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Regional Comprehensive Economic Partnership (RCEP): Issues and Way Forward

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Pacific Money

Regional Comprehensive Economic Partnership (RCEP): Issues and Way Forward

The RCEP sounds good in theory, but implementation is a tall order.

Regional Comprehensive Economic Partnership (RCEP) is an initiative to link the ten ASEAN member states and the group’s Free Trade Agreement partners, Australia, China, India, Japan, South Korea and New Zealand. In total, the grouping of 16 nations includes more than 3 billion people, has a combined GDP of about $17 trillion, and accounts for about 40 percent of world trade.

If negotiated successfully, RCEP would create the world’s largest trading bloc and have major implications for Asian countries and the world economy. Negotiations among the 16 parties began in early 2013 and are scheduled to conclude by the end of 2015.

The RCEP seeks to achieve a modern and comprehensive trade agreement among members. The core of the negotiating agenda would cover trade in goods and services, investment, economic and technical cooperation and dispute settlement. The partnership would be a powerful vehicle to support the spread of global production networks and reduce the inefficiencies of multiple Asian trade agreements that exist presently.

Realizing these benefits depends on addressing several challenges during the negotiation phase. The first would be overcoming risks, arising from negotiating partners with different levels of development and varying interests. There is a flexibility clause built into the RCEP framework, worded as follows: “RCEP will include appropriate forms of flexibility including provision for special and differential treatment, plus additional flexibility to the least-developed ASEAN Member States.” This flexibility clause could help break deadlocks and protect national interests, but could also limit, change or curtail progress in achieving greater liberalization.

The existing five ASEAN+1 and twenty three ratified bilateral FTAs, varying greatly in their terms, pose a significant hurdle to RCEP negotiations. For example, the rules of origin (ROOs) determine the country of origin of products and in turn their eligibility for preferential treatment in international trade. Moreover, the partnership should aim to improve coverage of important trade issues (such as competition policy, environment and labor standards). The lack of commonality across FTAs and varying internal policies of countries would prove to be a difficult task to harmonize and consolidate under RCEP.

India is a major player in the RCEP negotiations and is under pressure currently to bring about steep reductions in its tariffs. In fact, a steep tariff reduction for goods from China has been the biggest threat for negotiators and the industry, fearing a rush of cheap goods from across the border.

In addition, countries such as Singapore, which has near zero tariffs on most goods, and Malaysia, where 90 percent of trade is carries a negligible customs duty, would also exert pressure on India to lower barriers.

As a result, negotiators are looking at possible options to avoid enormous damage. The first option being discussed is to have a common list for tariff reduction across all 16 RCEP members. The second option is to have one list for ASEAN members and individual lists for the other countries. There is also the possibility of having carve-outs for individual countries to maximize gains for India.

The partnership has much to gain from a more liberalized service trade. Though this is a sensitive issue for many countries, it would be more suitable if a sector-wise liberalization process is adopted. Nations can then integrate more confidently once the benefits become visible.

The focus on the RCEP negotiations must be to further entrench ASEAN centrality, which is being challenged by many new and overlapping economic cooperation arrangements in the region. The successful conclusion of the RCEP negotiations would serve as a fresh move towards regional integration and unleash economic linkages that would be immensely beneficial for all involved.

Ideally, the negotiations would attempt to hand pick the best features of existing Asian FTAs and use them as a basis for negotiations to maximize quality. An earlier attempt at regional economic integration with the South Asia Free Trade Agreement (SAFTA) proved to be disappointing. The negotiations must set clear timetables for concluding talks and actively pursue reforms deeper than any attempted before. The RCEP’s potential future as a major trade bloc will remain uncertain until there is enough political will to go through the arduous negotiation rounds.

The RCEP will no doubt face stiff opposition from various interest groups within the participating countries. But now that India has decided to join, it will need to balance economic and strategic calculations and prepare to lead in the “Indo-Pacific century”.

Rohit Sinha and Geethanjali Nataraj work for the Observer Research Foundation in New Delhi.