Two Models for Integrating Asia: A Must Win for President Obama

Asia is now home to more than 50 percent of the world’s economic activity, a long-anticipated benchmark vastly accelerated by China’s stunning, swift economic growth and its overtaking Japan as the planet’s second-largest economy. Asia’s dynamism is transforming the world, its institutions, and U.S. strategy. Secretary of State Hillary Clinton has described the shift to Asia as a strategic pivot.

While U.S. foreign policy and security leadership are aptly refocusing on Asia, more needs to be done—and fast. This is particularly the case on trade.

The United States has lost ground in Southeast Asia over the last decade. In 2004, the United States was ASEAN’s largest trading partner, with total trade valued at $192 billion. Today, China, a non-consequential partner for ASEAN in the early 1990s, is the region’s largest trading partner, with two-way trade totaling $293 billion in 2010.

Over the past 10 years, ASEAN has inked free trade agreements (FTAs) with China, Japan, Korea, Australia, New Zealand, and India. The United States has only one FTA in ASEAN—with Singapore. The result has been a ceding of market share and presence in the world’s fastest growing and most dynamic markets. No wonder that U.S. economic growth has suffered. Ignorance and relative neglect of Southeast Asia have cost the United States jobs, growth, and influence.

That is why the CSIS-U.S. ASEAN Strategy Commission has recommended that the Obama administration put a stake in the soil when President Obama travels to Indonesia for his third U.S.-ASEAN Leaders Meeting and first East Asia Summit and tell the region that the United States wants to negotiate a U.S.-ASEAN FTA. The signal would resonate loudly in capitals around the Asia Pacific. It would demonstrate that the United States is back, serious, and committed to reasserting its role as an economic leader in Southeast Asia.

There is a real competition under way to define how economic integration of Asia will proceed. The wagers are high. The winning model will determine standards and rules. It will define the pace of trade and investment and support a move toward either global free trade or a return to regionalism and nationalism. Those left out of the predominant structure will experience slower growth and face grinding competition to engage from outside.

The two competing models are those of the U.S.-led Trans-Pacific Partnership (TPP) and the China-led ASEAN Plus Three — ASEAN plus China, Japan, and South Korea. Competition for economic integration is good for Asia. It should sharpen the sense of urgency for governments to move faster and more decisively. The TPP model is one based on a high-level U.S. FTA standard that is comprehensive and binding.

The Chinese ASEAN Plus Three model puts geopolitical concerns above specific trade and investment rules and links countries together through a lowest-common-denominator formula that is very effective and has a high impact in the short term. Trade expands rapidly as tariffs are reduced, but binding rules on investment, procurement, intellectual property, environment, and labor provisions are not addressed.

In sum, the U.S.-led model is deep and requires massive political commitments by governments to legally bind themselves and reform current regulations and practices. The China-led model is relatively shallow and easier for governments to join. It is high-profile, with nonbinding agreements expressing general intent and some specifics around tariffs, but it includes little on other commercially important rules and regulations.

Fortunately, President Obama and the United States have begun to address the lack of leadership on trade that has resulted in the serious loss of U.S. market share in Asia. Congress recently passed the Korea, Colombia, and Panama FTAs and will announce, with the eight other negotiating partners, a significant framework agreement for the TPP, signaling that the talks are progressing well toward an agreement.

Passing the U.S.-Korea FTA convinced Asia that the United States is putting presidential political capital behind trade again. That factor was a game changer and has resulted in Japan, Canada, Mexico, and Korea indicating serious interest in joining the TPP, making progress toward the vision of a Free Trade Area of the Asia Pacific seem more compelling and achievable.

Prime Minister Yoshihiko Noda has recognized that Japan cannot survive if it sits on the sidelines while Korea moves ahead with its FTAs with the European Union and the United States. Japanese economic intelligence was spot on when it advised its government that Korea would move to join the TPP as soon as Seoul passes the U.S.-Korea FTA.

Progress on the TPP makes the China-led ASEAN Plus Three model look less compelling than even two months ago. The ASEAN Plus Three has its own secretariat, in Seoul, and has delivered extensive, if shallow, trade integration in East Asia. China’s partners in the ASEAN Plus Three are among the strongest proponents for competing trade and economic architecture.

The rest of Asia wants to trade with China and to receive its investment and low-cost loans for infrastructure development, but it does not want to be dominated by China. Much of Asia also rejects the idea of Chinese governance even in the commercial and economic space—a phenomenon that has been strengthened during the last year and a half as China has tested whether it could turn the screws on its Asian neighbors over questions of sovereignty in the South China Sea by leveraging its new economic dominance. Thrusts by Beijing have been parried.

Strategically, the table is set for President Obama to suggest a U.S.- ASEAN FTA. This move would send the signal that the United States is willing to invest over the long term in strengthening ASEAN as an institution. It would provide a much-needed carrot to help drive political and economic reform in Burma, enhance economic capacity and reform in less-developed economies such as Laos and Cambodia, and move forward immediately with ASEAN nations willing and able to embrace a structure that would be fully compatible with and complementary to the TPP. At the same time, it would strengthen ASEAN as the fulcrum of regional economic and security architecture for Asia.

The end game is to present a compelling case to China to join in the more comprehensive and inclusive economic integration model for the Asia Pacific and to abandon its efforts to put its eggs only into forums that it can dominate, a behavior that sets up eventual structural conflicts in Asia that could divide and destabilize the Asia-Pacific region down the road.

Bringing China aboard and allowing it a leadership role, but convincing it to play by rules that it and its neighbors around the Pacific and Indian oceans define multilaterally, is the surest path to regional peace and prosperity. There is no mission more important if President Obama is to achieve his goal of ensuring that the American people have opportunities, jobs, and a safe world to live in.

Ernest Z. Bower