AEIR 2019/2020


A new FTA in a congested trade landscape: Can RCEP unravel the noodle bowl?

Just this past November 20th, the Association of Southeast Asian Nations (ASEAN) announced their intent to negotiate a comprehensive Asia-wide trade agreement. The potential result will be a more open and efficient trade and investment environment covering a region with a combined GDP of $ 15 trillion and a population of 3 billion people.

If the Regional Comprehensive Economic Partnership (RCEP) is to successfully create an environment that maximizes the potential of regional production networks for all members, it will need to harmonize the existing noodle bowl of trade agreements. The political and economic realities of existing agreements and regional interests will make this a high wall to breach, but the potential efficiency gains may drive a better agreement that could move in the right direction.

Is Simplification Possible in the Current Environment?

Simplifying the trade environment in a region where the average country has nine FTAs is an important goal. In these initial days after the announcement, details are scarce but expectations are high. To understand the potential for this agreement to achieve its objectives, we need to put it in a broader geopolitical context.

First we need to think about who it includes. The RCEP aims to integrate the markets of 16 countries including the ASEAN 10, People’s Republic of China (PRC), Japan, Republic of Korea, India, Australia and New Zealand. In their existing regional agreements, most countries incorporate sometimes extensive exemptions for sensitive goods. Since sensitive goods are often where distortions are most prominent, these lists will need to be shortened. This is a potential complication to negotiations among countries that prefer to operate by consensus.

In addition, because the proposed RCEP includes developed countries, it will need to follow the rules set out in Article XXIV of the GATT. This means that tariffs must eventually reach zero among the group within the medium term, and substantially all traded goods must be covered. In practice, many of Asia’s larger countries have favored partial and staged liberalization in their existing agreements. This is reflected by their relatively high average tariff rates-–India’s average MFN rate is 12.6%, Republic of Korea’s is 12.1% and PRC’s is 9.6%. The absence of the option of partial liberalization may make WTO compliance a challenge.

RCEP vs. TPP Negotiating Countries

Source: USTR and ASEAN Secretariat websites.

A second contextual element to consider is the on-going TPP negotiations. The popular press has suggested that PRC’s support for the RCEP is the result of pressure from the US-driven TPP. While this is a biased reading, it raises some concerns that should be considered. In particular, we know that the drivers of the TPP are primarily political, not economic. If this is also reflected in PRC’s support of RCEP, then it is possible that the difficult economic decisions that will inevitably arise in multi-country negotiations may be relegated to later discussions in order to achieve a completed agreement.

Another feature of the TPP-RCEP relationship is that six of the RCEP countries – Australia, Brunei, Malaysia, New Zealand, Singapore, and Vietnam - are simultaneously involved in the ongoing TPP negotiations. Overlapping countries will have an incentive to push for more comprehensive and deeper issue coverage as a result of their participation in the TPP. This does not necessarily have to result in discord, but the main RCEP proponents will need to keep this incentive structure in mind.

A final consideration is the geopolitical environment in Asia on territorial disputes. As Surin Pitsuwan, outgoing ASEAN Director-General points out, this is one of Asia’s "most contentious" periods in years. Though all negotiators have assured the press that this matter will not spill over into trade negotiations, it raises an important question. Will the RCEP include a fully-applied, binding dispute settlement mechanism? ASEAN has only inconsistently included this feature in its trade agreements. Yet, WTO trade disputes among Asian countries are not unusual. For a modern and fully functioning trade agreement, this will be an important feature.

Is There Logic to Another Agreement?

If negotiators stick to their goal to build a "modern" agreement that can succeed in "establishing an open trade and investment environment," then simplification of the tangled regulatory regimes of the noodle bowl is certainly possible. Though similar global efforts have not met with success (remember the Free Trade Agreement of the Americas?), for Asia, the timing is right. If a genuine commitment exists, then this is an important opportunity to build a single "Asian" template that can then be replicated in extra-regional agreements. The challenge is great, but the RCEP may yet result in a successful single undertaking in Asia.


*Thanks to Myo Thant for his input and advice on this post.

The views expressed in this blog post are the views of the author and do not necessarily reflect the views or policies of ARIC, the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ARIC does not guarantee the accuracy of the information and data included in this blog post and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with official ADB terms.