Making RCEP about region-wide liberalisation

Author: Sourabh Gupta, Samuels International

During the penultimate week of January, officials of the 16 Asia Pacific nations comprising the membership of the Regional Comprehensive Economic Partnership (RCEP) held their third round of talks in Kuala Lumpur. The scope and method of the negotiations were discussed and working groups established in the areas of competition, IPR, technical cooperation and dispute settlement. A fourth round is scheduled for April in China.

When concluded, the 16 nations — the 10 ASEAN countries plus Japan, South Korea, China, India, Australia and New Zealand — covering 49 per cent of the world’s population, 30 per cent of world gross domestic product (GDP) and 29 per cent of world trade, will have constructed one of the largest pan-regional groupings within the multilateral trading system.

For the agreement to be a stepping-stone to broader region-wide liberalisation, as well as a worthy successor to the ‘open regionalism’ philosophy of trade deepening that was championed by APEC a quarter-century ago, RCEP must stay true to its Guiding Principles and Objectives. Along the way, it should also seek an enhancement to these principles.

First, RCEP must strictly adhere to its intent to observe GATT Article XXIV and eliminate substantially all tariff and non-tariff barriers, without any major sector exclusion, in the area of goods trade. The trade liberalisation rate for ASEAN+1 FTAs has ranged from a high of 95.7 per cent (ASEAN–Australia–New Zealand FTA) to 79.6 per cent (ASEAN–India FTA). RCEP must aspire to a liberalisation rate that corresponds to the former and closely matches the 95 per cent liberalisation rate target envisaged in the Trans-Pacific Partnership (TPP) negotiations. Equally in the area of services, GATS Article V (which has similar liberalisation requirements to GATT Article XXIV) should be respected. The level of commitments under the ASEAN+1 FTAs do not currently meet this standard.

Second, RCEP should eschew the single undertaking approach (SUA) and, as an eminent panel of experts has recommended, create a set of linked agreements that are simpler in design and reachable by different timelines. The region’s integration process has been a rolling one and the episodic nature of the single undertaking approach does not comport with this approach to integration. The high-wire extortions that inevitably characterise a SUA end-game are also procedurally inappropriate as a device for 21st-century liberalisation in the Asia Pacific (as the TPP countries are gradually discovering).

Hence, while RCEP member states should consensually arrive at common end-goals, different formats as well as adjustment paths — especially for less-developed member countries — must be accommodated. Deviations in implementation schedules should be admitted, even as the deviation from a common final schedule is minimised. The richer countries within the grouping could play a ‘pathfinder’ role, taking upon themselves a more ambitious pace and range of liberalisation commitments.

Third, the spaghetti or noodle bowl effect resulting for the multiplicity of rules of origin (ROOs) need to be unwound and consolidated as best as possible. Although every last eccentricity need not be reined-in, best practices in this area should be observed. ROOs should be simplified: those at low MFN-bound rates should be eliminated and the scope of diagonal cumulation and outward processing schemes with the least-restrictive value content rules expanded.

Ideally, one ROO per product should be established in the RCEP area; if this is too onerous, the current percent of tariff lines subject to a co-equal rule should be increased significantly. That as many as two-thirds of tariff lines in all five existing ASEAN+1 FTAs share at least one common ROO suggests that a sequential approach to harmonisation is not entirely beyond reach.

Equally, the agreement must not be festooned with carve-outs, such as the sensitive track, special products track, highly sensitive list and exclusion list in the ASEAN–India FTA. The Partnership is an exercise in negotiated liberalisation, not negotiated protectionism, and the exceptional nature of the exclusion list should reflect this fact.

Fourth, most of the ‘Factory Asia’ fragmentation trade already travels across (much of) the RCEP area at very low tariffs or entirely duty-free, due to a variety of prior initiatives. For RCEP to serve a meaningful purpose, its focus must therefore shift to reducing the cost of ‘beyond-the-border’ barriers that can compound and tip the operation of a supply chain into the red. The institutional architecture of Asian trade regionalism has tended to follow, not precede, the exchange of goods on the ground. In keeping to this spirit, the ‘beyond-the-border’ impediments that sequentially originate at the factory gate to the living room — road connectivity; domestic trucking cartels; port services bottlenecks; maritime transport price-fixing arrangements; customs delays and poor electronic document management standards; classic SPS/TBT and product standard barriers; denial of entry to third-party logistics providers; distribution chain investment caps — must be reformed with the same comprehensiveness with which trade crosses RCEP borders today.

Regulators across the region should aspire to reach beyond formulaic institutional negotiating formats and horizontally organise, and address, these multiple issue areas within overarching clusters that conform to the real-world flow of business.

Furthermore, as regulators develop trust and confidence in their counterparts and graduate from their inherited approach of protecting domestic interests to promoting regional ones, RCEP will help embed the trade liberalisation dimension within the broader pan-Asian and Asia Pacific-wide agenda of connectivity, regional cooperation and comprehensive integration. At a practical level, RCEP could set a roadmap to situate this liberalisation dimension within the overall blueprint of the ASEAN Economic Community and guide the two towards common end-goals. An East Asia Cooperation and Development Fund that builds regulatory capacity and coherence across developing Asia would provide a valuable complement. It will also be a boon for region-wide services liberalisation, given that (as recent value-added data confirms) a much higher ratio of services is embodied in goods that crosses borders than is ordinarily captured by conventional trade statistics.

Finally, and foremost, RCEP must serve as a building-block to broader trade liberalisation and, to the furthest ability possible, advance trade multilateralisation’s bedrock principles of non-discrimination, national treatment and peer-driven liberalisation. RCEP should adhere to the Best Practice for FTAs developed and endorsed by APEC’s leaders in 2004. Countries sharing common membership in RCEP and TPP should cross-share preferences with their non-RCEP and non-TPP peers. Over and beyond, RCEP and TPP countries might consider adopting a set of common principles and standards on the strength of which benefits could be shared reciprocally, and to a larger body of membership, on a non-discrimination basis.

The Asia Pacific must not be allowed to be carved up into two somewhat-overlapping but competing trade blocs — both of which ultimately share a common aspiration to reduce transaction costs at, and beyond, the border.

Sourabh Gupta is Senior Research Associate at Samuels International Associates, Inc., Washington DC.

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