Regional Comprehensive Economic Partnership (RCEP): An ASEAN Point of View

The expected finalisation of the Regional Comprehensive Economic Partnership (RCEP) has been postponed from December 2016 to December 2017. India’s reluctance to open up its economy and strike a deal extended the 4-year-long negotiation to its fifth year. Should the Association of Southeast Asian Nations (ASEAN) share or be concerned about India’s reservation?

ASEAN countries do not share India’s reluctance, which stems from its unique economic conditions. Currently, India is among the RCEP negotiators that have the highest tariff, which forms the bulk of India’s trade barrier. According to the trade and tariff indicators of the World Trade Organisation (WTO), the average trade barrier of India is 39.6% and 72% higher than that of Singapore and China respectively. The high trade barrier that India currently maintains bulwarks its manufacturing industries from the relatively cheaper manufacturing products from China and ASEAN. To reduce trade tariffs to below 3 percent immediately to join RCEP would send sudden shockwaves through India’s manufacturing industries.

ASEAN would not be affected as much as India by the compromise over tariffs, as major manufacturers within the association, such as Thailand, Vietnam and Indonesia all have considerably lower trade barriers. ASEAN has adapted to much a more open and integrated economy through years of large trade volume among ASEAN countries and between ASEAN and China. The manufacturing industries in ASEAN will have a much smoother transition than their counterparts in India.

Although the negotiation of RCEP is spearheaded by China, the largest economy among the sixteen founding members of the free trade agreement, ASEAN will profit from the finalisation of RCEP the most. RCEP is dedicated towards reducing tariff and non-tariff trade barriers. Non-tariff trade barriers include sometimes tedious and repetitive tests on goods, as well as environmental, health-related and ethical standards. RCEP will standardise the non-tariff trade barriers and streamline bureaucratic and costly tests that were sometimes used strategically to increase the cost of imported goods so as to protect domestic manufacturers. The high transaction cost and the “noodle bowl effect” (trade complicated and slowed down unexpectedly by increasingly tangled Free Trade Agreements) that arise from the lack of a coordinated and integrated regional trade agreement will be addressed in the interest of ASEAN countries. Thereafter, producers from ASEAN could become involved more in the global value chain.

The benefits of RCEP are apparent: Petri and Plummer from East-West Centre predict that the income of ASEAN countries would increase by about 3% in total by 2025 under RCEP, whiel Ken ITAKURA from Nagoya City University estimates that RCEP could boost the real GDP of almost all ASEAN countries more than any other free trade agreement.

Even though RCEP has unmistakable economic benefits for ASEAN, sceptics are still concerned about the potential political constraints posed by other main stakeholders in the agreement, especially China. The exclusion of the U.S. in the negotiation seems to suggest that China attempts to set the agenda and establish a hegemonic status.

However, such suspicion is unnecessary. If China was aiming to monopolise the voice of RCEP, it would not have endorsed the inclusion of Japan and India, the other two largest economies in Asia, as founding members in the negotiation. India and Japan’s demands are distinct from China’s. India is against a near-zero tariff rate and strict protection for intellectual properties that might impede the development of its medicine manufacturing. On the other hand, Japan’s interest lies in the extension of the trade agreement to cover investment, trade, service provision and strict intellectual property regulation. Accommodating the disparate interest parties in the negotiation exhibits China’s determination to promote regional integration and free trade, even at the risk of postponing finalising the agreement.

The compromises that China has made so far also relieve concerns about whether it intends to further its dominance in Asia-Pacific region. Initially, RCEP was a much narrower free trade agreement that covers mostly the trade of goods. Eventually, the agreement expanded to cover service sectors advocated by India as well as investment and intellectual properties, requested by Japan. Inclusivity is the paramount objective of RCEP which emphasises an “Asian centrality,”  instead of a “China centrality” purported by sceptics.

Politically, RCEP serves as a building block of China’s overarching economic and diplomatic framework, “One Belt, One Road” (OBOR), the integrating effect of which is valuable for ASEAN. Du and Ma in their 2015 paper argues that China’s intention of OBOR is to strengthen China’s existing economic ties within Eurasia, as well as to secure China’s commodity supply. RCEP plays a critical role in OBOR to promote trade and investment in Asia, as 7 out of China’s 10 largest trade partners are located in Eurasia. Meanwhile, 7 out of ASEAN’s top 10 trade partners are covered in the negotiation of RCEP. China and ASEAN share common interests in the stability and integration of Asia through RCEP.

RCEP is the best alternative for ASEAN, while the Trans-Pacific Partnership (TPP) spearheaded by the U.S. is likely to be aborted, with the U.S. withdrawing. In fact, RCEP might be more achievable and suitable for ASEAN compared with TPP—the environmental, health and sanitary standards of RCEP are able to guarantee a commonly acceptable and safe trade agreement. On the other hand, RCEP does not force ASEAN countries to enforce drastic economic and political reforms that confront the entrenched corruption and labour rights issues in some ASEAN countries. Although such reforms are beneficial in the long term, restrictions that are much more stringent than the international standards do not cater to developing countries’ most imminent demands for rapid development.

The accession clause of RCEP also sets it apart from TPP, which lacks such a clause. The clear accession criteria make it possible for non-founding countries to participate in this economic framework in the future. RCEP might seem less ambitious than TPP at the moment in terms of regulation standards, but its large size and  the potential to expand further from the current version, which already encompasses about 30% of the world’s GDP and 45% of the world population, eclipses TPP.

RCEP provides ASEAN with economic opportunities with minimal political risks. ASEAN countries stand on the same ground and should solidify to actively push for the prompt finalisation of RCEP, thereby establishing their prominent status in the free trade agreement.