Few firms buy and sell goods or services in just one market—even if that one market is huge. In the long run, larger, more comprehensive agreements are much better for firms than smaller, more limited agreements. This is what makes the TPP such an important agreement for business. But, if the deal never makes it out of Capitol Hill in Washington, the remaining TPP countries have many options that can be pursued in the near term. As Plan B strategies go, these are certainly better than nothing.
That is the simple part. Simple, but crucial—and yet a narrative that is often not explained sufficiently by politicians when discussing trade agreements. Trade agreements are about access to products, yes; but they are also about the prices of those products for consumers, and the kinds of products and services available to consumers that may be affected by in future.
Firms cannot assume that government policies will remain benign. Companies cannot keep their heads down, their “powder dry,” or hope that some other organization will do the important work of ensuring that policy and regulatory frameworks stay supportive. Conditions can literally change overnight.
Perth: The talks in Perth between the 16 governments negotiating a free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), across Asia represent a curious mixture of building momentum for closure at the end of the year and a growing realization of the distance that has to be crossed to reach the finish line.
On issue after issue, officials said that they were working towards ambitious goals but then went on the discuss the diversity of members, the complexity of the issues, the challenges of building a suitably enabling environment and so on.
Each qualifying statement is both true, of course, and disheartening. There is not much point in crafting yet another trade agreement in Asia that does not really respond to the needs of the business community.
In Perth, the East Asian Business Council (EABC) got to present their recommendations to the Trade Negotiating Committee (TNC). This is the top-level negotiating group for RCEP. EABC also offered up a survey done by JETRO of businesses across the region that highlighted many of the problems companies currently have using existing FTAs. These challenges will be familiar to any business operating in Asia—uncertain information, lack of benefits, hard to use, and so forth.
For RCEP to avoid making the same mistakes, it has got to involve more businesses into the process. Allowing the EABC to present recommendations on behalf of companies is a good start. Australia also included a number of what it terms “stakeholder” events for Perth. At these sessions, a handful of companies were allowed to present information to different groups of officials.
The total number of companies represented, however, remained microscopic. Given the difficulties that businesses often have in getting information exchanged at the domestic level with government officials, it is not good enough to say that officials in the room already know what businesses need or want or do not need or do not want.
RCEP is meant to close by the end of this year. Leaders have said it shall be so and have already extended the deadline once. To do so again would, apparently, be unacceptable.
This is the truly difficult part of RCEP. Negotiations are, apparently, accelerating. But the gaps are still wide and the business community as a whole is going to be very disappointed in the outcomes if the agreement closes without crafting an agreement that is helpful in making it easier to do business across Asia for companies both large and small.
Officials may decide to hive off a portion of the agreement and do an “early harvest” for 2016. This is a time honored ASEAN tradition. It would allow leaders to declare a partial victory in RCEP, meet the deadline, and continue negotiating.
To be frank, however, it is not really clear what might be harvested. Of course it is only April and there is still time to conclude more chapters. At the moment, it looks like only the economic and technical cooperation chapter might be sufficiently teed up for finish by the next round in New Zealand in June. Probably an SME chapter could be concluded, as such chapters are mostly arm waving around the importance of helping smaller companies with limited commitments for member governments.
To make the package of benefits better, some tariff reductions will probably be announced. My favorite examples, of course, of snow removal equipment, will undoubtedly be included in the tariff lines for early harvest. Makers of snowshoes, snowplows and snow skis will be delighted with the zero tariffs coming from RCEP.
Given the concentrated levels of trade between member countries, as shown in a new Policy Brief we have just drafted, limited tariff reductions in RCEP (below 90%) will deliver no new net benefits for most businesses. Market access negotiations will need to continue—and industry will have push hard—before sectors like textiles can expect to see any benefits from this new deal.
The services negotiations are proceeding on the basis of a positive list (except for Australia). This means that only sectors listed for opening will actually be opened for RCEP member firms. It could be possible to find a handful of service subsectors that might be gathered up for the early harvest package.
Positive lists also come with the modes of supply drawn from the World Trade Organization, so RCEP members can open up sectors like travel and tourism, but do so only, for example, for mode 2—for their own citizens to travel to other RCEP countries to use travel and tourism services. In any case, it would be possible to craft an early harvest list for services that replicate commitments made already at the WTO or within existing ASEAN + 1 deals for most members.
Investment, by contrast, is done on a negative list basis. All sectors will be opened for investment, except for those listed. This is generally more challenging for officials to do the first time, as they have to think more carefully about what specific reservations they might have. Hence, an early harvest package may have extremely limited investment provisions. (And, if companies do not push, the final agreement may also be quite modest.)
In short, an early harvest would likely offer up only the most limited benefits for companies while officials continue to wrestle with the hardest issues.
However, this might actually be a desirable outcome for businesses and certainly, it should be seen as better than a race to conclude the entire agreement by the end of this year given the current status of talks. As of now, negotiations are not at the point where most companies will be satisfied with the RCEP outcomes.
Recall again that officials are only going to meet once to craft an Asian trade agreement for a good long time—once RCEP is concluded, they will not meet again to have wholesale revisions. (They might, some people fantasize, turn RCEP/TPP into the Free Trade Area of the Asia Pacific.) So this is the trade deal that will stick in the region for at least a decade. It very much matters that they get it right the first time.
We have, as usual, been heavily focused on e-commerce. We believe this is the most important area for RCEP as the countries involved have a novel opportunity to be innovative and forward looking, especially for mobile. An ambitious outcome here will unleash new opportunities for smaller firms across the region.
But e-commerce is also challenging as it is cross-cutting and requires sustained attention across different chapters. We recommend giving responsibility to the e-commerce working group for the topic and letting them ensure that e-commerce provisions are included at the end of the day in various specific chapters, like intellectual property rights or customs or services, that facilitate trade for smaller firms in the e-commerce space.
To really push RCEP officials to be more ambitious, however, businesses will have to urge governments in and across the region to take the entire project seriously. This is an important opportunity for companies. It should not be wasted.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***
Asian governments were slower than some to join the free trade agreement (FTA) party, but once they got involved, they have been enthusiastic participants. Singapore, for instance, has more than 20 active deals with several significant agreements like the Trans-Pacific Partnership (TPP) and a bilateral with the European Union just waiting for ratification to be completed.
Many companies understand that all these trade agreements must provide benefits of some sort that could give them a competitive advantage in the marketplace somewhere. How does a firm figure out which deal provides the best benefits for which markets?
Firms seem to have multiple answers to this question, “So how?”
For some, especially many of the smaller firms at a Singapore Business Federation event last week, government should figure it out and help companies. Clearly, governments all across the region need to work hard to get more information into the hands of firms. It does no good at all to negotiate a beautiful deal if no one knows about it. The terms of the agreement have to be communicated in a language that makes sense to busy business people.
Governments might also usefully work on training their own people about the various trade deals. It also does not help to have a splendid trade agreement that goes unused because, for instance, the customs officials in a specific port never got the memo about new changes required from an agreement.
While governments should certainly do a better job of making trade agreements accessible, firms that want to be competitive have to figure out how to use the various available tools to their advantage. Companies have to be willing to invest some resources—particularly some time and, potentially, some money into investigating whether or not trade agreements deliver bottom-line impacts to the firm.
While it is possible to say, broadly, which agreements are “better” than others—with deeper, more meaningful cuts or improved market access or investment protection—the extent of benefits embedded in an agreement can vary between sectors, industries and even firms. Hence working out which deal is the “best” or offers the firm the greatest savings or access may require substantial knowledge of the firm as well as various agreements.
As an example, it is possible to imagine an agreement that is broadly not particularly good. The tariff cuts are generally poor with many tariff lines not included at all. However, if a firm’s products are included in the portion of lines that got cuts, the deal could be very helpful and deliver substantial bottom line results to the company. Or, if the agreement has limited market opening in services, but 3 star hotels are opened for investment, then 3 star hotel operators may receive significant benefits out of what might otherwise be a rather disappointing agreement.
Firms can hire specialists to assist in working out what sort of benefits could be available from different agreements. In the past, the benefits for firms might have been modest because many of the bilateral agreements in the region were not, frankly speaking, very good for companies. They often excluded sensitive sectors and—by definition—carved out most of the things that are actually traded between the parties.
However, the latest generation of agreements can be quite different. Firms can gain substantial benefits. The best of the bunch is likely to be the TPP, since the deal is deep and broad and likely covers the sector and industry of interest to most firms.
The ASEAN Economic Community (AEC) could hold some promise for firms, especially for those companies that are either new to ASEAN or are interested in expanding market access for goods to other ASEAN members. Do note that the AEC is mostly (for now) about duty-free access for goods.
But the AEC is not the only agreement that can be used in ASEAN. Firms could also use the provisions in the ASEAN-Australia-New Zealand (AANZFTA) that has significantly better coverage in many areas, including services and investment. The agreement works not just between ASEAN and ANZ, but also within ASEAN.
The Regional Comprehensive Economic Partnership (RCEP), still under negotiation, also has potential to be useful for firms. It might, again, provide better inter-ASEAN coverage too for some sectors.
This complexity, however, is partly why firms may need to find a specialist to assist in finding the benefits of various overlapping trade agreements. These specialist firms can be at least three types: embedded within the big consultancy firms in the region, smaller specialist companies, or companies that provide software solutions.
A trade deal will not, of course, solve all problems of competitiveness. Even the best agreements do not resolve issues with exchange rate shifts, labor or staffing issues, licensing requirements, soaring rents, many business costs and so forth. But FTAs can be a critical tool in the tool kit that provides advantages, particularly relative to other competitors that may not be using such agreements or be using such agreements effectively.
For most firms, the potential payoff from successfully harnessing a trade agreement could more than offset any costs associated with figuring out how to best use a deal. This applies not just to larger firms, but also to many smaller companies.
Companies may also want to develop or acquire some level of in-house knowledge of trade agreements as well. Without basic understanding of FTAs, for example, companies may struggle to make sense of software solutions or to provide sufficient information to consultancies so they can provide better recommendations on future pathways.
In the past, developing such information and knowledge may not have been so critical. But with economic growth slowing in the region and with the potential benefits in various agreements increasing, it is no longer time to ignore trade agreements. Instead, they should become one piece of the competitiveness arsenal for every company in Asia.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***