Ambitious new trade agreements are set to create greater opportunities in the region

If asked to name the founding members of the TransPacific Partnership (TPP), which is shaping up to be the most important free trade agreement (FTA) of the early 21st century, not many people would guess that one of them is Brunei Darussalam. The country has an enthusiasm for FTAs that has few rivals. After all, the Sultanate’s oil and gas exports face few import restrictions globally, due to the crucial importance that energy costs play in international competitiveness. Most countries whose exports are dominated by oil and gas do not bother pursuing FTAs, and some, such as Iran and Sudan, are among the most protectionist in the world. Brunei Darussalam, on the contrary, sees FTAs as an opportunity to raise its profile and engage with the world’s leading economies.

From ASEAN To TPP

The country’s history with FTAs begins with the ASEAN FTA (AFTA), which the Sultanate signed in 1992, along with Singapore, Indonesia, Malaysia, Thailand and the Philippines. Brunei Darussalam joined ASEAN, which began as an anti-communist political bloc, upon gaining independence in 1984. Under the AFTA, ASEAN members agreed to gradually reduced import tariffs to zero on nearly all products. Starting in 1995, ASEAN members began a series of agreements to progressively liberalise trade in services. In 2002-04 the grouping launched a major effort to extend its free trade area by negotiating FTAs between the ASEAN bloc and individual countries or pairs of countries. These initially included Australia and New Zealand (in one agreement), and Japan, China, India and South Korea (each individually).

The Early Stages

Meanwhile, the earliest stage of the TPP began to take shape in discussions on the side lines of the 2002 Asia-Pacific Economic Cooperation (APEC) summit, a 21-member forum that includes all the major East Asian and South-east Asian economies, plus all of North America, Peru, Chile, Russia, Australia and New Zealand. Three of APEC’s most pro-free-trade members, Singapore, Chile and New Zealand, were frustrated by APEC’s lack of progress towards an FTA. So they decided to negotiate a deal among themselves, aiming to fashion a model FTA that larger APEC members would eventually want to join. Brunei Darussalam later joined the negotiations, and was one of the four signatories of the TPP in 2005. The direct impact of the agreement was limited, given the small size of the countries involved and the fact that their trade regimes were already quite open. Although the US and other large Asia-Pacific countries were initially more interested in World Trade Organisation (WTO) negotiations, that soon changed when the WTO’s Doha round of talks collapsed in 2008. The US then announced it was entering talks to join the TPP. Meanwhile, Brunei Darussalam pursued its own bilateral FTA with Japan, the Brunei-Japan Economic Partnership Agreement (BJEPA), which was signed in 2007.

Current State Of Free Trade

The Sultanate has a relatively open trade policy, even with countries with which it has no FTA. Brunei Darussalam’s average applied tariff on imports from most-favoured nations was just 2.5% in 2011, according to the WTO. That compares to 9.6% in China, 4.6% in Japan, 3.4% in the US, 2.7% in Australia and 0.2% in Singapore. Import tariffs are even lower for FTA partners. ASEAN FTAs with India, China and South Korea are relatively weak, leaving tariffs in place on many categories of goods. However, AFTA and ASEAN FTAs with Japan, Australia and New Zealand, combined with BJEPA for Japan and the TPP for New Zealand, Singapore and Chile, have eliminated or will soon eliminate tariffs on nearly all goods in both directions.

In the case of the TPP’s original signatories, this will happen on January 1, 2015. For the four newest members of ASEAN – Vietnam, Cambodia, Laos and Myanmar – it will take place on December 31, 2015, when the bloc is scheduled to formally mark the creation of the ASEAN Economic Community.

Removing Restrictions

The ASEAN bloc is committing to “remove substantially all restrictions on trade in services” in four priority sectors. For example, members have agreed to recognise each others’ national professional licences. BJEPA and some of ASEAN’s FTAs with other countries also include commitments to partly liberalise trade in some services. However, generally, services are far less affected by FTAs, and provision of services in Brunei Darussalam by foreigners is subject to limits, especially in licensed professions or in public tenders, where joint ventures with local companies are typically required. Bruneian business people told OBG that liberalisation of services carries both potential gains and significant risks, given the Sultanate’s relatively small and traditionally protected service sectors.

One area where Brunei Darussalam stands out within the region is its respect for and enforcement of intellectual property rights. However, officials at other embassies and business people told OBG that the country has considerable room for improvement in terms of foreign investment rules and trade in services by rationalising regulations, reducing bureaucracy, and speeding up approval times and permit and tender decisions.

Finishing TPP

Ambitions for the TPP were very high when the US joined in 2008 and others began to follow suit. Australia, Peru and Vietnam joined later in 2008, Malaysia in 2010, Mexico and Canada in 2012, and Japan in 2013. South Korea and Taiwan are also considering joining. Often described as a 21st-century trade agreement, the TPP has been seen as an opportunity to dramatically expand the coverage of FTAs by promoting common regulatory practices and environmental standards. However, expectations might have to be readjusted as talks have become bogged down by the complicated array of entrenched positions that have to be overcome to reach a 12-country FTA – especially one that involves heavyweights such as the US and Japan. As the smallest country in the talks, Brunei Darussalam can only influence them by aligning with bigger countries on issues that matter to it most.

The most sensitive aspects of the talks for the country are thought to be the sections on investment, labour regulation and services, especially financial services, which the original TPP agreement deferred. Over the summer of 2014 the US and Japan were at loggerheads, not yet willing to compromise over various issues, while New Zealand even suggested that the talks proceed without Japan. However, the US administration was clearly keen to keep Japan in and was expected to start pushing seriously towards completion after US midterm elections in November 2014. Few people now expect the TPP will lead to big changes in sensitive areas such as protected service sectors or how governments regulate labour or environmental standards. Instead, the TPP is expected to include at most longer-term commitments in those areas and in some cases only vague commitments to negotiate more specific rules later.

Launching RCEP

Meanwhile, the 10 countries of ASEAN and the six states with which it has FTAs – China, India, South Korea, Japan, Australia and New Zealand – have launched talks on a broader, more unified FTA covering the 16-country area. The planned Regional Comprehensive Economic Partnership (RCEP) was announced at the 2011 ASEAN summit with a framework agreement that calls for “broader and deeper engagement with significant improvements over existing ASEAN FTAs”. A fifth round of talks was held in June 2014 in Singapore and participants are aiming for a deal in 2015. The RCEP has similar long-term ambitions to the TPP, but at least initially will be less far-reaching due to the inclusion of India and China in RCEP, which are more protectionist than any country in the TPP.