The first round of negotiations to establish the Regional Comprehensive Economic Partnership (RCEP) was held in Brunei in May. Negotiators are working toward a 16-member free trade agreement involving the 10 Asean economies plus China, Japan, South Korea, India, Australia and New Zealand.
The RCEP is one of a series of huge regional pacts currently under negotiation including the Trans-Pacific Partnership (TPP) and the US-EU FTA (the Transatlantic Trade and Investment Partnership), the latter officially launched at the G8 meeting in Northern Ireland on June 17.
If implemented, the RCEP could create the world’s largest trading bloc with potentially huge economic gains for the countries involved.
Also significant, in the geopolitical battle to shape the future of regional trade rules and standards, the RCEP includes China but not the United States.
The RCEP faces some key challenges if it is to live up to its potential. Details remain sparse, but what we do know from the RCEP’s guiding principles is that it will add to, rather than replace, existing “Asean+1” FTAs with individual states, while at the same time introducing “significant improvements” over these agreements.
There is, however, an important qualifier in the dreaded “flexibility” clause: “The RCEP will include appropriate forms of flexibility including provision for special and differential treatment, plus additional flexibility to the least-developed Asean member states.”
Flexibility could be a boon or bane for the RCEP. While it could help break deadlocks and protect disparate national interests, it could also limit change or curtail progress in achieving greater liberalisation. Indeed, there is much to negotiate — and many breakthroughs needed — if the RCEP is to supersede existing agreements.
The existing five Asean+1 and 23 ratified bilateral FTAs vary greatly in terms of almost everything up for negotiation. One example is rules of origin (ROO), which determine the country of origin of products and in turn their eligibility for preferential treatment in international trade.
There are at least 22 different ROOs among the Asean+1 agreements, even after aggregating those that are similar but not the same. Only about 30% of tariff lines on the Asean+1 FTAs share common rules of origin. With bilateral agreements — the Japan-India FTA for instance — there are 12 types of rules of origin, seven of which are unique from the Asean+1 FTAs. The sheer number of such rules — and their lack of commonality across FTAs — will make the task of harmonising and consolidating them that much harder.
Proponents of FTAs argue that deeper agreements can be achieved more rapidly on difficult issues when there are only a small number of negotiating partners involved. But many advocates fail to explain how this principle works within the context of FTA consolidation, where parties are essentially reversing the negotiation process and adding more countries.
If access to a bigger market is the lure, then wouldn’t the Doha Round under the World Trade Organization be a better, if not easier, process? It may be better. But we know it is not easier. Doha has gone almost nowhere since talks began 12 years ago. In truth, consolidation may be just as difficult, if not more difficult, than simply starting from scratch.
Getting a pair of countries to agree on a specific set of terms will not necessarily facilitate similar breakthroughs with third parties. To ignore this is to ignore on-the-ground realities and the political economy aspect of FTA negotiations. And anyone who has looked closely at an FTA will know how difficult the task of enmeshing even two similar agreements can be, let alone many different ones.
But consolidate they must, if the RCEP is to eventually emerge. The question is how and what form it will take.
Pursuing harmonisation while retaining flexibility is likely to produce one of two outcomes. Because harmonisation implies consensus, it could result in a “race to the bottom”, where the lowest common denominator rules. Alternatively, countries taking advantage of flexibility could result in a conservative approach that preserves the current “noodle bowl”.
These outcomes are more likely than the hoped-for “race to the top” scenario, unless incentives are provided to overcome pressure from the vested interests that lobbied for different rules of origin to begin with.
The very existence of so many ROOs and exemptions confirms the power of such lobbies. Breaking through these pressures will not be easy, and will require a stronger commitment to reform from all members, big or small, strong or weak. The problem is that some countries may not see any carrot — and there is no stick.
If a race to the bottom or minimal change comes about, then the RCEP will be largely redundant. Although cumulation rules may expand through increased membership, this usually amounts to little when product fragmentation trade is significant.
Changing the type of ROO is more important, but also more difficult. The South Asia Free Trade Agreement (Safta), a failed attempt at consolidation, illustrates this. Most trade within South Asia continues under more generous bilateral FTAs or under most favoured nation (MFN) rates. Sadly, Safta’s main contribution has been to add another strand to the global spaghetti bowl.
Will the same fate befall the RCEP? Unless there is enough political will to close potential loopholes disguised as “flexibility” and pursue reforms deeper than those ever before attempted, the RCEP’s future as a consolidated bloc remains uncertain. The RCEP faces many challenges but this is the fundamental one.
A meaningful RCEP will require resolve similar to that which gave birth to the European Union — an example of successful FTA consolidation if nothing else. Unless this happens by its 2015 deadline, the RCEP may be seen as serving the geopolitical interests of a few players, to little economic effect. Then it will not be “the economy, stupid”, but just politics as usual.
Jayant Menon is Lead Economist at the Office of Regional Economic Integration, Asian Development Bank. The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, its board of governors or the governments they represent.