Free Trade
Why EU and ASEAN won’t seem to get a Free Trade Agreement anytime soon

Vietnam port
© Hien Phung Thu | shutterstock.com

In times of turmoil in international relations like Brexit and US-China trade war, the European Union has to find new regional trade partners - and ASEAN is a potential candidate for a fruitful Free Trade Agreement. But even though there have been several rounds of discussions, an agreement is nowhere in sight. What are the reasons? 

In today’s globalized era, economic stability has become one of requirements to be recognized as a world leader. With the current trade war between USA and China resulting in trade blockades, many regions are exploring new partnerships to open alternative markets. The Association of Southeast Asian Nations (ASEAN) is one of the most popular destinations. With more than 647 million people in population, it’s no surprise that many big players like USA, China, and the European Union (EU) are interested in the region.

Already, ASEAN is EU’s third largest trading partner outside Europe with more than 265 billion Euro of trade in goods in 2018. Bilateral trade in services amounted to 85.5 billion Euro in 2017. EU also is the largest investor in ASEAN countries. Based on 2017 information, The FDI stocks into ASEAN accounted for 374 billion Euro. On the ASEAN side, EU is the second largest trading partner after China which covered around 14 percent of ASEAN trade.

But the road to a Free Trade Agreement (FTA) between EU and ASEAN is long and bumpy.

It started in 2007 when negotiations for a region to region trade and investment agreement took place. However, the discussions were paused in 2009, and only bilateral negotiations between EU and specific countries in the region were pursued.

Problems with Malaysia, Indonesia, Philippines

The first major obstacle is the issue of palm oil. The EU-plan to ban imports of palm oil due to the EU’s green deal take a hard hit at the first and second world’s largest producer of palm oil, Indonesia and Malaysia. The negotiation with Malaysia is unlikely to continue in the near future since the country has threatened to walk out of ongoing negotiations with the four-member countries of the European Free Trade Association if the ban of palm oil still takes place in the EU. They also will take this matter into legal action against EU to the World Trade Organization (WTO) under the allegedly discriminatory action on the restrictions on palm oil-based biofuels.

Another obstacle is the political situation of the Philippines. Fraser Cameron, director of the Brussel-based think tank EU-Asia Centre, points out that the Philippines is "way behind" in talks mainly because of EU’s "reluctance to engage" with the government of president Rodrigo Duterte. The so-called “war on drugs”-policy is a very controversial issue with reports about extrajudicial killings against the alleged drug addicts.

Countries like Myanmar and Cambodia will not be included in any FTA negotiations anytime soon. Human rights violations in both countries are still under the scrutiny as well.

Bilateral FTAs with EU still doable

On the bright side, some ASEAN countries already completed trade negotiations with the EU. But it was a long shot for them as well: Singapore took nine years to negotiate, Vietnam took seven years. Each negotiation took many rounds to cover all scopes of trade. In the case of Singapore, there had been eleven rounds of negotiations since March 2010. At the end, the benefit that both parties get will be on many areas such as tariff liberalization, reduction of non-tariff trade barriers and promotion of services and investment. The agreement provides EU companies with improved access to government procurement opportunities. For the EU consumer, they can be assured that Singaporean products comply with health and safety, social rights, consumer rights, and environment protection standards.

Things were more complex in the case of Vietnam. The fact that the negotiation took 14 rounds of negotiations speaks for itself. The negotiation covered not only trade and tariff issues, but also human rights, intellectual property, labor rights and environment issues. However, the Free Trade Agreement with Vietnam entered into force on 1st of August 2020. On the Vietnam side, they have received the benefit of the non-tariff exports for more than 71% for the next ten years. The tariff elimination will benefit key export industries, including manufacturing of smartphones and electronic products, textiles, footwear, and agricultural products, such as coffee. On the other hand, the EU also gets 65% non-tariff export for the next seven years. According to the Ministry of Planning and Investment, the FTA is expected to help increase Vietnam’s GDP by 4.6 percent and its exports to the EU by 42.7% by 2025.

With that, we can see that countries like Vietnam and Singapore who have successfully completed the free trade negotiation can increase not only their export rate but also their GDP. These benefits can become greater if more bilateral agreements between ASEAN members and the EU take place which will be leading to the interregional free trade agreement in the future. However, for the rest of ASEAN member states, the difficulties are still remained in sight.

Vietnam coffee
Vietnamese coffee. The EU-Vietnam FTA eliminates tariff, and is expected to benefit key export industries, including agriculture. © Nguyen Quang Ngoc Tonkin | shutterstock.com

There is still a lot of untapped economic potential

According to ASEAN Prosperity Initiative report, the trade war between USA and China has caused the relocation of production base: They decided to leave China and plan to plant the new base in ASEAN instead. Igor Driesmans, EU representative to ASEAN gave an interview to “ASEAN Post” on this matter. He said: “The EU is working to provide support in standards setting, trade facilitation, and other fields to help eliminate Non-Tariff Barriers. There is still a lot of untapped economic potential, and we want to work toward the common goal of fully achieving free trade in the region.”

However, when it comes to free trade agreement between EU and ASEAN, Ambassador Driesmans doesn’t think it will happen anytime soon. “As of now there is an ambition gap between the parties. We would like to see competition, procurement, sustainable development included in the negotiations. ASEAN is more cautious,” Ambassador Driesmans explained. Free trade agreements take a very long time to accomplish, seeing from the case of Singapore and Vietnam. It is hard but not impossible, and Ambassador Driesmans hopes to see it being realized in 10 to 15 years.

The relationship between the European Union and ASEAN has always been positive. EU has invested in many projects such as on climate change and environmental issues. But when it comes to free trade, bilateral agreements are still the best option for EU at the moment. There is a chance that an interregional economic partnership can happen, but ASEAN has to step up its standard to reach the EU level.