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Talking Trade blog

Drawing up guidelines for business in RCEP

Published 08 June 2015

KYOTO--The 16 countries involved in the Regional Comprehensive Economic Partnership (RCEP) are currently gathered in Kyoto. The 8th round runs all week long, as officials try to meet an announced deadline at the end of this year.

RCEP is an unusual animal in the free trade agreement (FTA) zoo.  Under RCEP, the 10 countries of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) are trying to knit together their existing FTAs into one comprehensive agreement.

This requires getting ASEAN to work together with the six dialogue partners that have existing FTAs with ASEAN (Australia, China, India, Japan, New Zealand, and South Korea).  In RCEP, the ASEAN members often meet to caucus first, followed by the remaining six (in RCEP lingo—the AFPs or ASEAN Foreign Partners).  Once both groups have held caucus sessions, they gather together as 16 parties for negotiations.

Like in most FTAs, the RCEP party negotiators are split into specific chapters.  RCEP negotiations are under way for goods; rules of origin; customs procedures and trade facilitation; sanitary and phytosanitary (SPS) rules for agricultural products; services; investment; intellectual property rights; competition policy; economic and technical cooperation; and legal issues. 

The original intention of RCEP was to sort out the problems created by having five different agreements (called ASEAN+) with sometimes differing commitments between them.  The issues that need addressing can be seen clearly by businesses trying to ship goods between ASEAN and the AFPs. 

For example, many goods have tariff reductions that are different across the five existing agreements.  In some, tariffs may have fallen all the way to zero allowing a firm’s products to enter duty free.  In other deals, the tariffs that matter to the firm have not been touched at all.

Equally (or even more) problematic for businesses, the rules of origin (ROOs) used across the five existing deals are different.  Depending the product, firms may be forced to have entirely different sourcing patterns for different markets with raw materials or components from alternate suppliers to get final products to qualify for benefits under the ASEAN+ FTAs. 

For some products, the ROO might be 40 percent regional value content (RVC).  Put crudely, this means that a firm needs to sufficient transformation of the raw materials and components to take place inside the ASEAN member states and the dialogue partner to count for at least 40 percent of the final the value of the good. 

But other ASEAN+ agreements may require a change in tariff heading instead, where the creation of a final product results in a different classification for the product relative to the raw materials or components used.  Worse still, some agreements require some products to use multiple ROOs simultaneously to qualify for preferences.

In short, these sorts of rules make it difficult for firms to actually take advantage of the benefits on offer from some of the existing agreements. 

RCEP could try to sort out most of these challenges that firms face in operating across the 16 member countries.  However, because RCEP is not a voluntary organization, participating countries are approaching the tasks of harmonizing across agreements with different degrees of enthusiasm.  In RCEP, unlike some FTAs, the parties are essentially drafted to participate by dint of having an existing deal. 

Having an agreement with ASEAN, however, does not automatically mean that members are eager to extend their existing trade arrangements to other members.  This is true both for ASEAN countries as well as many of the AFPs.  Hence, around the table in RCEP, some members are downright hostile to further market opening while others remain relatively enthusiastic. 

One area of potential scope for new efforts can be found in e-commerce.  Previous FTAs did not cover this topic, which means that the members do not have to worry overly much about existing commitments.  In addition, all 16 parties in RCEP have some level of interest in creating new rules to govern this space.

This is particularly true if RCEP countries approach e-commerce from the perspective of smaller firms.  Small and medium sized enterprises are very active and constitute the largest share of the economy in all member states. 

More important, seizing the opportunity means letting smaller firms join a larger marketplace for their goods and services.  They can attach themselves to some of the biggest global enterprises in ways that were previously not possible.  The e-commerce marketplace includes buying and selling to other businesses as well as consumers. 

But this is an unfamiliar place for government officials in charge of trade negotiations.  In many economies, the domestic rules and regulations for managing e-commerce are either undeveloped or underdeveloped.  This makes it more challenging to create appropriate rules for governing e-commerce at the RCEP level.

In some of the fastest evolving sectors of the global economy, it is important that officials aim for light touch regulations.  Many of the goods and services that will be provided in 5 or 10 years time cannot even be imagined now.  Hemming in these types of developments could easily prove problematic for companies.  Restraining the growth and participation of smaller companies could leave the markets open for further dominance of the largest global players.

Hence, officials need to think carefully about what sort of rules they want to create for the e-commerce space in RCEP.  Most businesses would prefer a harmonized set of regulations, rather than a patchwork quilt of rules across 16 different countries.  This is certainly better for smaller firms who will struggle to handle different requirements and rules in different RCEP marketplaces.

These rules should put in place specific policy objectives, rather than specify specific types of rules.  The objectives can be met by different governments and businesses in an evolving fashion, rather than be set down in a difficult-to-amend trade agreement. 

For instance, government officials are likely to be concerned about the spread of online gambling or pornography.  RCEP rules could allow governments to regulate these types of activities directly.  Restrictions could also be handled through the use of exceptions clauses allowed elsewhere in all trade agreements that grant governments the right to regulate in the interest of public health, morality, security and so forth.  Or governments could create a policy framework that would highlight types of activities that should be constrained. 

Because policymakers do not know enough, most likely, about e-commerce and its current and future potential, trying to create specific rules about what can and cannot be opened is likely to be deeply problematic.  Instead, government might best support smaller firms in e-commerce by thinking broadly about their needs and crafting the RCEP agreement to better meet the issues of concern to small companies. 

This requires a holistic view of e-commerce and a vision of helping smaller firms buy and sell smaller value goods or supply services of all sorts across the internet.  It means ensuring that information can flow freely and that companies have access to some of the best, safest, and most secure platforms and technologies for managing their e-commerce activities.  Finally, it means helping smaller firms manage cash flow issues by helping open trade financing and e-payments systems so firms can successfully get paid for their goods and services. 

Creating an agreement where few have existed before is never going to be easy.  But the benefits of a true regional platform could perhaps be best expressed in RCEP through bold steps in e-commerce.  This would help unleash the economic potential of the small companies that make up the backbone of the economy in all RCEP members.  It could be the most concrete example of where RCEP negotiations can make a difference to the Asian regional landscape.  ***

On a different note, before closing, I would like to give a shout out to APEC for the APEC Business Travel Card and to the American government for finally allowing U.S. passport holders to participate.  The card saved me at least 2 hours getting into Beijing and a further two hours clearing immigration in Japan.  Thanks!

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Dr. Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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