The Financial Express

RCEP: Emerging economic and strategic landscape in Asia-Pacific region

| Updated: December 03, 2020 13:30:11

Evaly and Fianancial Express Evaly and Fianancial Express
RCEP: Emerging economic and strategic landscape in Asia-Pacific region

The Regional Comprehensive Economic Partnership (RCEP) agreement is set to create  the world's largest regional trading bloc. The agreement  was signed virtually on Sunday November 15 on the sideline of  the annual summit of the Association of Southeast Asian Nations (ASEAN). RCEP is made up of 10 ASEAN member countries and Australia, China, Japan, New Zealand and South Korea. The deal is considered very significant in view of the impact of the pandemic and the uncertain aftermath of the US presidential election.

The agreement has been described as comprehensive and mutually beneficial by member countries. It covers very wide range of areas  from trade in goods, investment, e-commerce, intellectual property and government procurement. While the newly signed trade agreement extends beyond trade to set rules and standards for a range of activities, but it does not establish unified standards on labour and the environment or limiting government subsidies and state enterprises  or commit member countries to open services and other vulnerable areas.

Overall, RCEP is modest in its ambition and largely focused on what are really achievable given the enormous diversity of member countries ranging from Myanmar to Australia and Japan. Therefore, rules have been essentially designed to accommodate those diverging interests. And that is reflected in the types of areas not covered or partially covered in the agreement. The agreement is mostly geared towards formalising the existing trade patterns  between member countries rather than to remake them. Therefore, this is the first step in liberalising trade and it can be further improved over time. On that count, this is a big step forward.

GDP of RCEP member countries accounts for 30 per cent of global GDP (US$ 26.3 trillion) and 28 per cent of global trade (US$12.4 trillion) with one third of world population (2.3 billion)-- almost a third of the global economy. The agreement is also flexible enough to cater to the disparate needs of member countries who are  at various stages of their economic development such as Myanmar and Australia. The RCEP agreement will give  a timely boost  to economic activity at a time of the global health crisis as well as to the long term economic prospect for the region. It is estimated that RCEP will add US$200 billion to  global GDP annually by 2030 and 0.2 per cent to its member countries GDP.

RCEP negotiations were launched by ASEAN in 2012 between the 10 members of ASEAN and  Australia, China, India, Japan, New Zealand and South Korea, and the talks dragged on and progress was limited. However, the discussions gained momentum after Donald  Trump became the US  president in 2017 and started to undermine the global multilateral trading system. That gave rise to growing trends in increasing protectionism. This has led the participating countries to become more vigorous to promote free trade.  Chinese premier Li Keqiang summed up the sentiment when he said, "The signing of  RCEP is not only a landmark achievement of East Asian regional cooperation, but also a victory of multilateralism and free trade''. RECP is "hugely symbolically significant, coming at a time of global uncertainty' said Simon Birmingham, Australian Minister of Trade.

It is now quite unclear how the US will respond to the emerging trade arrangement in the region. President-elect Joe Biden, however, indicated he would wait to negotiate any new trade deals as he is faced with more urgent issues to deal with at home. But pressure is also mounting in Europe to act to deal with RCEP which is seen as a Chinese sponsored free trade deal. Manfred Weber, a senior EU lawmaker considers reunification of the so-called Western world is needed now to counter the rise of China. He told the South China Morning Post that RCEP is a wake up call for Europe and the US to unite against China.

However, India is an exception. It was initially involved in the negotiations but pulled out last year. The official reason cited that "As far as India is concerned, we did not join RCEP as it did not address the outstanding issues and concerns of India". But the real issue was Indian politicians were unwilling to lower their countries steep tariff barriers. This issue was further made  complicated by Indian politicians' perception that RCEP would largely be led and dominated by China. This was further made clear by the Hindu supremacist  organisation, RSS, of which the present ruling party in India, BJP,  is an affiliate. The RSS is quite clear about its stand on  RCEP and said that India was unlikely accept the China-led trade deal.  Further to make India's stand very clear, Ashwani Mahajan, chief of Swadeshi Jagaran Manch, the RSS economic wing, said that there was little support for the deal in India.

RCEP is essentially  an ASEAN initiated  regional free trade initiative and remains an ASEAN agreement. It has never been led or driven by China. But given the sheer size  of the Chinese economy it will remain an important but not dominant player. If China plays any role in setting any agenda, it will have to be done collaboratively. Therefore, India's China apprehensions are misguided. Also, China is not responsible for creating uncompetitive manufacturing and agriculture sectors in India behind the high tariff walls and subsidies over the last 70 or more years.

US President Donald Trump described India as the largest tariff country in the world. That is the main stumbling block for India to join any free trade bloc made up of open economies even if China is not a member of that bloc. If one goes by India's tactics in negotiating a free trade agreement (FTA) with the European Union (EU) stretching now  over a decade, no body knows whether those negotiations with the EU are on or off at the moment.  That makes one to think twice  in undertaking any negotiation on  a FTA with India.

Now even India's two biggest promoter in the region Australia and Japan also joined in RCEP because realism dictated them to do so while at the same time Australia and Japan as the two principal client states of the US in the region are ganging up to militarily confront China at the behest of the US. However, India's absence from RCEP diminishes some of the value for Australia and Japan in furthering their non-economic agenda in the region using RCEP as a conduit.

In fact, Australian prime minister Scott Morrison made a dash to Tokyo last week to sign up a military alliance pact called the Reciprocal Access Agreement with Japan. Many strategic analysts consider this agreement a very important step in establishing an Indo-Pacific Alliance against China. Also, many observers in China were also surprised that Australia was treating its biggest trading partner as a security risk.

Meanwhile, Japanese prime minister Yoshihide Suga on last Sunday's meeting clearly indicated his intention to take a leading role to bring India back into the group. To ensure India is not left out high and dry, and to ensure and to incentivise India's collaboration in this US led anti-China military alliance, US Navy Secretary Kenneth Braithwaite this week declared that US needed a new fleet based in Singapore that could swiftly respond to tensions in the Indian Ocean. He further added, "We can't just rely on the 7th fleet in Japan. We have to look to other allies and partners like Singapore, like India''.

RCEP is likely to shape the future of trade in Asia as a whole. This new free trade bloc will be bigger than the European Union (EU) and the US-Mexico-Canada agreement. The joint statement by leaders  said the deal "demonstrates our strong commitment to supporting economic recovery, inclusive development, job creation and strengthening regional supply chains as well as our support for an open, inclusive, rule based trade and investment arrangement''.

The US under the Trump administration initiated the process of a general reshaping of international trade relations by dictating the terms favourable only to its own economic interest while directing all efforts to dismantling and undermining the current multilateral trading system. This has further incentivised  the growing interest in forming  regionalised trading arrangements such as RCEP.

The key feature of a free trade area is that each member country maintains its own separate tariff structure as against non-bloc members. Therefore, rise of regional trading alliance, or blocs like RCEP not only poses a challenge to the multilateral trading system but also  poses special challenge for  developing countries like Bangladesh if they remain outside a regional trading arrangement.

However, the Bangladesh commerce secretary indicated that Bangladesh was not eligible for joining RCEP as it was not invited to do so. He further added Bangladesh is currently focused on entering into bilateral trading arrangement such as  the country is undertaking with Bhutan, a country that  ran a trade surplus of US$47.3 million with Bangladesh in 2018-19. Many in Bangladesh appear to have taken comfort in India's refusal  to join RCEP despite being invited to join the bloc. Such a reaction is quite surprising and belies any logic.

Meanwhile, according to the Financial Express (November 19), the National Board of Revenue (NBR) suggested the Bangladesh government to refrain from entering into any free or preferential trade agreements with countries that run trade surpluses with Bangladesh. It further suggested  the government to consider revenue generating aspects of trade i.e., alluding to  tariffs and supplementary duties which constitute 30 per cent of total tax revenue. And strangely enough, it also asked government to consider to provide protection to local industries prior to signing such a deal without mentioning which industries and why and how that can be done while undertaking  a free trade negotiation.

If such protectionist measures are followed through, they will further deepen the structural rigidities the Bangladesh economy now faces with a highly concentrated export product-- RMG and a highly regressive taxation regime. If Bangladesh remains outside the largest trading bloc, RCEP which is in its immediate neighbourhood will put the country  at the greatest disadvantage with serious economic consequences for the country and its people as the global multilateral trading system is becoming dysfunctional.

Furthermore, a group of countries within specific geographic region such as South and South East Asia stretching into the Far East and Pacific region may possess common characteristics and complementary economic attributes but are divided by seemingly arbitrary political boundaries. Through cooperation these countries can enlarge domestic markets in favour of a more comprehensive regional market through rapid abolition of trade restrictions.

Bangladesh is geographically the closest country to the South East Asia region. In 2018-19, RCEP member countries accounted for close to 11 per cent of Bangladesh exports. Entering a free trade agreement with RCEP bloc will help accelerate increase in natural trade flows that now exist with the bloc thus resulting in increased trade creation. Also, such an arrangement will result in lowering tariff barriers against RCEP member countries and that will enable Bangladesh to achieve enhanced competitive advantage based on its evolving comparative advantage which will enable the country to create a more diversified manufacturing base and to explore new avenues in services exports. Lowering of tariffs will also create an enabling economic environment to push for a more progressive income and wealth based taxation regime to replace or reduce the importance of the current highly regressive consumption-based taxation regime. Such a change in the taxation regime will also help to reduce income inequality and poverty.

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