WTO Doha Round negotiations remain beached by seemingly irreconcilable differences.

On one side, the US is invested in the 12-nation Trans-Pacific Partnership (TPP) and the EU-US Transatlantic Trade and Investment Partnership. On the other, China is one of 16 (Asean plus 6) Asia-region countries negotiating the Regional Comprehensive Economic Partnership.

Against this background of overlapping but potentially competing groupings - none of which encompass both China and the US - China has used its role as Apec chair this year to breathe life into the 2006 agreement to explore the Free Trade Area of the Asia-Pacific (FTAAP) for the entire 21-country Apec membership.

This initiative has met opposition from the US, which sees it as a competing distraction from the TPP. The TPP faces closure difficulties resulting in repeated timetable adjustments. China's push for the FTAAP was treated as a geopolitically motivated countermeasure, which it may well have been.

The joint ministerial statement enjoins Apec members to "kick off and advance … the eventual realisation of the FTAAP". The goal of establishing the FTAAP is to be realised "as early as possible by building on ongoing regional undertakings". A key ingredient in the process is a "collective strategic" two-year study on relevant issues.

Therein sits the compromise. China gets its study and an undertaking that the FTAAP project will go forward. The US keeps TPP front and centre for as long as it takes to complete, and as part of the structure of international commitments that will fertilise the FTAAP.

But the compromise papers over fundamental differences. The fix is temporary because the mechanics of an Apec-wide consolidation of mega-regionals into a FTAAP will be laden with big power rivalries. Already, some are saying that China will have to join the US-led TPP as a pathway to FTAAP. That will be a hard sell, especially if a FTAAP is in the offing. Should the FTAAP import everything from pre-existing deals, or should a clean slate be the starting point?

A novel approach to cut through the time-devouring wrangles around that question has been suggested in a new book by Fred Bergston, Gary Hufbauer and others at the Washington-based Peterson Institute for International Economics. The idea is simple. China and the US should cut away from the herd and negotiate their own free-trade and investment agreement.

Readers should pause for thought before they conclude this suggestion should fail the laugh test. Non-cooperative behaviour between the US and China imposes big negative spillovers on the rest of the world. Why not start now? Talking in these terms would change the mood music. No existing initiatives would need to be interrupted, although they might later be influenced by a successful big power deal. Through a series of orchestrated steps, such an agreement could beat a path back to the WTO.

The leadership and vision required to pursue such an idea may seem in short supply now. But perhaps it is not such primitive economics to suggest that demand can drive supply.

China and the US already have many working groups looking at a range of issues. They have embarked on a bilateral investment negotiation, and have potential deals on information technology, procurement, and environmental goods. An existing framework for trade in services could potentially be harnessed at short notice.

Progress in these areas would smooth the way for the big picture of comprehensive co-operation envisioned in the Peterson Institute book. The book takes a number of positions that demonstrate the devil will be in the details. But those details are what leaders doing their job would manage.

This article appeared in the South China Morning Post print edition as: Beijing must take a different route to realise FTAAP goals