The Effect on Asia of a US-EU FTA

Will the United and the European Union manage to sign a Free Trade Agreement and if so what would be the consequences for Asia? Would such a deal provide a boost to world trade in general or represent a move towards fragmentation of into blocs?

What is for sure is that interest in the idea, which has been bandied around informally for years, is partly the result of the collapse of the Doha Round of negotiations under the WTO. A similar dynamic supports the progress towards free trade between the Association of Southeast Asian countries and China, South Korea and Japan.

For Europe and the US there is the added incentive - and for Europe in particular - of finding a new stimulus for stagnating economies with aging populations. Thus so far at least there appears to be more enthusiasm for the idea in Europe than in the US. Germany's Angela Merkel and Britain's David Cameron have publicly supported the idea and a high-level working group is currently exploring how a deal might be done and expedited in a timely manner rather than involving years of tortuous negotiations over tricky items such as farm supports and aircraft industry subsidies.

From the US perspective too it is not clear how negotiating such a deal would impact its Asia/Pacific trade strategy, notably the Trans Pacific Partnership (TPP) concept being promoted as a way of strengthening ties with at least some Asian nations as a way of balancing the growth of China's trade deals and influence. It is possible that progress towards a EU-US deal would spur Asian countries to engage more actively with the TPP. On the other hand, it could have the opposite effect persuading the Asian countries to focus on their regional destinies. Given the global reach of east Asian manufacturing expertise, companies and brands, they can keep growing in other regions such as Africa anyway.

Any rapid progress towards a pact would require strong support from US President Barack Obama, who hitherto in his presidency has seldom seemed to relish foreign initiatives, preferring to react rather than try to be pro-active.

The size of trade and investment links across the Atlantic dwarfs the US-China relationship, at least for now. Business interests would mostly be favorable. But political opposition on both sides of the Atlantic could be formidable. In Europe liberal economic principles are under increased scrutiny given banking, debt and other crises. Globalization has become a dirty word in many quarters, especially in France and southern Europe. The EU anyway may be too preoccupied with its internal problems and the Eurozone in particular to focus on such a huge deal.

The US has fewer such qualms but a multitude of regional and sectoral interests represented in Congress which - as with the US-Korea FTA - stall passage of an important agreement reached by the administration. More broadly there are also those who would prefer that if political capital is to be invested in trade deals which have scant popular appeal, it would be best to focus on Asia, or revive efforts to support a limited version of Doha and stave off the threat of regional blocs being created.

Others still look to reducing US dependence on foreign energy and hence see little need for expanding trade generally. They look to diminished reliance on imported manufactures and would not be unhappy for the US to retreat from some aspects of its global role, elements of which are seen as having increased its trade deficit without commensurate economic or political gains.

An EU-US bloc might not in itself damage global trade. There is plenty of evidence that the liberalization resulting from the North American Free Trade Area spurred trade generally not just that between the US, Mexico and Canada. Likewise, in its own limited way, the Asean FTA has helped bring down barriers more broadly.

However the possibility of a EU-US pact does have implications for east Asian countries and how far they can move towards free trade among each other given both their political antagonisms and the differences in their relationships with the US. These have been brought into sharper focus over the past year by China's aggressive postures towards Japan and its neighbors on the South China Sea.

Western supporters of a US-EU pact claim that the very existence of negotiations would act as a barrier to protectionist trends generally and encourage countries outside the main reading regions - EU, US and East Asia - not to retreat into increased protection. Others however argue that it would be better for all concerned to focus on a global deal because only that can bring in the countries with the best hope for future trade growth due both to their expanding populations and their currently low level of trade participation. These include the whole Indian subcontinent and much of Africa and South America.

In any event, Asia needs to keep a close watch on what is happening to these EU-US proposals. They will reverberate across the region despite the geographical distance from Asia.