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

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.