Asia’s Regional Comprehensive Economic Partnership: The Challenge

June 23, 2013

Waldorf-Astoria, New York

5th Avenue Chick5th Avenue, New York City

MY COMMENT: This is a well written piece by my friend and Cambodian Institute for Cooperation and Peace colleague, Dr Jayant Menon. This grouping is among other groups (APEC, TTP+) in Asia. I am not as excited about groupings like this since they tend fizzle out after one or two meetings; there is no political will to achieve concrete results. I think ASEAN Community project should be given first priority. Its target dateline is 2015 at a time when Malaysia will be the Chairman of ASEAN.Din Merican

Asia’s Regional Comprehensive Economic Partnership: The Challenge

by Jayant Menon, ADB and ANU

The first round of negotiations to establish the Asian Regional Comprehensive Economic Partnership (RCEP) — a free trade agreement (FTA) across ASEAN+6 (the 10 ASEAN members plus Australia, China, Japan, South Korea, India, and New Zealand) — was held in Brunei in May.

Delegates from 16 Asia Pacific nations pose for photos in Bandar Seri Begawan, Brunei, on 9 May 2013 prior to the first round of negotiations of the Regional Comprehensive Economic Partnership. (Photo: AAP)

The RCEP is one of a series of mega-regional trade agreements currently under negotiation including the Trans-Pacific Partnership (TPP) and the US-EU FTA (the Transatlantic Trade and Investment Partnership), officially launched at the G8 meeting in Northern Ireland on 17 June. If implemented, RCEP could create the world’s largest trading bloc with potentially significant economic gains for the countries involved. Also significant, in the geopolitical battle to shape the future of regional trade rules and standards, RCEP includes China but not the US.

The RCEP faces some key challenges if it is to live up to its potential. Details remain sparse, but what we do know from RCEP’s Guiding Principles is that it will add to, rather than replace, existing ASEAN+1 FTAs, while at the same time introducing ‘significant improvements’ over these agreements. There is, however, an important qualifier in the dreaded ‘flexibility’ clause: ‘RCEP will include appropriate forms of flexibility including provision for special and differential treatment, plus additional flexibility to the least-developed ASEAN Member States’.

Flexibility could be a boon or bane for the RCEP. While it could help break deadlocks and protect disparate national interests, it could also limit change or curtail progress in achieving greater liberalisation. Indeed, there is much to negotiate — and many breakthroughs needed — if RCEP is to supersede existing agreements.

The existing five ASEAN+1 and twenty three ratified bilateral FTAs vary greatly in terms of almost everything up for negotiation. One example is rules of origin (ROOs), which determine the country of origin of products and in turn their eligibility for preferential treatment in international trade. There are at least 22 different ROOs among ASEAN+1 FTAs, even after aggregating those that are similar but not the same. Only about 30 per cent of tariff lines across the ASEAN+1 FTAs share common ROOs. With bilateral agreements — the Japan-India FTA for instance — there are 12 types of ROOs, seven of which are unique from the ASEAN+1 FTAs. The sheer number of ROOs — and their lack of commonality across FTAs — will make the task of harmonising and consolidating them that much harder.

Proponents of FTAs argue that deeper agreements can be achieved more rapidly on difficult issues when there are only a small number of negotiating partners involved. But many advocates fail to explain how this principal works within the context of FTA consolidation, where parties are essentially reversing the negotiations process and adding more countries. If access to a bigger market is the lure, then wouldn’t the Doha Round be a better, if not easier, process? It may be better. But we know it is not easier. In truth, consolidation may be just as difficult, if not more difficult, than simply starting from scratch.

Getting a pair of countries to agree on a specific set of terms will not necessarily facilitate similar breakthroughs with third parties. To ignore this is to ignore ground realities and the political-economy of FTA negotiations. And anyone who has looked closely at an FTA will know how difficult the task of enmeshing even two similar agreements can be, let alone many different ones.

But consolidate they must, if a RCEP is to eventually emerge. The question is how and what form it will take. Pursuing harmonisation while retaining flexibility is likely to produce one of two outcomes. Because harmonisation implies consensus, it could result in a ‘race to the bottom’, where the lowest common denominator rules. Alternatively, countries taking advantage of flexibility could result in a conservative approach that preserves the current ‘noodle bowl’. These outcomes are more likely than the hoped-for ‘race to the top’ scenario, unless incentives are provided to overcome pressure from the vested interests that lobbied for different ROOs to begin with. The very existence of so many ROOs and exemptions confirms the power of such lobbies. Breaking through these pressures will not be easy, and will require a stronger commitment to reform from all members, big or small, strong or weak. The problem is that some countries may not see any carrot — and there is no stick.

If a race to the bottom or minimal change comes about, then the RCEP will be largely redundant. Although cumulation rules may expand through increased membership, this usually amounts to little when product fragmentation trade is significant. Changing the type of ROO is more important, but also more difficult. The South Asia Free Trade Agreement (SAFTA), a failed attempt at consolidation, illustrates this. Most trade within South Asia continues under more generous bilateral FTAs or under most favoured nation (MFN) rates. Sadly, SAFTA’s main contribution has been to add another strand to the global spaghetti bowl.

Will the same fate befall RCEP? Unless there is enough political will to close potential loopholes disguised as ‘flexibility’ and pursue reforms deeper than those ever before attempted, RCEP’s future as a consolidated bloc remains uncertain. RCEP faces many challenges but this is the fundamental one. A meaningful RCEP will require resolve similar to that which gave birth to the European Union — an example of successful FTA consolidation if nothing else. Unless this happens by its looming 2015 deadline, RCEP may be seen as serving the geopolitical interests of a few players, to little economic effect. Then it will not be ‘the economy, stupid’, but just politics as usual.

jayant-menon_0Jayant Menon is Lead Economist at the Office of Regional Economic Integration, Asian Development Bank, and Adjunct Fellow at the Arndt-Corden Department of Economics, the Australian National University.

The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, its Board of Governors or the governments they represent.

6 thoughts on “Asia’s Regional Comprehensive Economic Partnership: The Challenge

  1. Asia has a population crisis and the problem of our exploding numbers is not going to be solved by any number of agreements or partnerships… so our learned experts would be better employed suggesting ways we are going to feed, clothe and house ourselves and have jobs to go to.

    A good place to start would be to debate the growing number of megacities… which threaten to turn into disaster areas.

    “…resolve… that gave birth to the European Union…”? The European Union came into being as a result of the misguided dogma that unelected politicians can put aside sovereign parliaments. The same thinking gave birth to the Euro… and both will lead to disaster.

    Asia had better beware of Pied Pipers of Agreements…

  2. I am going to say that I am expert in this but I always have TV series or more documentaries such as Yes Minister/Prime Minister to rely on. Actually, there is a documentary by adma curtis. Kindly take note that the board game “Fuck you Buddy” which is later on change to “So long sucker” was created by John Forbes Nash & his colleagues to demonstrate their game theory

    One may wonder how does this relevant to this topics. Well most of them are economists & in some form or another subscribe some of the views in the documentary. Enjoy!

    Take note it does not mean everything it says is correct. Kindly use your brain & make your own deduction.

  3. We have so many excuses for our member ASEAN Ministers to have paid holidays in some exotic location without actually achieving anything, ASEAN + 1, +2, + 12, plus whatever, it’s just nonsense as far as I can remember, when they actually had to decide, no communique was passed, witness Cambodia, only talk and waste our money, stupidos niachkos….Oouch!!!

  4. Din,

    I do not agree with Isa’s remark that the EU is a disaster, created by politicians ‘to sweep aside sovereign parliaments’. No, far from it. EU was a necessary grouping to balance the huge American economy on the other side of North Atlantic. The Europeans of that generation got it right. Look how Airbus is now balancing the weight of Boeing, and how we all benefit from this competition.

    I recall when, in 1960, Paul Henri Spaak, one of the founders of the EU, and a force behind the Treaty of Rome, spoke in the college dining hall when I was an undergraduate. I was stunned by his farsightedness and vision. I still am. We need statesman of this stature to guide ASEAN today. We need some form of collective clout to balance the rival economies of China, Taiwan, and Japan.

  5. Farsightedness and vision were undoubtedly what started off the idea of a united Europe. Unfortunately the idea went off-track almost the moment those with vision were out of the centre stage… leaving what Europe has ended up with… an undemocratic breed of politicians for whom the dogma of the Union is all that matters… never mind at what cost.

    Europe will cease to exist as we have known it and along with it will go so much of what the continent has contributed to the world.

    But this is a piece about Asia so it is best to leave it at that. If one day our host puts up something on Europe we can all have our say.

    Just one parting thought… a friend returned from the UK the other day and said that on some streets of central London there are beggars… price for joining the EU?

  6. So do we have a common ASEAN currency going? Nah…ASEAN is smack between 2 giants; India and PRC. All 10 have different government basis; social, communist, republic, social democratic, democratic and ? Different basis of almost everything that makes a regional taxonomy not challenging but difficult for what is the common denominator?

    Diversity has its strength unlike homogenous India, PRC, Japan. Moreover, we have the SCS unlike EU land mass.

    10 puppets on a stage looking for a great puppeteer? The US looks good to counter balance PRC force field.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s