Port of Tanjung Pelepas, Johor (File Pix)

RCEP falls short of being transformational

By Jaideep Singh

On Jan 17, Malaysia ratified the Regional Comprehensive Economic Partnership (RCEP). On paper, RCEP seems big and impressive; it is the world’s largest free trade agreement (FTA) by economic size. Accounting for nearly 30% of global GDP, the agreement boasts some heavyweights in Asia-Pacific among its signatories, including Asean and its regional partners Australia, China, Japan and South Korea.

Intended to strengthen regional integration, RCEP has been greeted with considerable fanfare due to its scale. The agreement has been referred to as a “game changer”, a key to unlocking a new era of economic growth amid Covid-19 and the US-China trade war.

With chapters covering trade in goods and services, trade facilitation, investment and e-commerce, among others, many analysts are confident that it will help regionalise value chains, reduce bureaucracy in trade and improve market access to goods among partner countries.

The Asean Secretariat goes a step further, highlighting four key features of the FTA in its summary of the agreement. Accordingly, RCEP is said to be “modern, comprehensive, high quality and mutually beneficial”.

So far so good. But beyond all the rhetoric, when we examine RCEP more closely, how much value does it really add? Can we reasonably expect that it will be a significant contributor to growth in the coming years? To see if it lives up to the hype, let’s review each of the four aforementioned features of the agreement in the eyes of Asean, specifically in the context of Malaysia where applicable.

Feature 1: Modern

To start with, the Asean Secretariat considers RCEP to be at the forefront of “changing trade realities”, covering new ground through chapters on e-commerce and small and medium enterprises (SMEs).

The agreement supposedly achieves this by modernising two sets of trade agreements already active in the region. The first is Asean’s existing FTAs with Australia and New Zealand (AANZFTA), China (ACFTA), India (AIFTA), Japan (AJCEP) and South Korea (AKFTA), all of which entered into force between 2008 and 2010. The second is the ecosystem of World Trade Organization (WTO) agreements to which all RCEP countries are party by virtue of being WTO members.

In reality, RCEP is more of a standard FTA with a few additions that acknowledge the evolving patterns of trade. But it stops short of concrete policy prescriptions in these areas.

For one, unlike the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), RCEP does not have any provisions for acceptable labour standards or environmental preservation, which are increasingly becoming the norm.

Some detractors may argue that the imposition of such standards would go beyond the realm of trade agreements, impinging on domestic policy. But with five Malaysian firms having been banned from exporting to the US at some point since 2020 due to the suspected use of forced labour, this omission was a missed opportunity to bring labour rights violations in the region to the fore.

And what about the “new” chapters on e-commerce and SMEs?

In e-commerce, many of RCEP’s provisions, including the promotion of transparency, cooperation, paperless trading and digital certificates, are either already addressed in AANZFTA or affirm WTO decisions, which should apply to all trade in and out of Malaysia as an Asean and WTO member.

As for SMEs, it is a step forward that RCEP recognises the gains from SME participation in regional value chains, which has not been talked about in any previous FTA. However, rather than being a game changer, the agreement serves more as a first step for future integration in this regard. For local businesses, the agreement will not solve critical problems inhibiting SME growth, including the inability to access credit, limited skills and low adoption of digitalisation, which need to be addressed at a domestic level.

Feature 2: Comprehensive

“Comprehensive” is quite literally RCEP’s middle name, and the Asean Secretariat takes this to mean that the agreement has depth in its range of commitments. For instance, it praises the agreement for “achieving” trade liberalisation in goods and services through tariff cuts.

In practice, as research from REFSA suggests, the gains we can expect from tariff reductions are modest at best, especially for Malaysia and other Asean countries, as tariffs are already low to begin with. Over 70% of intra-Asean trade is currently tariff-free, and only 0.35% of products in the existing Asean Free Trade Area are subject to import duties. Indeed, as of 2019, Malaysia’s overall applied tariff rate to imported goods and services is 3.9%, according to the WTO, well below the global average of 7.9%, meaning the country is already a substantially open economy. Therefore, further promotion of trade for Malaysia requires reforms beyond just tariff reduction.

RCEP recognises this. In fact, the Asean Secretariat also highlights that the section on trade in goods and services goes beyond tariff reductions — “market access” in the jargon — and into “specific” trade barriers such as non-tariff measures (NTMs). At its essence, an NTM is a policy apart from tariffs, such as a quota or national standards, that increases importers’ and exporters’ transaction costs and, hence, reduces trade. As it stands, the RCEP countries continue to make extensive and growing use of NTMs. In fact, according to a 2021 report by Asean, businesses have cited the existence of NTMs as one of the top three regional issues in need of serious improvement to strengthen economic integration. In order to achieve a significant business-friendly economic impact, RCEP should therefore focus on reducing the 24,700 NTMs in operation across the region to date.

How does RCEP fare in this regard? Once again, the agreement focuses mainly on rehashing existing rules in the WTO and Asean’s FTAs. For instance, RCEP’s chapters on NTMs call for WTO-led international standards and transparency in the application of NTMs, all of which are already part of the WTO Agreement on Sanitary and Phyto-Sanitary Standards (SPS) and Agreement on Technical Barriers to Trade (TBT) since the 1990s, as well as AANZFTA.

Now, this is all good and well in theory. NTMs can be opaque and have been used as a loophole to protect domestic markets from competition on the pretext of protecting national health and security. So RCEP’s reiteration of the call for transparency across member states in the arena of NTMs, including information sharing and procedures for consultation, seems reasonable. But if existing agreements, like SPS and TBT and the Asean FTAs, did little to change the abundance of active NTMs in the region — and RCEP mostly repeats what is already meant to be in place — how could businesses cut transaction costs as hoped? Ultimately, ratification would not automatically lead to a reduction in NTMs unless there is political will and cooperation to put the provisions into practice.

Feature 3: High quality

The Asean Secretariat claims RCEP is “high quality” for adding value in two ways. First, it is said to go beyond the Asean FTAs in scope in terms of areas of trade addressed. But as we’ve seen, the evidence is mixed. A number of RCEP’s provisions, such as those covering e-commerce and trade in goods, are already covered in existing FTAs to which Malaysia is party. Nonetheless, one area that is fairly original is the larger scope of trade facilitation. RCEP calls on member states to commit to introducing at least three measures to simplify the cross-border movement of goods, including low documentation requirements, low rate of physical inspections and a rapid release of imported goods.

While the Asean FTAs do not explicitly cover these commitments, it is important to note that the region already has a few nonbinding initiatives to facilitate trade in a similar way such as the Asean Single Window and Asean Solutions for Investments, Services and Trade.

Second, and this is where RCEP deserves credit, it creates a “single rule book” for regional trade. The RCEP countries are currently subject to a multitude of overlapping bilateral and multilateral agreements, which could create a tangled “noodle bowl” of rules. RCEP sets the record straight by establishing a common set of rules of origin (ROO) for the entire region. Essentially, any goods manufactured using a combination of materials from RCEP and non-RCEP countries qualify for preferential access as long as they have a regional value content (RVC) of at least 40%. This is meant to help traders navigate the complex ecosystem of international supply chains, and could indeed make their life significantly easier — provided they have the means and economies of scale when accessing export markets in the first place

It is worth pointing out that common rules of origin are by no means a transformational idea: the existing Asean FTAs have “substantial commonalities” in the area with similar formulas for RVC. What makes RCEP special, however, is that it is the first FTA to bring China, Japan and South Korea together under one common set of rules. By extension, the East Asian countries are likely to see the biggest gains from this arrangement.

But the other RCEP signatories will also benefit. Indeed, thanks to the harmonised ROO, exporters across the board will now be able to use a standardised certificate of origin as part of the export process, which should simplify the paperwork for cross-border trade.

Feature 4: Mutually beneficial

Finally, the Asean Secretariat praises RCEP for bringing together countries at differing levels of development, with flexibility for the less developed member states, namely, Cambodia, Laos, Myanmar and Vietnam. RCEP also calls for economic and technical cooperation across nations.

However, the provisions on cooperation are voluntary, putting the onus on the more developed partner countries to provide help. In any case, these focus more on helping the least developed countries in RCEP that require substantial capacity building: an upper-middle income country like Malaysia would not benefit much from this sort of assistance.

For Malaysia, mutually beneficial investment and trade requires a concerted effort to beef up the industrial policy framework.

Rather than through RCEP, this needs to come from within. In essence, we need to focus on attracting sustainable, high-quality foreign direct investment (FDI) and reaping the benefits from the spillover of FDI where domestic firms and capacity are concerned. The ultimate aim should be to engage in learning-by-doing and R&D to equip local industrial players with the necessary skills to compete internationally through trade.

In this regard, the country currently lacks a strategic policy on how to encourage joint ventures and collaboration between multinational corporations (MNCs) and local companies to help the latter integrate into MNCs’ global supply chains. There is little coordination between key public stakeholders, such as the Ministry of International Trade and Industry, Malaysian Investment Development Authority, Ministry of Finance and Economic Planning Unit, to establish clear guidelines for the promotion of domestic start-ups to serve, complement and eventually even compete with established MNCs.

As a consequence, highly productive activities, such as the homegrown design of chips and integrated circuits in Penang, take place without enough government inputs or assistance. Though some former local employees of MNCs have managed to start their own firms, such as Globetronics Technology Bhd and Pentamaster Corp Bhd, we would see a lot more success stories if Malaysia had a strategic and coordinated industrial and innovation strategy. Ratifying RCEP and expecting instant results without addressing these crucial policy issues would be akin to planting seeds in concrete.

Conclusion

Rather than a game changer, it would be more useful to think of RCEP as the first step in the path towards more transparent and integrated trade in Asia-Pacific. It functions primarily as a harmonising document that reiterates and standardises provisions already in place in Asean’s relationship with its regional partners. Nonetheless, as an indication of the direction of travel for regional integration, it moves the ball forward, especially at a time when the growing US-China rivalry creates significant challenges and opportunities.

As for Malaysia specifically, the clearest value of ratifying RCEP may be as a signalling function: it reiterates the country’s position as an internationally integrated economy, open for foreign trade and investment, and well positioned to take advantage of the new opportunities in the region. But in order to translate the theoretical benefits of RCEP into sustained growth, Malaysia needs to focus on enhancing its own trading and industrial capacities.

At the end of the day, it is only through clear decision-making and the political will to promote broad-based value addition and capacity building that this country can turn this small step into a giant leap in order to build back better.

 

-Published in The Edge Markets on 8 February 2022.