The New Landscape of Trade Policy and Korea’s Choices

Abstract

The terrain of global trade rules is shifting. Top-down global negotiations - the source of the remarkable trade liberalization of the past half century - have succeeded, after two decades of effort, in generating a hopeful outcome at the Bali ministerial meetings of the World Trade Organization (WTO). Nevertheless, these achievements came at considerable cost and are deeply scaled back from the Doha Round's early ambitions. Meanwhile, hundreds of small bilateral agreements have created a noodle-bowl of overlapping rules.Against this background, two huge negotiations have emerged in the Asia-Pacific: an track centered on the Regional Comprehensive Economic Partnership (RCEP), and a track centered on the Trans-Pacific Partnership (TPP), which also includes the United States. Partly due to these initiatives, negotiations have now also started between the European Union and the United States, and the European Union and Japan. Countries producing nearly 80 percent of world GDP are engaged in one or more of these negotiations.1If these and other mega-regional negotiations succeed, they will become the new engine for drafting global trade rules. The Trans-Pacific and Trans-Atlantic negotiations, were they to adopt similar rules, would be especially influential. But if the mega-regionals fail, they would spell an end, at least for now, to progress on updating rules. This could mean rising economic tensions and further deceleration in trade growth.As one of the world's most open and agile economies, Korea has a large stake in the outcome. Korea has hedged its bets by launching in 2003, and by now mostly executing, a roadmap for free trade with all of its major trade partners (Bark, 2012). Korea has concluded high quality trade agreements with the European Union, the United States and many Asian neighbors, and its current negotiations with China are expected to be successful. Nevertheless, Korea would benefit greatly from an open, liberal region-wide trade regime.How much effort should Korea now invest in the RCEP and TPP? Its direct gains, although significant, would not be as large as for some other countries, since the new agreements would partly overlap Korea's existing FTAs. (One important new element in both agreements, however, would be free trade with Japan.) At the same time, Korea would find RCEP and TPP easy to sign, since it has already accepted high-quality rules in its US and European agreements.This unusual position gives Korea a catalytic role in shaping outcomes. As a first-mover and valued partner in regional agreements, it could help steer Asia-Pacific negotiations toward coherent regional and perhaps global results. Korean leverage will be greatest at the outset of each negotiation - as in the current stage of RCEP - when key features of the agreement are still fluid. Of course, given the complexity and effort involved in each negotiation, another alternative is to sit back, hoping that Korea's hedging strategy will safeguard its most important interests regardless of how the mega-regional agreements turn out.This paper is based on a rigorous analysis of trade policy options, but it is ultimately designed to inform urgent policy choices. To accomplish that objective, the paper considers questions that cannot be answered solely with quantitative results and depend on judgments. It argues that an active Korean policy role could help to realize direct gains from the new mega-regional agreements, as well as help to ensure a cooperative regional outcome. This would require forceful Korean participation in the RCEP and TPP negotiations (the latter is likely but not certain at this writing2) in part to advocate their convergence. The paper examines these options using the results of a detailed, quantitative analysis of regional integration by Michael Plummer, Fan Zhai and this author (Petri, Plummer, & Zhai, 2012).I. Why Asia Pacific Integration MattersKorea's trade neighborhood is huge, innovative and dynamic. …