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Talking Trade blog

RCEP: Low quality, low ambition beckons?

Published 12 February 2015

BANGKOK—The 16 Asian countries in the Regional Comprehensive Economic Partnership (RCEP) trade negotiations have continued to meet in Bangkok. As the last post suggested, getting an ambitious outcome from this trade agreement could bring significant benefits for member countries and the region as a whole.

A strong RCEP would provide new opportunities for large and small firms to connect to one another and to their customers and consumers across the region.  It could include better transparency of rules and regulations so that companies find operating businesses less challenging.  The deal could save time and money for firms by speeding up barriers to trade at the borders and address new sets of issues that previous agreements left out.

In short, the rhetoric surrounding a possible RCEP deal is very helpful.  However, seven rounds into the negotiations, the reality of what might emerge from these rooms is less optimistic. 

In part, I would argue, low ambition stems from a particular chicken-and-egg problem in RCEP.  That is, while businesses stand to benefit in important ways from an agreement that ties together the region from Japan and China to India and New Zealand, and includes all of ASEAN, business groups are not engaged in the talks.  Because business groups are not here and are not pushing for ambitious outcomes, government officials do not feel especially compelled to deliver much. 

Of course, a post like this might not galvanize firms to pay greater attention either.  However, in the absence of feedback from businesses and others about what is needed or what is lacking, officials are likely to continue to bump along the bottom of the ambition scale.

A few businesses have managed to present materials here.  A couple of firms or industry associations were able to speak directly to officials in the experts meetings on e-commerce and non-tariff barriers, for example.  [For the sake of transparency, I should note that the Asian Trade Centre also presented a proposal on e-commerce.]  But business is largely absent and uninterested.  Consumer groups and other NGOs are equally unengaged. 

I have always joked that trade officials have never deliberately embarked on a low quality, low ambition agreement.  But precisely this mindset seems to be seeping into negotiations in several ways.  Start with the most basic element of a free trade agreement (FTA):  market access for goods.  In general, an FTA tries to deliver better benefits for members than non-members receive.  The single easiest deliverable is to grant lower tariff (or duty) rates to member companies. 

Talks have been hamstrung around this issue in RCEP.  India, South Korea and China showed up at the last round with a proposal to open only 40% of their tariff lines for benefits.  Things got even worse this round, when India further suggested that concessions on the 40% of items covered would vary, depending on the member country.

This is even more depressing than it first appears.  India does not actually trade much in goods with the other RCEP members.  Thus, much of India’s trade takes place in a very narrow band of tariff lines or product categories.  A 40% offer could easily exclude from the outset all the items that might conceivably be traded with anyone and certainly would carve out all the items of particular interest for most trading partners. 

The latest offer made things even worse, as the specific content of India’s 40% offer could shift between RCEP member countries.  Recall that the whole point of an agreement like RCEP is to make it easier for companies to source, buy and sell from and across members.  If every country has different sets of sensitive items that are completely excluded from coverage, it becomes so complicated for companies that many will just skip using the agreement at all. 

To add further fuel to the low ambition fire, India has also suggested deeply unhelpful provisions in the rules of origin (ROOs) discussions.  Tariffs and ROOs work in tandem.  I could create fantastic tariff reductions but make it so difficult for products to qualify for these lower rates that no one will use them.  Conversely, I can recommend easier ROOs that help business take advantage of even relatively higher tariff levels.  One of the best things about previous ASEAN agreements was that their ROO regimes were generally quite good.

For RCEP, India is suggesting applying the rules only to “wholly obtained” goods.  These are items that are 100% sourced from inside one (and only one) country—mostly things that are grown, harvested, dug up or fished out of the country’s territory.  This completely negates a primary purpose of a deal like RCEP, which is to connect together supply or value chains across the region.  Firms almost never source goods only from one territory anymore.  Further harm comes from such rules, as they would condemn the poorer members in the agreement to stick to exporting only raw materials and (mostly) unprocessed agricultural products where the value is often lowest.

Outside of goods, things are not shaping up much better either.  In services, for example, many members are pushing to use a negotiating method (a positive list) that is frequently a route to low-quality outcomes.  Under this method, countries open only the sectors explicitly listed in the agreement. 

The track record of ASEAN and the Dialogue Partners (or ASEAN Foreign Partners, AFPs, as they are called here) is not great.  Most members barely agreed to open services in the existing ASEAN+1 deals.  Thus, although it might be possible to have an ambitious, positive list approach to services, the signs are not promising.  This sort of list is stubbornly resistant to change later as well, making it harder to ratchet up quality over time in services.

In several other areas like competition, intellectual property rights, or sanitary and phytosanitary (SPS) rules over food and food safety, talks are progressing extremely slowly with wide gaps between member positions.   These splits are not always between ASEAN and its Dialogue Partners either.  Often, the disagreement is greatest between ASEAN members or, especially, between some Partners. 

Lest I be accused of picking only on India, let me say that other members are also pursuing low ambition outcomes.  In e-commerce, for example, it was the Malaysian lead trade official (joined, however, by India) who apparently helped kill off a unanimous suggestion of the experts group to proceed with setting up a working group on the topic.  E-commerce was one promising avenue for helping small and medium sized firms take advantage of the agreement and plug into larger chains for greater growth and job prospects.

Officials continue to work around a schedule that calls for conclusion by the end of the year.  The next round, however, is not until June.  Given how relatively little has been decided, getting a deal done a few months from now will be a major challenge.  The prospects for more ambition are not bright either, without substantial pressure for improved outcomes.

This is not an easy negotiation for many countries.  It is expensive to send delegates to far-flung locations and keep them away from their offices for a week or more.  Many of the RCEP participants only have small trade offices in the first place and putting a dozen or more people in Bangkok is a huge strain on resources. 

Given the apparently clear low trajectory of the talks after 7 rounds of negotiations, it seems to me that it is time to take bold action.  If, in the end, officials can’t craft an agreement that businesses use, what is the point?  Countries should be thinking seriously about walking away from this deal until the time is “ripe.” If this is not possible, then members should at least admit by the end of the next round that if higher ambition is not forthcoming quickly, then the agreement cannot and should not be done on the current timeline.  This would allow time for countries to improve their knowledge and understanding of some key issues.  It would give an opportunity to dramatically improve the offers on the table before a deal is sealed.  The alternative could be a 16 party low quality, low ambition trade agreement in Asia.

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Dr. Deborah 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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