Despite setbacks, EU-Asean free trade deal can still be realised: analysts

SIXTEEN years after talks first began on a free trade agreement (FTA) between the European Union (EU) and the Association of Southeast Asian Nations (Asean), such a mega pact continues to remain a pipe dream.

In 2017, the EU and Asean reinitiated formal talks, setting up a joint working group, but progress has been limited. Over the years, the EU has gone on to ink bilateral FTAs with Singapore and Vietnam, with discussions at various stages with several other Asean member states.

Of late, the calls to revive the long-stalled negotiations for a region-to-region agreement have been gaining some traction.

In late-September, the Singaporean-German Chamber of Industry and Commerce launched a position paper underlining the need to resume the negotiations on an EU-Asean FTA, adding that achieving such a deal would be a game changer for trade relations.

The Business Times spoke to academics and economists to get their take on whether a breakthrough could still be realised at some point.

Current EU-Asean trade agreements

The EU and Asean commenced talks for a regional FTA in 2007, but they were suspended two years later due to disagreements among Asean member states over the agreement’s scope and depth, divergent interests and development levels, and human rights concerns related to Myanmar.

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Since then, the EU has pursued individual bilateral FTAs with Asean nations with the longer term aim of eventually establishing a region-to-region FTA.

Singapore and Vietnam are the only Asean countries that currently have bilateral FTAs with the EU. The EU-Singapore FTA entered into force in November 2019, while the one with Vietnam began in August 2020.

Negotiations are ongoing with several other Asean member states for such deals. Thailand and the EU relaunched negotiations in March this year, after they were suspended alongside diplomatic relations in the wake of the former’s military coup in 2014.

The European Commission has also announced in July that the Philippines and EU will restart negotiations on an FTA. This comes after talks were halted since 2017 due to diplomatic tensions against the backdrop of the Philippines’ war on drugs. 

Other member states, however, are still facing a stalemate in discussions. Official talks with Indonesia were launched in 2016, but stalled in the face of disputes over the treatment of state-owned enterprises and local content requirements, among other issues. And with Malaysia, trade negotiations have been on pause for more than a decade – official talks began in Oct 2010, but were suspended in 2012.

Benefits of a regional FTA

While “negotiating with individual countries is a faster way of dealing with contentious issues”, Song Seng Wun, Singapore economic adviser at CGS-CIMB Securities, said a regional FTA has many benefits over bilateral ones.

An EU-Asean FTA would establish a vast free trade area encompassing over 1.5 billion people, thereby boosting trade, investment opportunities, and economic growth for both regions, said Dr Lili Yan Ing, secretary-general of the International Economic Association.

Asean – the world’s third largest trading bloc – was the EU’s third largest trading partner in 2022.

Analysts said that an EU-Asean FTA would accelerate the integration among Asean members, foster a rules-based and inclusive regional order, and strengthen the strategic partnership between the two regions.

Professor Pasha Hsieh, the Jean Monnet chair at the Singapore Management University’s Yong Pung How School of Law, said the largest benefit of a regional FTA would be “the harmonisation of rules of origins, which are different in bilateral FTAs”.

He was referring to the rules of attributing a country of origin to a product in order to determine its “economic nationality”.

Currently, the rules are more restrictive under the EU-Vietnam FTA than that of the EU-Singapore FTA, which could cause some confusion to companies trading in the region.

However, as Dr Ing pointed out, “trade liberalisation, including a regional FTA, may also result in disproportionate benefits of liberalisation among industries and workers, in favour of capital owners and skilled workers, which could potentially result in divergent social and environmental impacts”.

“Suitable adjustment policies and equitable compensation mechanisms are necessary in mitigating any adverse effects,” she added.

Increased urgency amid China-US tensions

Academics said that the ongoing trade, technology, and geopolitical tensions between the US and China have made Asean a more attractive trade partner to the EU.

“The tensions have created a sense of urgency for the EU and Asean to strengthen their economic ties, diversify trade partnerships, and develop a rules-based regional order to counterbalance the influence of the two superpowers,” said Dr Ing.

However, the tensions also introduced additional complexities as the EU and Asean must navigate the competing interests between the US and China, while managing their internal differences, she said.

“As long as the EU can support a neutral position of Asean towards the US and China, the EU-Asean FTA can bring significant impact on trade and investment for both regions,” said Dr Ing.

Challenges ahead

Many obstacles line the road to an Asean-EU FTA, which observers said could take years before it is realised.

Dr Yeo Lay Hwee, director of the European Union Centre in Singapore, believes that the biggest hurdle is the different levels of capacities and ambitions of Asean member states.

“The EU is also seeing rising protectionism, and similarly in some Asean states, we see the rise of resource nationalism,” she said.

Song, meanwhile, said it is important to recognise that “unlike Singapore, some countries face domestic political implications as they have to fulfil certain restrictive conditions upon entering FTAs”.

For example, the North American FTA between Mexico, Canada, and the US required Mexico to recognise a minimum wage for its auto workers and committed Mexico to enacting legislation to protect workers’ rights to collective bargaining.

The EU and Asean currently have different priorities when it comes to environmental, social, and governance issues, which are increasingly becoming a focus of trade agreement negotiations.

What’s next?

Divergent interests and priorities as well as the different levels of ambitions as to what should be in the FTA will continue to be the main stumbling blocks, said Dr Yeo.

“While there is a compelling case for the EU-Asean FTA to become a reality, unfortunately it is not likely to be smooth sailing,” she added. 

Challenges such as the palm oil dispute between the EU and Indonesia and the ongoing human rights concerns in Myanmar, which have disrupted previous discussions, will remain relevant.

Likewise, Prof Hsieh believes that a regional FTA “remains a goal” and the EU still “primarily focuses on bilateral FTAs”. 

It is likely that bilateral agreements with Thailand and Indonesia will be concluded first before any regional FTA negotiations can recommence.

Song pointed out that simply having discussions back on the table would be a positive sign. “The discussions will help to set out the parameters and bring us closer to a regional FTA,” he said.