Economic Gains

Linkage between economic gain and trade policy is a very common framework. Basically, it postulates that the more a state gains economically, the greater the chance it will participate in an FTA. The framework is very common in the field of Economics. Yet even within International Relations (IR) theory, the issue of gain is also a central theme of state‟s behavior. The neoliberal-institutionalist theory proposes the concept of absolute gain for determining state action on international cooperation. The paradigm basically absorbs some realist assumptions of International Relations, such as state as a unitary actor seeking maximum gains (Grieco, 1988, p. 486-487). It will, therefore, determine their action on a given international cooperation (TPP in this research), in which the state will seek absolute gains. The more absolute gains it can take, the more willing a state will be to participate in international cooperation. Within this research, a state will pursue an FTA in order to get three types of economic gains:

trade gain, investment gain, and lock-in reform opportunity.

Trade gain is an obvious reason for fostering an FTA. By liberalizing tariffs and other barriers, there will be more opportunity for export. Economically, this is called a „trade creation‟ effect. In East Asia, in which many countries rely heavily on external markets, an FTA is an important tool to access overseas market, especially as the latter are getting more restrictive due to economic slowdown and domestic political pressure. Particularly in Southeast Asia, trade links heavily with development process. It constitutes a significant proportion of

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the economic growth component. The more it exports, the higher the economic growth; the less it exports, the lower the economic growth. Consequently, it will also lead to employment level and welfare gains. Moreover, securing an FTA is also important against other countries competing to access the same market. One country does not trade only with a single country. So, a country must keep an eye on the performance of its competitors, especially those with the same export structure and export market. Securing an FTA is a winning tool as it will reduce tariff barriers only for members while maintaining tariffs to non-members. In a different situation, if a country loses market share given that its competitor has already secured an FTA with the targeted market, FTA can also be a tool to correct the disadvantage. Solis & Katada (2008) discusses this possibility on their work on cross-regional FTA. They argue that an FTA is arranged due to „fear of exclusion‟ or „trade diversion‟ from the existing FTAs as a way to improve competitiveness.

For a small country, like those in Southeast Asia, there is always a danger to secure an FTA with a bigger trading partner like the US. Due to power asymmetry, the latter can demand higher liberalization without the former can demand the same thing. Yet as argued by Ravenhill (2006), a small country is still always better off with than without an FTA. It is because a bigger country is always a more important partner for a small country than vice versa; therefore, the trade benefit they may enjoy will be higher. This causes a small country to be willing to liberalize more as the expected benefit will outweigh the cost.

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Another gain from an FTA is investment. As a country secures FTA, it is anticipated that, as a member, it will experience an inflow of foreign capital. If the agreement is between developed and developing countries, then it is the latter that will experience higher FDI flow than the former. As an FTA is secured, there is an opportunity to produce goods in a more cost-effective way, which means relocating factories to developing country with the target to serve a big consumer market in the developed country (Ravenhill, 2011, p. 183). This is what happened in Mexico after NAFTA, in which the country received a massive surge of FDI from around US$ 8 billion in 1990 to US$ 24 bilion in 2001 (Ravenhill, 2011, p.

183). This is also why some FTAs, such as TPP, are embedded with investment agreement. An investment agreement is important as it creates an investment-friendly environment for foreign capital, especially in Asia, where the governments traditionally require many restrictive measures for FDI operation (Aggarwal, 2006, p. 9). An investment agreement will prohibit local-content requirement, export performance requirement, rule for expropriation, and the like.

As a result, member countries are more likely to experience more FDI. This investment gain is very important if one observes the development process in Southeast Asia. Throughout the second half of the 20^th century, Southeast Asia has been tying its development process with the inflow of foreign investment.

Foreign companies, either joint-venture or fully-owned, make a substantial contribution to these countries‟ exports. They also serve as the main source of capital, technology and working skills. Therefore, even without a substantial trade gain, sometimes a country still pursues an FTA exactly for this investment gain

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(Kimura, 2006, p. 51). If one takes into account the competitive environment in which East Asian countries compete heavily for FDI, especially from China, then the greater the need is to secure investment gain through an FTA (Kimura, 2006, p.

51).

The last indicator relates heavily with the investment gain, e.g. opportunity to lock-in reform. An FTA is important as it shows a commitment to a pro-business, conducive investment climate, which will be critical for inviting foreign investment. Therefore, FTA is seen as an external push to conduct domestic economic reform, or to lock-in reform commitment. Within an FTA, especially the one with a high standard like the TPP, a country is bound to many reform agenda, such as greater liberalization, enhanced transparency, and fair competition.

This is even more important in the globalized world, in which many countries compete with one another to attract FDI (Ravenhill, 2011, p. 180). Continuing this logic, it makes a lot of sense to secure such commitment in an FTA as countries‟ participation is less than the one in WTO level. Therefore, it will greatly improve a country‟s visibility in the eyes of foreign investors (Ravenhill, 2011, pp. 180-181).