Cleaning the ‘noodle bowl’: hopes high for mega APAC FTA

March 2020 | FEATURE | GLOBAL TRADE

Financier Worldwide Magazine

March 2020 Issue

Following seven years and more than 20 rounds of often intense negotiations covering a wide range of trade-related topics, expectations for the Regional Comprehensive Economic Partnership (RCEP) are understandably high.

A free trade agreement (FTA) in the Asia-Pacific (APAC) region between the 10 member states of the Association of Southeast Asian Nations (ASEAN) – Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam – and their five FTA partners – China, Japan, Korea, Australia and New Zealand – the RCEP is reaching its final stages, with officials aiming to sign the agreement in February or March 2020.

Immense in scope and value, the RCEP potentially includes more than three billion people – 45 percent of the world’s population – and a combined GDP of approximately $21.3 trillion, which accounts for around 40 percent of world trade. In addition, continued economic growth, particularly in China, India and Indonesia, could see the total GDP of RCEP members grow to over $100 trillion by 2050.

There was, however, one high-profile drop out from the RCEP. In November 2019, India (the sixth FTA partner) left the negotiating table, criticised by partners for its “cautious” approach to negotiations – an attitude that is believed to stem from India’s modest merchandise export growth to the ASEAN, as well as surge in imports from China. What is beyond doubt though is that India’s decision not to join the RCEP has significantly reduced the FTA’s impact.

“The RCEP provides a basis for more open trade and investment in the APAC region, by addressing concerns about a ‘noodle bowl’ of overlapping bilateral agreements,” says Julian Chaisse, professor of law at City University of Hong Kong. “Another key economic rationale for the RCEP resides in the scale of economy.

“An FTA long in the making, the RCEP was complicated to some extent by the parallel completion of the ASEAN Economic Community (AEC), as well as often acrimonious Trans-Pacific Partnership (TPP) negotiations.”

“The consolidated market size for the RCEP – 48 percent of the world population and 28 percent of world GDP in 2018 – is large enough to create a positive trade creation effect and boost more inclusive economic growth in this region,” he continues. “The higher ratio of intra-regional trade among RCEP member economies of over 40 percent is another promising factor in expecting a large trade creation effect.”

Key challenges overcome

An FTA long in the making, the RCEP was complicated to some extent by the parallel completion of the ASEAN Economic Community (AEC), as well as often acrimonious Trans-Pacific Partnership (TPP) negotiations – a trade pact largely torpedoed by the withdrawal of the US (remaining members have forged ahead with a new version of the deal).

“2017 was a turning point,” recalls Mr Chaisse. “RCEP negotiations became very complex, with around 700 officials gathering for negotiations that year, compared to 60 delegates at meetings in 2013. At the same time, the RCEP stakes increased because of the conclusion of the AEC, as well as TPP and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) talks. In this process, India also complicated the negotiations.”

So, how did RCEP countries overcome these difficulties? “By using the ASEAN as a benchmark,” explains Mr Chaisse. “For example, in the case of rules of origin (RoO), the ASEAN-Australia-New Zealand (AANZFTA) approach to simplifying rules of origin is to allow alternative rules for most product lines. The principal alternatives are the regional value content, which requires 40 percent of the free-on-board value to have been added within the region, as well as changes to tariff classification approaches. The former had been generally preferred within ASEAN and the latter by Australia and New Zealand. Both have their advantages and disadvantages, depending on the specific product category.”

Meeting expectations

How then do trade observers envisage the RCEP performing in the years ahead? Is it likely to meet expectations? And how much of a boost to the RCEP will the US withdrawal from the TPP provide?

“On average, the 16 countries’ income would be 1.5 percent higher than a baseline scenario with no RCEP, based on an estimate made prior to India opting out of the FTA,” says Mr Chaisse. “As with any computable general equilibrium (CGE) modelling, numbers are estimates, but the orders of magnitude suggest that the RCEP has potential to be a win-win agreement, even when focusing only on trade.

“The RCEP will boost global value chains by supporting small and medium enterprises’ (SMEs) inclusion through the promotion of cross-border investment,” he continues. “The agreement will also play a critical role in promoting and reinforcing regional production networks by liberalising and facilitating both trade and investment, by tackling behind-the-border issues relevant to supply chains and production networks.”

For the moment, it should perhaps be left to the RCEP itself to deliver a forecast as to its future success. “We have committed to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement,” expressed a joint leader’s statement made at the time of the third RCEP summit. “The RCEP will significantly boost future growth prospects and contribute positively to the global economy, serving as a supporting pillar to a strong multilateral trading system and promoting development in economies across the region.”

Fraser Tennant