RCEP - A Life Raft for Trade Liberalization in Asia

Port activity in Chittagong, Bangladesh.
Port activity in Chittagong, Bangladesh.

By Ganeshan Wignaraja

The Regional Comprehensive Economic Partnership offers hope in in an ocean of trade policy pessimism.

There seems to be a pushback against trade agreements in the post global financial crisis era. The Trans-Pacific Partnership (TPP) was signed in early 2016, but US presidential candidates have spared no effort criticizing it so near-term ratification is highly uncertain. The WTO Doha Round is in the deep freeze after 14 years of negotiations. Unilateral trade liberalization has virtually come to a standstill.

Yet negotiations are proceeding in Asia on its own mega trade agreement – the Regional Comprehensive Economic Partnership (RCEP). While there have been some sticking points during the negotiations and afterwards, an RCEP deal could occur in 2017, with significant economic implications for Asia and beyond.

In short, in an ocean of trade policy pessimism, the RCEP offers a life raft to sustain trade liberalization in challenging economic waters.

RCEP negotiations were launched in November 2012 in Phnom Penh, Cambodia, and scheduled to conclude by the end of 2015. While this deadline has passed, negotiations appear to be intensifying following the signing of the TPP. The 12th round of RCEP negotiations will begin on 22 April in Perth, Australia, seeking to address further tariff reductions on goods between members and improvements in existing offers on services and investments. A 13th round of RCEP negotiations is planned for 12 June in Auckland, New Zealand.

RCEP parties aim to achieve a modern and comprehensive trade agreement, and the agenda covers trade in goods, services, investment, economic and technical cooperation, and dispute settlement. Compatibility with WTO trade rules on goods and services is also a principle for RCEP negotiations.

The RCEP seeks to reconcile two long-standing proposals into a region-wide trade deal: the East Asian Free Trade Agreement, which includes the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China (PRC), Japan and the Republic of Korea, and the Comprehensive Economic Partnership for East Asia, which adds Australia, India, and New Zealand. The RCEP bridges the two proposals by giving ASEAN a central role in coordinating regional trade, and adopting an open accession scheme.

The RCEP can help regionalize the sophisticated global value chains that make Asia the world’s factory. It will also reduce the overlap among Asian free trade agreements (FTAs) and the risk that Asia becomes a confusing ‘noodle bowl’ of multiple trade rules. If a comprehensive agreement can be reached, trade barriers in Asia will come down and the new rules will be consistent with WTO agreements. Rules of origin could be rationalized and made more flexible, and be better administered through electronic means. In the area of investment rules, where no WTO agreement exists, the RCEP will promote easier foreign direct investment (FDI) flows and technology transfers by multinational corporations.

Since the RCEP will contain three of the largest economies in the world—the PRC, India and Japan—it is globally important. The RCEP bloc represents 49% of the world’s population and accounts for 30% of global GDP. It also makes up 29% of global trade and 26% of global FDI inflows. Our conservative estimates, using a computable general equilibrium model, suggest that if the RCEP were implemented it would bring income gains to the world economy of at least $260 billion within a decade. Other estimates suggest an even higher figure of around $600 billion.

There are some sticking points, though, to the RCEP negotiations and aftermath.

First, negotiators from large countries may find it difficult to respect the central role of smaller ASEAN economies in RCEP. Second, the RCEP may only achieve limited trade and investment liberalization if parties with different levels of development and interests negotiate exclusions to protect sensitive sectors. Third, there is a risk that businesses, particularly small and medium-sized enterprises (SMEs), may underuse the RCEP tariff preferences and other rules due to a limited understanding of its legal provisions. Fourth, many countries will find it difficult to pay for physical infrastructure and improve trade facilitation so goods and services can be transported smoothly across RCEP member countries.

RCEP negotiations should focus on a template with the best features of existing Asian FTAs, including ASEAN+1 and the Korea-US FTA. Afterwards, significant outreach and business services are needed for SMEs to lower the costs of using the RCEP. Expanding the Asian Bond Markets Initiative and supporting public–private partnerships can also help increase regional infrastructure financing.

The RCEP and the TPP are sometimes portrayed as competitors. The RCEP is likely to be less ambitious than the TPP (with high standard trade rules geared more toward advanced economies), and the prospect of development assistance for adjustment means developing countries will find it easier to join. Nonetheless, the two agreements are better seen as complementary pathways to a rules-based regional trading system. In the future, it is possible both could be merged into a region-wide FTA – a Free Trade Agreement of Asia and the Pacific (FTAAP). At the APEC Summit in Beijing in November 2014, APEC leaders launched a collective study on issues related to the realization of the FTAAP; the results of the exercise will be reported later this year at the APEC Summit in Peru in November.