This was supposed to be the year that the Regional Comprehensive Economic Partnership (RCEP) trade negotiations finally wrapped up. Once again, it will not happen.
The 16 parties involved (Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam) have been talking since early 2013. After 24 formal rounds, at least 9 ministerials, multiple informal meetings, and annual leader’s meetings, RCEP remains a work in progress.
Why is it taking so long to get an agreement?
The short answer is two-fold—a lack of sufficient political will and serious technical challenges in bridging the gaps between widely different member states.
The lack of political will seems surprising to many outsiders. After all, at a time of rising global trade tensions, surely this is the best time to lock down an agreement in Asia to keep trade lanes open for mostly export-dependent trading states?
With the start of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) trade benefits on December 30, 2018, the competitive risks to non-member states in Asia will continue to rise. So far, RCEP countries Australia, Japan, New Zealand, Singapore and Vietnam have agreed to start CPTPP (along with Canada and Mexico) at the end of the year.
Yet not every state in RCEP is prepared to make the political and economic decisions needed to close the agreement. The final leg of negotiations always includes the toughest challenges over the most sensitive issues. For many RCEP states, leaders remain unable or unwilling to make the hard calls over specific tariff cuts, service sector openings, investment protections and other individual details needed to bring a comprehensive agreement to the finish line.
While most of the agreement is done or nearly done, with roughly a dozen out of 16 chapters that are or could be closed quickly, at least four key chapters are still a relatively far distance from closure.
The market access for goods continues to stymie quick conclusion. India will not grant higher levels of tariff cuts on shorter timelines. China wants more access to Japan.
The timelines for phasing out tariffs often remain entirely too long. Tariff cuts over a 20 or even 30 year time horizon provide no help to companies struggling to survive today.
Too many product categories are excluded entirely, including too many agricultural products and areas where smaller firms could capture value addition at home or become part of supply chains if given a chance.
The rules of origin are both far from complete and unnecessarily complicated. If the agreement were to conclude now, firms would be unable to access lower tariffs for many products, because the ROOs for many items are so challenging to meet that companies would simply avoid using RCEP at all. These are technical issues that must be addressed prior to completion.
The rules of origin (ROO) should, especially, help facilitate the supply chain formation that was part of the original impetus behind RCEP in the first place. Our recent Policy Brief 18-06 urges officials to think carefully, as an example, about automotive ROOs as an important final deliverable from the RCEP framework. Other sectors should be considered in a similar fashion.
Services liberalization remains far too limited—opening is often concentrated in areas that are just not commercially meaningful. Smaller firms, in particular, need access to the broadest possible range of service sectors now and into the future.
Investment protection should not be sector-specific, but should be available for all RCEP investors. Any sector-specific provisions, as we note in our recent Policy Brief 18-05, becomes exceptionally complicated for firms, including SMEs.
Finally, as we have repeatedly made clear, digital trade is critically important. It will become the backbone for most trade in the region in the future. Yet key elements of digital trade and e-commerce remain uncertain in RCEP, including the importance of information flows and the difficulties for smaller firms in rules that require all data to remain locally hosted.
These are not issues that matter only for technology firms, but increasingly for every single company doing business of any type.
After all this time, and despite the challenges noted above, RCEP is still close to conclusion.
The difficulty now is the political calendar for 2019. If finishing the deal in 2018 was tough, it is likely to be more challenging in the coming year.
Thailand takes over from Singapore as ASEAN Chair. ASEAN drives RCEP and, with a Thai election looming in February(ish), it will be hard for the Thai government to focus on RCEP until probably mid-year.
This is not the only election that matters for RCEP. Both Indonesia and India will go to the polls in 2019. Each country needs to make some tough calls in the RCEP talks and the election cycle does not raise expectations that these will happen easily next year.
RCEP is important. Firms need clarity and certainty on trade arrangements and rules. Reducing risk in Asia can bring about greater investment and jobs in the region.
The Asian Trade Centre and the Asia Business Trade Association will remain engaged in RCEP talks for 2019. To find out how your company can be involved, contact us at email@example.com or firstname.lastname@example.org today.
For a short recap on RCEP, see our Policy Brief 18-09 on RCEP Status.
***This Talking Trade was written by Dr. Deborah Elms, Executive Director of Asian Trade Centre and Vice-Chair of the Asia Business Trade Association, Singapore***