The future of regional trade arrangements

THE RECENT US ELECTION has cast doubt over the future of the Trans-Pacific Partnership (TPP) and whether it will be ratified by the US Congress (for a discussion about the TPP in the context of legal services, see China Business Law Journal volume 7 issue 5: Legal Services and FTAs.)

If the TPP is jettisoned by the US, certain countries in the Asia-Pacific region will pin greater hopes on another proposed mega-regional trade agreement, the Regional Comprehensive Economic Partnership (RCEP). The RCEP is currently being negotiated between the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing free trade agreements: Australia, China, India, Japan, South Korea and New Zealand. Both the TPP and the RCEP are considered to have profound geopolitical implications in addition to having significant potential to promote trade liberalisation in Asia. This article considers some key differences between the two proposed agreements, various ways in which the countries in the Asia-Pacific region can maintain the momentum towards freer and fairer trade and what obstacles remain in terms of achieving the objectives of these agreements. The issues are considered with specific reference to financial services and legal services.

TPP AND RCEP: KEY DIFFERENCES

In the area of financial services, the role of regional trade agreements such as the TPP and the RCEP needs to be viewed in the context of calls for greater regional financial integration. Financial integration complements trade integration, a point that has been recognised by many countries within the Asia-Pacific region. The importance of financial integration is reflected in ASEAN’s Financial Integration Framework, the objectives of which include removing restrictions on the provision of financial services by ASEAN financial institutions and increasing the integration of the regional capital markets.

Encouragingly, we have already begun to see cautious moves towards financial integration between certain ASEAN members in the area of banking, insurance and capital markets. One noteworthy development in this regard is the ASEAN Collective Investment Scheme Framework, which was launched in 2014 by Singapore, Thailand and Malaysia and provides a framework for the mutual recognition of investment funds. This is particularly interesting given the parallel establishment of a similar arrangement between mainland China and Hong Kong, which commenced in 2015, and also the plans to establish the Asia Region Funds Passport between Australia, Japan, South Korea, New Zealand and Thailand. Although these three initiatives are complementary in nature and have the potential – at least in theory – to be rolled into one framework at some point in the future, they nonetheless reveal the different geopolitical alignments within the Asia-Pacific region.

It must be noted that achieving financial integration is not an easy task in view of the significant differences between markets in terms of their legal and regulatory systems. These differences make it difficult to achieve convergence in rule-making and best practice and are particularly stark in areas such as disclosure requirements, licensing requirements and consumer protection laws.

The challenges are compounded by the differences between regional financial markets in terms of their respective stages of development and also their varying levels of sophistication. They are also compounded by domestic concerns, including the need to maintain financial stability and the ever-present shadow of local protectionism.

The TPP has a greater focus on financial services and legal services than the RCEP. In fact, the TPP serves more as a WTO-plus, comprehensive trade agreement with rigorous and standardised requirements, whereas the RCEP serves more as an agreement to multilateralise and consolidate the existing bilateral trade agreements within the region. The RCEP is also underpinned by the need for flexibility and differential treatment in order to accommodate the different levels of development between the member countries, which is likely to limit the degree of liberalisation that the RCEP can achieve. Indeed, the leaked draft chapter on trade in services in the RCEP contains a provision to the effect that the parties recognise the importance of increasing the participation of the least-developed ASEAN member states in regional services trade and that the commitments by such states may be made in accordance with their individual stage of development.

In the area of financial services, there are two aspects that are particularly noteworthy in the TPP. First, the TPP recognises and facilitates the supply of certain financial services on a cross-border basis instead of requiring suppliers of those services to establish a presence in other member states. Secondly, the TPP recognises and facilitates the mobility of financial institution professionals between member states. Similar liberalisation applies to legal services, where the TPP recognises and facilitates the provision of legal services on a cross-border basis and also encourages greater integration between foreign and domestic lawyers.

These two trends – an increase in the cross-border supply of services and an increase in the mobility of professionals – are particularly important within the Asia-Pacific region as its financial and legal services markets become more sophisticated and integrated. In the area of financial services, these trends are accelerated by developments in Fintech, which is transcending borders and innovating and disrupting financial services in a way that is fast outstripping the ability of regulators in the region to keep up. In the area of legal services, these trends are accelerated by the strengthening of regional networks between legal service firms and the increase in offshore investment by companies from capital-exporting countries such as China.

This article is an abridged text of a paper that the author delivered at the 9th ASEAN-Australia-New Zealand Dialogue, which was held in Kuala Lumpur from 30 October to 1 November.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.