1. The Trans-Pacific Partnership: Implications for Indonesia and Regional Economic Integration
Jeffrey J. Schott
Senior Fellow
Peterson Institute for International Economics
Presented at the Trade Outlook for 2013 Conference
Jakarta, Indonesia
30 January, 2013

2. The TPP: A Big Deal in the Making
The GDP of TPP-11 countries is $21 trillion or 30 percent of global output.
TPP-11 countries export $4.4 trillion of goods and services, or 20 percent of global exports.
Developing comprehensive new rulebook for trade and investment in goods and services.
Substantial upgrading of existing trade pacts among participating countries.
Important stepping stone to broader Asia-Pacific and multilateral trade accords.

3. TPP-11: Like-minded but Not Alike
2011 GDP
($US billions)
Population
(millions)
Human
Development
Indexa
Economic
freedom in
the world indexb
Australia
1,488
22.7
0.929
7.97
Brunei 16
0.4
0.838
n.a.
Canada
1,737
34.4
0.908
Chile
248
17.4
0.805
7.84
Malaysia
279
28.7
0.761
6.96
Mexico
1,155
113.7
0.770
6.66
New Zealand
162
4.4
0.907
8.27
Peru
174
30.0
0.725
7.61
Singapore
260
5.3
0.866
8.69
United States
15,094
311.9
0.910
7.69
Vietnam
123
89.3
0.593
6.54
Total
20,734
658.2
Indonesia
846
241
0.617
6.88
a The Human Development Index (HDI) is published by the United Nations Development Program. The index comprises six indicators: life expectancy at birth, mean years of schooling, expected years of schooling, per capita gross national income (GNI), GNI rank, and non-income HDI value. The index is on a scale of 0 to 1, where 0 is the lowest and 1 indicates the highest level of human development.
b The index measures the degree to which the policies and institutions of countries are supportive of economic freedom. The index assesses five broad areas: size of government, legal structure and security of property rights, access to sound money, free to trade internationally, and regulation of credit, labor and business. Countries are ranked on a scale of 0 to 10, with 10 representing more economic freedom.

4. Current Status of TPP Negotiations
15 negotiating rounds since launch in March 2010
3 rounds set for 2013: March in Singapore; May in Peru; September (location TBD).
APEC Trade Minister’s meeting in Surabaya in April – stocktaking / opportunity to revise offers.
APEC leaders meeting in October: start of the end-game negotiations?
TPP leader seeks to finish talks in 2013, but numerous “sticking points” remain.
Uncertain whether South Korea and/or Japan will enter talks in 2013.

5. TPP Sticking Points: Market Access Issues
Liberalization of trade barriers protecting dairy, sugar, and rice.
Tariffs and origin rules affecting textiles, clothing, and footwear.
Services trade reforms, especially financial services, insurance, and labor services.

6. TPP Sticking Points: Rulemaking Issues
Intellectual Property Rights including pharmaceutical patents, copyrights covering the new digital economy.
Investor-State Dispute procedures.
Disciplines on State-Owned Enterprises to ensure “competitive neutrality.”
Rules and enforcement of environmental policies including conservation and climate change.
Rules and enforcement of labor standards and practices, including linkage to ILO Commitments.
Disciplines on the use of capital controls.

7. TPP: Implications for Indonesia
Indonesians live in a very dynamic neighborhood; need to use trade pacts to enhance competitiveness.
TPP-11 accounts for 27% of Indonesian exports.
Whether Indonesia participates or not, TPP will have important implications for its trade and investment:
TPP preferences could divert sales to Indonesia’s competitors: about $4.5 billion of its exports to the US compete with similar products from Vietnam.
TPP-mandated economic reforms would promote a more conducive climate for growth and encourage firms to increase investments in TPP countries.

8. Indonesia’s merchandise trade, 2011
Partner
Imports (in $ million)
Share of total (%)
Exports (in $ million)
Share of total (%)
China
26,212 15
22,941 11
ASEAN
51,109 29
42,099 21
of which:
Brunei
1,018 1 82
Malaysia
10,405 6
10,996 5
Singapore
25,965
18,444 9
Vietnam
2,383
2,354 EU
12,503 7
20,536 10
India
4,322 2
13,336
TPP - 11
56,935 32
54,703 27 US
10,834
16,498 8
Canada
2,016
960
Mexico
413
658
TPP - 13
91,800 52
106,426 53
Japan
19,437
33,715 17
Korea
13,000
16,389
World
176,355 -
201,472

9. RCEP and TPP: Complementary or Competing?
Indonesia pursuing intra-Asian integration in the Regional Comprehensive Economic Partnership (RCEP) = ASEAN + 6 (Australia, China, India, Japan, Korea, New Zealand).
RCEP aims to broaden and deepen ASEAN + 1 pacts with the other 6 by end of 2015; similar agenda / timetable as work on ASEAN Economic Community (AEC).
Both cover extensive areas of economic activity (goods, services, IPR, regulatory policies), but RCEP aims at softer commitments than the hard law obligations under construction in TPP.
RCEP will provide special preferences for poorer countries, plus exemptions for LDCs.
RCEP likely to yield two key outcomes by end of 2015:
Accelerating progress on the ASEAN Economic Community
Providing China a platform to continue incremental reforms that in the future would allow it to participate in more comprehensive regional and global pacts.

10. RCEP and TPP: Does Indonesia need to choose?
Indonesia can pursue RCEP, then TPP; or both at the same time.
RCEP is not competing with TPP:
TPP close to completion by end of 2013; RCEP just starting.
Overlapping membership: several countries already engaged in both initiatives. 6 of 16 RCEP members in TPP; plus Philippines and Thailand have expressed interest.
Easier to implement RCEP standards if already committed to more comprehensive TPP obligations.
Why do both?
Bigger payoff in terms of investment and economic growth.
Cost of non-participation: potential large-scale trade and investment diversion.

11. Indonesia’s prospective income and export gains
Agreement
2015
2020
2025
Billions
Share (%)
Income
-TPP 13
-0.2
-2.4
-3.5
-TPP 16
2.2
0.2
38.4
3.4
62.2
4.0
-East Asia FTA
-0.4
1.6
-0.1
12.8
0.8
Exports
-0.3
-4.8
-1.3
-5.6
-1.1
4.4
78.6
21.1
98.3
19.6
-0.8
8.6
2.3
32.6
6.5
If Indonesia stays out of TPP-13 it suffers small income and export losses over the next decade.
Negative impact falls largely on manufacturing sectors.
Those losses would be offset by ASEAN + 3 accord.
Largest gains result if Indonesia joins TPP-16
GDP increases by 4% above baseline by 2025.
Exports grow almost 20%.
Preferences not extended to China.

12. Whither China?
Priority on deepening pacts with Asian neighbors for political and economic reasons.
Not ready for TPP-style commitments to transparency and disciplines on government intervention in the marketplace.
TPP members want to use TPP to help them better compete with China – rationale for overlapping membership with RCEP and TPP.
China-Japan-Korea investment pact shows willingness of China to commit to incremental but substantive economic reforms in regional pacts.
China-Korea free trade talks could set precedents for a broader Asia-Pacific pact.

13. TPP Going Forward
New members could join after TPP is signed using accession clause but less likely that big countries could do so.
TPP unlikely to be template for FTAAP.
FTAAP more likely to be a hybrid pact among TPP and RCEP countries with reciprocal obligations between “hard law” of the TPP and consensus based Asian commitments.
TPP disciplines would continue to apply among TPP members, just as WTO does not dilute FTA commitments.

14. Conclusions
The TPP is the most substantial trade agreement under negotiation in the Asia-Pacific region in terms of depth of prospective trade liberalization and scope of rulemaking obligations.
TPP’s “high standards” would boost productivity growth across the economy by spurring new trade and investment / improving the quality of Indonesia’s economic institutions and governance.
However, TPP participation would impose binding obligations that would constrain the use of politically popular policies.
Whether it participates or not in the TPP, the pact will affect Indonesia’s trade, investment and GDP.
Indonesia does not need to make a choice between deepening integration with RCEP and joining the TPP; it can and should do both in the coming years.