The main outcome of the Asia-Pacific Economic Cooperation (APEC) annual meeting in Beijing has been an agreement to launch a “strategic study” of a trade pact known as the Free Trade Area of the Asia-Pacific (FTAAP). Scheduled to take two years to complete, APEC officials have been keen to stress that the study is not an opening of negotiations. Notably, it is backed by China.
Through APEC’s agreeing to the study however, the alternatives – the long-promoted Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) agreements – will, in my opinion, probably fall by the wayside. The TPP is led by Washington and excludes China, while the RCEP is promoted by China and excludes the United States. Negotiations for each will continue – officials from the countries concerned will want to keep up political and trade pressure on any future FTAAP agreement through using the TPP and RCEP negotiations to push their own agendas.
The specter of a ‘two year study”, however, is likely to mean any future free trade agreement encompassing the entire Asia-Pacific region – which contains 40 percent of the world’s population and includes the United States, China and Russia – is likely to run into significant stumbling blocks, not least concerning the current US-led embargo on Russian trade over the crisis in Ukraine. It would seem a step far too far to anticipate the US agreeing to free trade with a bloc that includes Russia at this time.
In any event, while the political situation in China and Russia can be expected to remain constant, by the time the FTAAP study is completed, President Obama will be out of office. A potential President Clinton may be more global trade savvy than Obama has been – who is remembered at APEC for not attending last year’s meeting in Bali – a no-show that effectively scuppered any momentum the TPP had going for it.
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A two year study of the FTAAP also allows China to continue to delay U.S. calls for it to open up its long delayed Government Procurement Agreement (GPA), under which China would allow foreign companies to bid for Chinese government contracts. Originally part of China’s WTO accession agreements, the GPA is now as far away as ever – and remains a problem in terms of promoting a more level playing field in China when one considers the huge involvement of the Chinese government in commerce.
This means that the emergence of free trade – and its impact on U.S.-owned businesses – can be expected to fall more upon the RCEP agreement, which includes ASEAN, as well as China and India. The interesting point about ASEAN is that American and European companies can still take advantage of these trade agreements, even though they do not specifically include either the U.S. or E.U.. This is because ASEAN permits companies registered in ASEAN to qualify for treaty status, regardless of foreign ownership criteria.
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Rules are in place concerning local production and sourcing quotas, meaning that the majority of the component parts of products must be ASEAN-sourced (to what extent varies from product to product and differs slightly amongst member countries). But this does allow an American invested company to set up shop in Vietnam and take advantage of ASEAN’s FTA with China to sell duty free onto the Chinese domestic market as long as the correct legal and tax structures have been put in place.
In short, APEC’s agreeing to allow a study of the FTAAP may appear a grandiose scheme, but more importantly, it will likely push back the TPP even further. American companies looking to take advantage of the opening up of preferential free trade agreements with China and East Asia are better off looking at investments in ASEAN to make this happen.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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