Tag Archive for: FTAs

Agenda for change: building prosperity and security

On 2 February, ASPI released Agenda for change 2022: shaping a different future for our nation to promote public debate and understanding on issues of strategic importance to Australia. The key message in Agenda for change 2022 is that we need to embrace uncertainty, engage with complexity and break down the silos. Our economic prosperity, national resilience and security depend upon it.

In the lead-up to every federal election, ASPI looks at the big challenges facing Australia and what’s needed to address them. Agenda for change 2022 includes a chapter by national security expert Michael Shoebridge titled ‘From building defensive resilience to creating prosperity and security: a successful Australia in a divided and dangerous world’. This chapter seeks to connect the ‘strategic, technological and economic interests’ of the big ideas presented in other chapters.

Shoebridge positions his chapter in the ‘middleware’, between the need for cross-sectoral nation-building highlighted by me and John Coyne, and the call by David Uren to deepen trade cooperation with our free-trade agreement (FTA) partners.

We were wrong, Shoebridge says, to place deep faith in our FTA with China. It ‘means little in the face of what Beijing sees as an imperative need to demonstrate what happens when nations act in their own interest in ways that displease it’. In contrast, he says our FTAs with Japan, the US, South Korea and Indonesia are aligned with our strategic interests and democratic values. As will be our new FTAs with the UK and India. We should not neglect the emerging set of Indo-Pacific-focused EU members, including Germany, the Netherlands, Norway and France, and the ‘tech and military concept partner’, Israel.

The challenge is that our ‘brittle supply chains’ continue to shatter under the pressure of Covid-19 and ‘ruthless intervention of state power into markets’. We need to make the shift from trade with everyone to trade with priority partners. Shoebridge highlights the key element: trust.

Encouraging Australian businesses to ‘diversify trade in any way possible’ is the wrong approach. We need to ‘prioritise two-way trade and industry integration with this set of jurisdictions that we can trust, and that are security partners, not just economic partners’. Shoebridge notes that ‘France makes our list and, over time, the French are likely to realise Australia continues to make their list’.

Trust underpins the opportunity to take advantage of the preferential trade arrangements we have with partners, but we also need to ‘mirror current Foreign Investment Review Board rules that scrutinise investment from sources with known higher national security risk with rules that actively encourage investments from sources where Australia has common national security interests’. Shoebridge says that ‘the “core group” of the Quad plus AUKUS is a great place to a start’.

Shoebridge suggests that Australia has three paths available to it: we can be a customer, a victim or a contributor–partner. Australia rejected the victim pathway when we partnered with others to create our 5G network. On critical minerals, rare earths and batteries, he says we’re choosing the path of partner–contributor, which is reinforced by the key technologies focus of AUKUS.

However, there continues to be much to do when it comes to supply-chain vulnerability. ‘Playing to our advantages will make strategic and economic sense not just to us but to our partners and help make our cooperation real, not just a set of political policy notions.’

This chapter warns of lapsing into the ‘default mindset’ of ‘unitary policymaking and action, whether at the federal or state and territory level’. Shoebridge notes, ‘[T]he dynamic of increasing federal power we have experienced since 1901 has been reversed by a rediscovery of state and territory constitutional and institutional power (as an example, they don’t just have responsibility for their health systems; they run them). This is far from a problem, though; it’s actually a strength.’

Shoebridge says that net zero and climate change prove the point. ‘South Australia, Victoria and NSW are filling the policy and investment space not taken by the federal level.’ He advocates improving national cohesion on the policy responses to Chinese power and highlights that national cabinet is a key tool in enhancing our contributor–partner relationship with trusted jurisdictions.

But how? We need to focus on our core group of trusted partners, and targeted funding is key. Shoebridge says we need to leverage the ‘$20 billion in newly available funding in the government’s planned defence spend from now to 2034 that flows from the cancellation of the Attack-class submarine program’. That funding, Shoebridge says, should be ‘redirected to the replacement technology agenda set out so crisply in AUKUS—around AI, cyber, undersea tech and quantum tech’.

The good news, concludes Shoebridge, is that Australia has the ‘beginnings of this new path’ towards being a trusted contributor–partner.

Did Australia start the anti-dumping trade contest with China?

The South China Morning Post has been keeping a running tally of the incidents in Australia’s deteriorating trade relationship with China this year, starting with a set of events that was entirely ignored by the Australian media.

On 13 February, Australia’s Anti-Dumping Commission commenced an investigation into Chinese aluminium extrusions followed by a separate investigation started on 17 February into Chinese aluminium flyscreens. On 28 February, the commission decided to extend anti-dumping duties on Chinese stainless steel sinks.

There were a further eight anti-dumping actions against Chinese products between March and July. Some of the punitive tariffs imposed on Chinese products were as high as 78%.

Australia’s trade minister, Simon Birmingham, and the farm lobby cried foul when China imposed anti-dumping duties on barley and announced anti-dumping and countervailing duty investigations into wine exports.

‘Australian farmers are among the most productive in the world, who operate without government subsidy of prices’, Birmingham said following the barley duties, adding that Australia reserved its right to launch an appeal to the World Trade Organization.

While there’s no doubt that the Chinese anti-dumping actions were spurred by the breakdown in relations with Australia, there are many in trade circles who believe Australia had it coming anyway.

Australia has been the world’s third most prolific user of anti-dumping measures over the past six years, having initiated 84 actions, with only India and the United States doing more, according to the World Trade Organization. The vastly larger European Union economy, by contrast, initiated 67 actions over that period while Japan initiated just six.

Australia dismantled its forbidding tariff walls under the Labor government of Bob Hawke and Paul Keating in the 1980s and 1990s, but the anti-dumping bureaucracy that was left behind remained responsive to industry complaints.

It allows anti-dumping duties to be imposed if it can be shown that goods are being imported for less than they are being sold in their home market; countervailing duties can be imposed when the imported goods have been subsidised.

The Productivity Commission argues that anti-dumping actions should have been abolished along with the tariff barriers, as they are simply a form of industry protection that results in higher prices for both industry and consumers.

However, there is always political mileage to be gained from protectionism. In the lead-up to the Coalition’s 2013 election victory, Tony Abbott vowed to reverse the onus of proof in anti-dumping investigations, so it would be up to the importer to prove its products were not being dumped, not up to the Australian government to prove they were. That would have flatly contradicted WTO conventions to which Australia is a signatory.

Ahead of the 2019 federal election, Labor’s Bill Shorten promised to triple anti-dumping duties, although, again, that would have flouted the WTO requirement that duties be proportionate to the difference between export and home prices.

In practice, successive governments have made it easier for firms to lodge anti-dumping complaints, and the result has been a steep increase in the number of active anti-dumping cases from 23 to 95 over the past decade.

China, which is the target of a third of Australia’s anti-dumping measures, has particular reason to feel aggrieved. In 2005, the Coalition government under John Howard agreed (in the teeth of strong opposition from the United States) to recognise China as a market economy. Australia was the third country to do so, after Singapore and New Zealand.

Market economy status, which was a precondition for Howard commencing negotiations for a free-trade agreement with China, carried precise implications for anti-dumping actions under WTO rules.

An anti-dumping action against a market economy could proceed only if it were shown that goods were being sold for less in an export market than their cost in the country of origin.

For a non-market economy, it was assumed it was too hard to estimate that cost, so a proxy based on the cost of the goods in question in other markets could be used. It is nearly always possible to demonstrate that goods are being sold at below cost when a surrogate measure of cost in an entirely different market is used.

Despite Australia formally granting China market economy status and sealing the free-trade agreement, the Anti-Dumping Commission has continued to treat China as a non-market economy, making use of a WTO exemption for products where a ‘particular market situation’ (in WTO parlance) is held to be distorted by a regulatory or other government intervention.

Last year, Australia lost a crucial case at the WTO over its use of this ‘particular market situation’ exemption when imposing anti-dumping duties on Indonesian A4 copy paper. The Anti-Dumping Commission had deemed that the Indonesian manufacturers were benefiting from government timber subsidies resulting in cheaper pulp, so it constructed a benchmark based on the export price of South American pulp destined for Korea.

However, the WTO concluded that the commission was required to investigate the Indonesian producers’ costs before applying a surrogate price and it had failed to do so.

The commission has used surrogate pricing in most of its anti-dumping actions against China, and trade lawyers say the WTO’s ruling on Indonesian copy paper gives China a strong case to overturn the Australian actions.

China used a different WTO exemption when calculating its anti-dumping tariffs on Australian barley, claiming it was unable to obtain sufficient information from Australian barley producers to estimate the normal domestic cost and had therefore used the ‘best information available’, which it decided was the cost of Australian barley landed in Egypt. It came up with a 74% anti-dumping duty.

China added a further 7% countervailing duty to compensate for subsidies to Australian barley growers. Again, it said it was unable to get adequate information from the Australian authorities to calculate the size of 32 different rural subsidies, of which the biggest was the Murray–Darling basin infrastructure program. Instead, it asked the China Chamber of International Commerce to come up with a figure: it suggested $10 billion.

Australia’s wine industry is now bracing for similar treatment. In its claim, China’s wine industry argues that between 2015 and 2019, the import price per litre of Australian wine fell 13.7% while the average price of China’s wine imports rose 1.4%. Australia’s share of the Chinese wine market rose from 3.7% to 13.4%, with the increase coming at the cost of Chinese wine producers.

Birmingham has not yet delivered on his threat to appeal the Chinese barley tariffs. That may be because he doesn’t want to inflame the situation, or it may be out of fear that China would counter with a potentially successful appeal against Australia’s anti-dumping program.

In either case, Australia’s aggressive anti-dumping approach to China has left highly successful Australian export industries hostage to the fortunes of the broader bilateral relationship.

RCEP will redraw the economic and strategic map of the Indo-Pacific

Amid the many political crises of 2020, progress towards the Regional Comprehensive Economic Partnership has attracted practically no attention. Yet this ‘mega-regional’ free trade agreement is of massive significance for the Indo-Pacific. On arrival, RCEP will be the world’s second most important trade agreement, behind only the World Trade Organization itself.

If RCEP is completed during the November summit season—as now seems likely—it will remake the economic and strategic map of the region.

RCEP is a multilateral trade agreement comprising 15 Indo-Pacific countries: Australia, China, Japan, Korea, New Zealand and the 10 ASEAN members. Its objective is to harmonise the existing network of ‘ASEAN+1’ FTAs into a unified agreement, creating a single and cohesive set of trade rules for the Indo-Pacific. It also includes regulatory provisions for many ‘21st century’ trade issues, such as services, investment, e-commerce, telecommunications and intellectual property.

With such an economically and politically diverse group of participants, RCEP negotiations have been a herculean effort. Since the agreement was first mooted in 2011, the parties have completed 31 rounds of negotiations and held 18 ministerial meetings. The ‘text’—that is, the regulatory components—was settled in late 2019, and the market access provisions were finalised this year.

RCEP has also survived the Covid-19 crisis largely unscathed, with negotiations shifting to a virtual modality from April. The members intend to sign the agreement following the 2020 ASEAN summit, provisionally scheduled for early November.

On many counts, RCEP will be the most important regional trade agreement ever signed. By population and economic size it will be the largest regional bloc in existence, accounting for just under a third of world GDP.

Measured in terms of world trade, its 29% share is only a fraction smaller than the EU Customs Union’s 33% share. And RCEP will soon overtake Europe as Indo-Pacific economies rapidly deepen their trade orientation.

Comparison of regional trade blocs, 2019

  Year established Member states Population (millions) Share of world GDP (%) Share of world trade (%)
Comprehensive and Progressive Agreement for the Trans-Pacific Partnership 2018 11 504 12.9 15.3
ASEAN FTA 1992 10 654 3.5 7.4
Commonwealth of Independent States FTA 2011 8 244 2.4 3.1
EC/EU Customs Union 1958/94 28 513 21.9 33.1
Common Market of the South (Mercosur) 1991 5 293 3.1 1.8
North American FTA 1994 3 493 27.6 13.2
Regional Comprehensive Economic Partnership Expected 2020 15 2,290 29.1 28.7

The fact that RCEP is moving towards completion is in itself a historic diplomatic achievement. Since the launch of the project over a decade ago, negotiations have persisted despite a wide array of political headwinds, including a global turn towards protectionism, which has seen governments move to restrain rather than liberalise trade policy settings. It has also faced increasing diplomatic assertiveness from China, which has led to a deterioration in Beijing’s political relations with many Indo-Pacific governments.

Competition with Trans-Pacific Partnership negotiations preoccupied several members (particularly Australia, Japan and Vietnam) until 2018. And India’s decision to withdraw in late 2019 forced a strategic reset of negotiating objectives.

The Covid-19 crisis has further distracted policymakers and intensified protectionist impulses.

That the largest-ever regional trade agreement will be delivered against this hostile backdrop is a testament to the commitment of Indo-Pacific governments to rules-based economic integration.

Equally important, RCEP will also redraw the strategic map of the Indo-Pacific. The existence of a single, regionwide set of trade rules will change the economic outlook of its members. With barriers to intraregional trade and investment lowered, members will accord higher priority to deepening economic ties among themselves. Pursuing extraregional economic ties will fall in relative importance.

In a context of partial US–China economic decoupling, RCEP will change the calculus of many governments towards within-region responses.

It will also lock in multilateralism and ASEAN centrality in the regional economic architecture. While it is often claimed that RCEP is a ‘China-led’ agreement, the reality is that it is an ASEAN-led initiative. It is built on the foundation of the six ASEAN+1 FTAs and secures ASEAN’s position at the heart of regional economic institutions.

It also binds China to a multilateral model for trade liberalisation, which breaks with its preference for bilateral economic diplomacy (seen in the Belt and Road Initiative). The presence of developed countries (Australia, Japan and Korea) and large developing countries (Indonesia and Vietnam) also provides a collective hedge against fears of Chinese economic dominance.

Unfortunately, RCEP will add to India’s exclusion from the Indo-Pacific economic architecture. New Delhi’s withdrawal from negotiations was due to India’s inability to match the market access commitments of other members. This reflects the country’s more protectionist trade policy settings, and claimed fears of a ‘Chinese import surge’ if it joined the agreement as proposed.

However, it augurs poorly for India’s economic integration with Indo-Pacific partners, which was already very low because of its less open policy settings. RCEP will include an accession mechanism that keeps the door open to India joining if economic and political factors change.

RCEP will also provide a fillip to regional post-Covid-19 recovery efforts. The pandemic has interrupted many cross-border value chains, which are critical for the open economies of the Indo-Pacific. By lowering trade barriers—at a time when most of the world is raising them—the agreement will send a strong message that the Indo-Pacific is still open for business. And by harmonising national trade practices around common regional standards, it will make it much easier and faster to re-establish value chains once Covid-19 eases. With RCEP, the Indo-Pacific will return to economic dynamism faster than any other region in the world.

Foreign policy white paper 2017: geoeconomics

In geoeconomics and trade as much as in the security realm, Australia fears the international rules of the game are being battered and eroded.

In musing on the future of the Indo-Pacific, Australia’s new foreign policy white paper worries that connecting this vast region can feed tensions and geoeconomic rivalry:

Even as growth binds the economies of the Indo-Pacific, trade and investment and infrastructure development are being used as instruments to build strategic influence, as well as to bring commercial advantage. In the past, the pursuit of closer economic relations between countries often diluted strategic rivalries. This geo-economic competition could instead accentuate tension.

One of the ironies of Australia’s fretting about ailing multilateralism is that, for a couple of decades, Oz trade policy has been built on bilateralism and individual deals. In the geoeconomic stakes, we’ve done our bit to hack away at multilateral values.

Once, Australia was among the loudest and proudest promoters of the GATT/WTO ideal of a non-discriminatory international system where every trading partner gets equal treatment. Ditto our championing of APEC’s ideal of open regionalism. We still love the principles, we just don’t live ’em. Oh, Hermes, God of Trade, let us be non-discriminatory—but not yet.

Arguing that the old GATT/WTO way wasn’t delivering, Australia has spent two decades proclaiming its pragmatism in constructing a network of free-trade agreements (FTAs). The FTA nomenclature is a nice name for an agreement to discriminate against others, and it’s frighteningly fashionable.

The world had about 50 FTAs in 1990. Today it has about 280. No surprise that a sense of geoeconomic competition is abroad. The hoped-for liberalising dynamic of FTAs may be trumped by issues of power and the struggle for advantage.

The white paper gives the traditional Canberra explanation for FTA fever:

The Government’s trade agenda is pragmatic given the obstacles to progress at the multilateral level. The best current prospects to protect and improve Australia’s competitive position, open new commercial opportunities and help grow our economy through trade, lie in bilateral and regional FTAs. This will remain the case for the foreseeable future. We cannot afford to stand still while our trading partners are cutting their own bilateral and regional deals.

The 2017 white paper nods to the problems created by the noodle bowl of FTAs. The solution offered is to work towards the WTO gold standard by creating ‘a region-wide trade and investment arrangement’. This is a long-term aim because the document judges it’ll be ‘a generational endeavour’. The principles Australia wants to use in this generational effort are straight out of the gold-standard handbook: the arrangements need to be ‘based on strong, transparent rules’, ‘promote fair and open competition’ and be ’transparent and non-discriminatory with predictable regulatory systems’.

The idea is to build towards a non-discriminatory future based on a lot of discriminatory deals. It mightn’t be logical but it’s sure pragmatic.

As the handmaiden of globalisation, trade has become controversial. Arguments about equality and protectionism drive politics. In a world where neo-liberalism often rates as swearing, suddenly the trade side of policy has to argue about its merits more than just the dollars and cents.

Keeping trade free and markets open becomes a key national objective, as the white paper observes:

The continuing openness of the world economy will be vital to our interests. Any serious turn towards protectionism would weaken rules that enable stable and predictable international trade, which in turn supports economic growth, job creation and improvements in living standards. Even narrow protectionist measures could limit or disadvantage our exports and harm Australia’s economy.

Malcolm Turnbull is sharpening his attack lines: ‘Believe me; protectionism is not a ladder to get out of the low-growth trap. It is a big shovel to dig it deeper.’

Australia will argue for openness while seeking whatever preferential deals it can get, as the white paper explains:

Australia has FTAs with ASEAN and nine individual countries (Chile, China, Japan, Republic of Korea, Malaysia, New Zealand, Singapore, Thailand and the United States), which together account for 64% of our total trade. To open new opportunities for Australia, the government will expand our network of agreements to ensure that by 2020 we have FTAs with countries that account for over 80% of our trade.

To get from 64% to 80% will require FTAs with the EU, Hong Kong, India, Indonesia and the United Kingdom.

FTA fever is coming under political scrutiny. The Labor Party says all future FTAs should be vetted by the Productivity Commission. That’s a threat with heft because the Productivity Commission hates FTAs as discriminatory, distorting and trade-diverting.

Geoeconomic competition in the Indo-Pacific should generate some proper push and shove in Oz about the best way to serve free trade.

Macron and Turnbull clarify their common ambitions

France was a significant stopover in Malcolm Turnbull’s tour of Europe. The Australian prime minister visited France two weeks ago to hold his first bilateral meeting with French president Emmanuel Macron and to inspect the design facility for Australia’s future submarines in Cherbourg, Normandy.

The two men flew back together from the G20 meeting in Hamburg to Paris, where Macron hosted a working dinner with his Australian counterpart. Turnbull’s visit had two main objectives: to assuage doubts about the progress of the submarine project and to secure France’s support during negotiations for the EU–Australia free-trade agreement (FTA). On the French side, Macron wanted to assure Turnbull of France’s ongoing commitment to its submarine deal with Australia and of the new French administration’s full understanding of the significance of that contract for Australia’s national security.

Malcom Turnbull’s visit to Cherbourg was a necessary response to frequent criticism of his decision to choose Naval Group, formerly called DCNS, to build Australia’s next generation of submarines. With his inspection of the design office at Cherbourg, Turnbull also aimed to reassure the public about security issues after Naval Group’s leak scandal last year. The prime minister asserted that, more than just a military contract, that decision was also made to cement the close strategic rapprochement between Paris and Canberra that’s been underway since 2012.

In their joint declaration, Macron and Turnbull emphasised the global common interests promoted by France and Australia during the G20 meeting, particularly intelligence cooperation and the fight against terrorism, since the two countries are jointly engaged in the international coalition against Daesh. Both also mentioned their bilateral cooperation on cybersecurity and the control of international financial transactions. Macron also thanked Turnbull for his support of the Paris agreement on climate change after Donald Trump’s decision to withdraw from the accord.

Putting the submarine agreement in an Asia–Pacific context, Macron praised Australia’s regional leadership, describing it as a tool for the protection of France’s interests in the region. Without naming Beijing directly, Macron and Turnbull mentioned that France and Australia are jointly determined to maintain freedom of navigation in the South China Sea.

Alongside security, the visit was also dedicated to trade and investment cooperation. In fact, Macron specifically highlighted the economic dimension of the French–Australian bilateral relationship. That isn’t a surprise, given that he was elected partly on the promise to stimulate France’s economy. Since 2012, France has deeply modified the structures of its economic diplomacy to make it more efficient and to support France’s economic growth. Australia has been one of the main targets of those diplomatic efforts, as demonstrated by its submarine contract with Naval Group. Therefore, Macron reasserted France’s focus on deepening its commercial and investment links with Australia in the sectors in which French companies are already well represented, such as transport.

The fact that the French president focused so heavily on trade and investment indicates France’s support for the elaboration of an EU–Australia FTA in the lead-up to the start of the negotiations. That support is a crucial topic in the deepening of the French–Australian relationship, and Malcolm Turnbull stressed Australia’s commitment to sign FTAs with its major economic partners. One of the aims of the Australian prime minister during the G20 summit was to make sure of the support for an FTA from major EU member states. He discussed the topic with Jean-Claude Junker, Donald Tusk and Emmanuel Macron, who all asserted their commitment to reach an agreement over the next 18 months. Negotiations are likely to be tense in specific economic sectors, such as agriculture where France and Australia share a long history of tensions. Securing France’s support on that matter has been a key objective for Canberra.

The visit was also beneficial to Macron’s own political agenda. The invitation to the Australian prime minister was part of the French president’s intense series of bilateral and multilateral meetings with heads of state or government. Macron has received foreign officials almost every week since his election, while remaining almost silent on national policies. He has primarily worked on reinforcing his presidential status by focusing on international affairs, a domain of responsibility traditionally used by French presidents to strengthen their popularity.

However, while Macron has forged a clear vision for the strengthening of the EU, a goal he shares with Angela Merkel, he now needs to clarify his vision of how to bolster France’s role in overcoming global challenges. At a time of significant debate in France as to whether Paris should focus on interests or values in crafting its strategy, Macron aims to find a pragmatic balance between the two. A pragmatism President Macron claims to have found in Australia’s diplomacy.

Agenda for Change 2016: Australia’s regional economic diplomacy

Edited image courtesy of Flickr user Steve Snodgrass

This piece is drawn from Agenda for Change 2016: strategic choices for the next government.

Australia, as it has done in the past, has the potential to play a role in shaping the Asian economic cooperation agenda in a way that deepens regional economic linkages and lifts the growth potential of Asian economies. As the world’s economic gravity continues to shift to Asia, Australia will benefit greatly from being an integral part of Asia’s economic transformation.

Australia is in the middle of its own economic transformation. The commodities boom of the past decade is over. China’s iron ore and energy-intensive industrialisation saw Australia’s terms of trade—the price of Australia’s exports relative to imports—at an historic high in 2011. The natural resources sector and the Australian dollar both rose and then fell creating opportunities and challenges. As the dollar strengthened and productive resources shifted to the mining sector, manufacturing became less competitive and many industries suffered or shut down.

The challenge for Australia is now to upgrade industry, expand quality services exports, lift agricultural productivity and establish higher value-add manufacturing. For Australia to realise its higher value-add comparative advantage and lift its living standards will require deeper engagement with Asia.

The good news is that the transformation underway in Asia is complementary to achieving those objectives.

China is transitioning from an investment and export-led to a consumption-driven economy. The downward growth trajectory is natural at this stage of China’s economic development. But even at 6% Chinese growth will be among the highest in the region and have a larger impact than most because of the scale of China’s economy.

India, after a decade of underwhelming performance, is now experiencing economic growth close to 8%, making it one of the world’s fastest growing economies. India is looking to cash in on its demographic dividend, turning the nation into a manufacturing powerhouse.

The concluded China–Australia Free Trade Agreement (ChAFTA) and the Comprehensive Economic Cooperation Agreement currently under negotiation with India can ensure that Australia is at the forefront of both countries’ economic transitions.

But all of Australia’s bilateral initiatives need to leverage up broader reform and be deployed strategically to progress regional cooperation.

Negotiations for a bilateral deal with Indonesia is now back on the agenda. Deploying Australia’s diplomatic energies on India and Indonesia is a high priority, as is working with China to liberalise its economy through ChAFTA.

Those bilateral deals could, at best, lead to agreements that give momentum to Australia’s, India’s, Indonesia’s and even China’s reform programs and complement regional liberalisation efforts. At worst, they will lead to narrow agreements that don’t advance reform or, in China’s case, miss out on the opportunity that has been offered. Narrow agreements concluded merely for diplomatic, rather than economic, reasons may benefit some producers and achieve some liberalisation but they’re a missed opportunity with potentially adverse consequences. Australia’s FTA with the United States, for example, did little to slow the fall in bilateral trade and created substantial trade diversion because it was done for narrow political reasons.

The stakes for reform are high. Asia’s growing middle class—projected to be over 3.2 billion by 2030—is mobile and consuming higher quality services and goods with its growing wealth. If growth stalls it would be a huge lost opportunity. Much slower growth could also fuel social or political instability. So prioritising those economic policy initiatives is a major element of Australia’s security strategy.

The priority for Australian economic diplomacy should be achieving the best outcome possible in the Regional Comprehensive Economic Partnership (RCEP). A high-quality RCEP agreement would have a high payoff for Australia and the region. The GDP of the RCEP grouping—on conservative projections—could be close to double that of the Trans-Pacific Partnership (TPP) in 15 years.

Many RCEP members—including Australia—are in the middle of economic transitions that will be made easier to effect by a more open and dynamic external environment. Large neighbours committing to serious reforms and opening up of economies will not only benefit them but make it easier for others to implement domestic reforms. Some RCEP members, such as India, are coming from behind on economic and trade reform with economies that are relatively more protected from international competition. That means the gains from opening up will be large.

Given the openness to less developed countries in RCEP and the special and differential treatment afforded to them, Australia has an interest in helping those countries make ambitious commitments and reach those ambitions over time.

China, Indonesia and India won’t be part of the TPP in the foreseeable future. That elevates the importance of RCEP for them and the rest of the region. There’s real risk of trade and investment being diverted away from non-members towards the TPP grouping—by design, to create incentive to join.

Australia, Japan, Vietnam, Malaysia, Singapore, Brunei and New Zealand are members of both the TPP and RCEP. Australia can play a leadership role in steering the two agreements towards a broader regional agreement such as a Free Trade Area of the Asia–Pacific. This will make a significant contribution to the openness and strength of not only the regional economy but also the global trading system. Asia’s size and growth potential means an open and integrated Asia will be a driving force for global trade.

Deepening regional economic integration and keeping Asia open for business will lift growth potential in all major Asian economies, furthering economic security and aiding the successful management of political relations.