Free trade agreements
RCEP and its implications for the Lower Mekong Subregion
Published 03 August 2021
Poised to become the world’s largest free trade agreement (FTA) when ratified, the Regional Comprehensive Economic Partnership (RCEP) offers ASEAN members the potential to reach other countries beyond the US and China to diversify their supply chains. How will the FTA impact countries of the Lower Mekong subregion?
The Regional Comprehensive Economic Partnership (RCEP) is gaining steam to become the world’s largest free trade agreement (FTA) with ratification by Cambodia, China, Japan, Singapore, and Thailand to date.
Signed on 15th November 2020, the agreement becomes valid as of 60 days after six ASEAN and three non-ASEAN members complete their ratifications.
Indeed, RCEP holds great promise. If ratified by the required number of members, the pact constitutes a market of 2.3 billion people, or 30% of the world’s population. The trade bloc would have a combined GDP of US$26.3 trillion, or 30% of the global GDP. Analysts estimate that, by 2030, the arrangement potentially adds US$500 billion to global trade and US$209 billion to global GDP. (1)
Such economic significance is facilitated by RCEP’s distinction as ASEAN’s most comprehensive trade agreement. The text goes beyond all ASEAN+1 trade arrangements, with additional chapters on issues such as e-Commerce, intellectual property, government procurement, and competition. In addition, the bloc can be expanded over time. Its accession clause specifies that, subject to the consent of the members, any state or customs territory can join 18 months after the date of entry of this agreement.
Analyses regarding the effects of RCEP on the Indo-Pacific and Southeast Asia regions are abundant. There has been less research on the implications of the FTA on the Lower Mekong subregion, which is comprised of five ASEAN riparian states: Cambodia, Laos, Myanmar, Thailand, and Vietnam (CLMTV).
The Lower Mekong subregion has economic power, with a market value reaching nearly US$1 trillion. (2) Its economic growth registers around 7% to 8% annually – higher than ASEAN’s average. Moreover, many of the region’s 250 million people are relatively young. The youthful workforce makes CLMTV economies a linchpin of Southeast Asia’s supply chains.
Beyond its economic potential, the Lower Mekong subregion is where major powers wield influence through their strategic competition, which has been manifested in an alphabetical soup of Mekong initiatives, ranging from the US-Mekong Partnership to the China-led Lancang-Mekong Cooperation.
As the new kid on the block, RCEP promises both economic and strategic impact. Because the initiative propels economic liberalization, it has been well-received by the region. According to a survey of the region’s business communities, policymakers, and thought leaders conducted by the Institute of Southeast Asian Studies’ (ISEAS), more than half of respondents in Cambodia, Lao PDR, Myanmar, Thailand, and Vietnam agreed that the FTA will boost their countries’ trade and investment. (3)
The economic numbers echo these positive perceptions. With RCEP, Cambodia’s exports and GDP will expand by 7.3% and 2%, respectively. The Thai government predicted the agreement will raise 2021 GDP and exports by 3.5 to 4%. Moreover, RCEP may attract more foreign direct investment (FDI) from advanced economies, namely Australia, Japan, New Zealand, Singapore, and South Korea, galvanizing the subregion’s labor-intensive apparel and footwear sectors
As RCEP consolidates the rules of origin (ROOs), the region’s economies will be able to participate in regional production networks and add value to their exports. Critics argue that the marginal tariff benefits of this arrangement are very low. Nevertheless, the single ROO increases the ability of businesses to produce “made in RCEP” goods as producers can source inputs for various locations.
Take a car tire as an example. To run a car tire business, firms must secure components, like rubber, solidifying acids, carbon black, as well as labor, such as factory workers and after-sale services personnel. RCEP will open opportunities for CLMTV to further take part in global value chains by providing necessary components and labor. Leveraging these networks also adds value to local industries and economies. Thailand’s processed tuna industry is a case in point. By tapping transnational production networks, Bangkok can augment the value of its tuna exports five-fold, from US$945 million in import values to US$4.7 billion in export values. (4)
Moreover, RCEP can help the Lower Mekong countries better weather the uncertainties caused by COVID-19 and the US-China trade war. Like many economies, the subregion is grappling with the pandemic.
Consider Cambodia. Its GDP contracted by 3.1% in 2020. The virus outbreak disrupted the country’s garment and footwear manufacturing. While the economy rebounded in the second half of 2020, full-year exports declined by 9.9%. Tourism suffered as international arrivals to Phnom Penh plunged by 80%. The pandemic also dampened the booming construction and real estate sector, which witnessed a 10.7% drop in FDI inflows. (5)
In 2020, Lao’s GDP shrank by 0.5%, despite robust electricity exports and construction due to rising energy demand from neighboring states and infrastructure mega-projects such as the Boten-Vientiane railway. The recession was attributed to disruptions in its labor-intensive sectors connected to global supply chains and depressed tourism. The number of foreign visitors fell by 81.5%. (6)
In Myanmar, ongoing political turmoil caused by the military coup in February 2021 has adversely impacted an economy already hit hard by the pandemic. The political instability largely contributes to the disruptions of business activities.
For example, the bank closures render it almost impossible to settle financial transactions. Road damages and seaport paralysis stall land logistics and supply chains. According to the UN Development Program’s report released in April 2021, the combined effects of COVID-19 and the recent military takeover put Naypyidaw’s economy on the brink of collapse. (7) The study also estimated that in the worst-case scenario, these twin factors would make about half of Myanmar’s population, or 25 million individuals, end up in poverty by early 2022, with women, children, and small firms likely to suffer the most. (8)
Thailand’s economy also slipped into a recession of 6.1%. Goods and services exports fell by 19.4% due to sluggish external demand. The decline of tourist arrivals by 83.2% devastated an economy which counts on tourism to shoulder 20% of its GDP. (9)
Vietnam’s economy fared best in 2020, expanding by 2.9%. However, the services sector suffered a 78.7% reduction in international arrivals. Manufacturing also slowed in the first half of 2020, although it picked up later due to the state’s decision to shift production to essential goods such as personal protective equipment (PPE). Consequently, the 2020 net goods and services exports grew by 4.4%. (10) With RCEP bringing about future economic gains and opportunities as demonstrated above, CLMTV can take advantage of RCEP to recuperate from the damages inflicted by COVID-19 and bounce back from the crisis.
Other uncertainties are caused by the ongoing Sino-US trade war. The Biden Administration has kept most of the Trump-era tariffs on Chinese products. The United States Trade Representative Office (USTR) Report stressed that the administration will use “all available tools to take on the range of China’s unfair trade practices that continue to harm US workers and businesses.” (11) RCEP will serve as a cushion and enable its participants to navigate this environment.
In fact, the aggregate gains from RCEP under the US-China trade war will likely be greater than under normal conditions. The CGE model projects the value of within-RCEP trade amidst trade frictions to exceed US$445 billion. (12) Estimates for intra-bloc trade under a business-as-usual atmosphere figures at US$428 billion.
Beyond economic benefits, RCEP yields strategic impact. The power struggle between Washington and Beijing looms large on many fronts, ranging from infrastructure development to innovation. China’s Belt and Road Initiative (BRI), in particular the China-Indochina Peninsula Economic Corridor, is regarded as pushback against the US’ Pivot to Asia. (13) Consequently, the latter reinvigorated its ties with CLMTV, as reflected by the launch of the US-Mekong Partnership in September 2020 superseding the Lower Mekong Initiative.
The exacerbating US-China tussle raised concerns in the Mekong subregion. The ISEAS survey reports that the majority of CLMTV respondents view Southeast Asia as an arena of contestation among external powers. As a result, these nations are adopting “hedging” as a strategy. In other words, they are responding to the external wrangling by engaging other powers inside and outside the region. Illustratively, when asked which “third parties” to hedge against the uncertainties triggered by this bilateral strategic competition, the Number One and Number Two choices were Japan and European Union followed by India, Australia, South Korea, and the United Kingdom.
RCEP allows for hedging. Since its inception, this pact is an ASEAN-led initiative and reflects the ASEAN Centrality in action. The agreement’s Guiding Principles posits that “negotiations for the RCEP will recognize ASEAN Centrality in the emerging regional economic architecture.” (14)
While sceptics postulate that the bloc’s 40% ROO is relatively low compared to other FTAs such as the US-Mexico-Canada Agreement (USMCA), this low threshold reflects the “Open Regionalism” pursued by ASEAN members. As such, ASEAN countries can foster ties with various non-ASEAN entities. The ROO rule mandates products sold duty-free within RCEP to have at least 40% of its value coming from the bloc’s members. The remaining 60% of the goods’ value-added can be sourced from non-RCEP stakeholders, providing ample room for the subregion to undertake hedging.
In short, RCEP is a tool for ASEAN to reach other countries beyond the US and China to diversify their supply chains. Consequently, the power dynamics in the Lower Mekong subregion may find more balance.
(1) - https://www.piie.com/system/files/documents/wp20-9.pdf 2
(2) - https://www.bangkokpost.com/opinion/opinion/2026215/china-us-rivalry-on-mekong-mainland 3
(3) - https://www.iseas.edu.sg/wp-content/uploads/2021/01/The-State-of-SEA-2021-v2.pdf 4
(4) - https://www.youtube.com/watch?v=tAkMSui2MhA
(5) - https://www.adb.org/sites/default/files/publication/692111/ado2021.pdf
(6) - Ibid
(7) - https://www.asia-pacific.undp.org/content/rbap/en/home/library/democratic_governance/covid-19-coup-d-etat-and-poverty-impact-on-myanmar.html
(8) - Ibid
(9) - https://www.adb.org/sites/default/files/publication/692111/ado2021.pdf
(10) - Ibid
(11) - https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2021/march/fact-sheet-2021-trade-agenda-and-2020-annual-report
(12) - https://www.piie.com/system/files/documents/wp20-9.pdf
(13) - https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative
(14) - https://www.mofa.go.jp/mofaj/press/release/24/11/pdfs/20121120_03_03.pdf
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