Daily Times

Asia is open for business, and will soon be home to the world’s largest trade bloc, carrying with it more than a third of the world’s population and GDP. Rightly called the ‘mega-deal’ the Regional Comprehensive Economic Partnership or RCEP consists of countries from the Association of Southeast Asian Nations (ASEAN) bloc and Australia, China, Japan, South Korea and New Zealand. The geoeconomic benefits accruing from this Agreement are enormously significant for all countries involved, especially in the face of the Coronavirus global slowdown, and the establishment of this trading bloc will cement ASEAN’s position as the prime driver of regional integration and cooperation in the Asia-Pacific and Southeast Asian region. The RCEP will also serve as a pushback against the rising tide of populism and protectionism being fed by US-China saber-rattling over trade positions and the tit-for-tat tariffs being thrown around like blank cards in a high stakes poker game. With a large part of the global supply chain diversifying and looking for alternatives, China’s higher labour costs, reactive tariffs, and desire to move up the value chain has poised many ASEAN countries to scoop up business by offering competitive manufacture locations, as well as a fast growing regional market that complements, rather than undercuts, China.

The protection, upgradation, and enhancement of the Multilateral Trading System is of enormous importance in today’s ever more fractured world

The RCEP negotiations started in 2012 and the final agreement due to be signed in November of this year, comprises 20 chapters on trade, investments, intellectual property rights, e-commerce, etc. It is multilateral, geoeconomically diverse, and most importantly, a firm endorsement of the rules-based trading system that has its roots in post WW2 era agreements. For a quarter of a century, the World Trade Organization (WTO) has been both the standard-bearer for a rules-based Multilateral Trading Systemthat encompasses more than 160 countries, and the premier trade dispute settlement body. Now however, the WTO Appellate Body has been placed in limbo, with the US blocking appointments of new judges to the Body, leaving it without a quorum. The WTO, while integral to global trade, is in need of reform to reflect both the changing face of geopolitical and economic power, and to properly integrate new rules and regulations to standardizetrade in the high value-added data, technology and e-commerce industries. And this is where sleeker, more responsive agreements like the RCEP can take the lead, because, with fewer member states to create a consensus between, it is possible to both test drive some of the mooted updates and reforms that will take much longer for the WTO to implement, and to create new rules for innovative, unregulated, emerging industries that can go on to become the global standards for trade in those commodities or services.

That the RCEP will cause some pain is almost inevitable, as efficiency, technology, and digitization will move to replace inefficient and obsolete practices hitherto operating under the benign umbrella of state protectionism. While the exact tariff schedules will not be known until the actual signing, it is estimated that RCEP will induce tariff reduction or removal across over 90%of tariff lines, with some agriculture exceptions, and will implement a single certificate of origin for products manufactured and traded in member countries.And, most interestingly, the agreement includes provisions for investment facilitation, infrastructure development, and economic and technical assistance for member states within the bloc.

RCEP’s competitor in the region, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has been weakened by the pullout of the United States, as indeed has the RCEP with India choosing to sit out negotiations based on concerns over domestic competitiveness. Nevertheless, as per the Brookings Institute, RCEP has the potential to grow global real income by $285 billion annually, twice that of the CPTPP, and retains a flexibility in rule-making and negotiations that takes into account both the enormous capacity gap between developed countries and the developing world, and makes allowances for differing domestic trade and economic priorities. The RCEP focuses on tariff and protectionist policies in developing countries, many of whom face enormous domestic, political pressure from local manufacturers or growers fearing the influx of cheaper, better-quality alternatives. India’s decision to withdraw from the RCEP reflects the jitters many of these countries are feeling at the thought of removing tariff barriers and withdrawing age-old subsidies – domestic trade and export reform to improve global competitiveness and reflect the changing face of the ‘basket of goods and services’ is not an easy task. Consequently RCEP’s developing country-centric agenda, while not as ambitious as the CPTPP, is also more consensual and mindful of the difficulties of a reform agenda, thus making it a more appropriate framework for many Asian countries.

Both the RCEP and the CPTPP build upon the rules-based model of international trade embodied by the WTO, only CPTPP is following a WTO-plus model while the RCEP espouses a WTO-consistent approach. The protection, upgradation, and enhancement of the Multilateral Trading System is of enormous importance in today’s ever more fractured world. Unilateralist policies, embodied by Donald Trump’s United States, only intensify the environment of uncertainty and protectionism that has now resulted in the possibility of a US-China trade war and the fear of a ‘Great Fracture’ as stated by the UN Secretary-General António Guterres at the 75th anniversary of that august body. The parallels between American trade unilateralism in the 1980s against a rising Japan, and the same now against China are too great to ignore, but where Japan was constrained and contained, China is a much harder nut to crack.

Like a petulant child flouncing out the door,America has withdrawn from a plethora of multilateral agreements over the last few years. It hasstomped out of the TPP, and is not a part of the RCEP, thus removing itself from being in a position to set global trading rules and standards, and influencing trade priorities and supply chain routes in the Asian region. The resulting vacuum is set to be filled by China, positioning itself as the premier supporter of the Multilateral Trading System and rules-based trade liberalization, thus enhancing its credibility as the newly evolving center of geoeconomic and geopolitical power. For countries not in the fold of these mega-regional deals, the scramble to avoid marginalization or the effects of trade diversion will spawn great pressure to either join one of the mega-deals or create new, competing regional trading blocs, no matter the terms, because suddenly, even a bad deal would be better than no deal.

The writer is an investment analyst at raanas@gmail.com