Evaluating Asia’s mega-regional RTA: The Regional Comprehensive Economic Partnership

Ganeshan Wignaraja 06 April 2013

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Asia is following a global trend towards mega-regional regional trade agreements with the recent launch of negotiations for a Regional Comprehensive Economic Partnership. Led by ASEAN, the negotiations will include all ASEAN members and its six FTA partners: i.e. Japan, China, South Korea, India, Australia, and New Zealand. Successfully concluding this trade deal would create the world’s largest free-trade bloc with profound economic implications for members and for the world economy.

Purpose of the Regional Comprehensive Economic Partnership

The Partnership was launched at the East Asia Summit in November 2012 in Phnom Penh, Cambodia (Basu Das 2012). While strengthening ASEAN centrality, its core purpose is to reconcile two long-standing proposals: (1) the East Asia Free Trade Agreement, which focussed on ASEAN members, China, Japan and South Korea; and (2) the Comprehensive Economic Partnership which added three economies – Australia, New Zealand and India. The new Partnership bridges the two proposals by adopting an open accession scheme. The negotiations began in early 2013 and aim to be completed by the end of 2015.

On the negotiating agenda

The Regional Comprehensive Economic Partnership seeks to achieve a modern and comprehensive trade agreement among members. According to its Guiding Principles and Objectives for Negotiating, the negotiations are expected to be guided by several key principles including:

  • Consistency with WTO rules such as GATT Article XXIV and GATS Article V.
  • Providing improvements over existing ASEAN+1 trade agreements.
  • Reflecting different levels of development of participating countries and allowing for special and differential treatment for least developed countries.
  • An open accession clause to enable participation of any ASEAN partner and other external economic partners at a future date.

The core of the negotiating agenda will cover goods trade, trade in services, investment, economic and technical cooperation, and dispute settlement. More specifically it seeks to achieve the following:

  • Gradually reduce tariff and non-tariff barriers on most trade in goods to create a free-trade area;
  • Largely eliminate restrictions and discriminatory measures on trade in services for all sectors and modes of services;
  • Create an open and facilitative climate for investment;
  • Address the special needs of less developed ASEAN countries through early elimination of tariffs on products of interest to them and provision of development assistance to narrow development gaps; and
  • Provide for a dispute-settlement mechanism to effectively resolve trade disputes.

Size and gains from the Regional Comprehensive Economic Partnership

The economic importance of the trade bloc is striking (see Table 1). The grouping covers 49% of the world’s population and accounts for 30% of world GDP. It also makes up 29.3% of world trade, 26.4% of world FDI inflows, and 22.4% of world FDI outflows. The Partnership can be a powerful vehicle to support the spread of sophisticated global production networks underlying the rise of the Factory Asia and to reduce the risk of an Asian 'noodle bowl' of multiple trade rules in overlapping Asian trade agreements (Kawai and Wignaraja 2013). Implementation of a comprehensive deal will provide for open and simplified trade rules which are consistent with WTO agreements on goods and services. Rules of origin could be rationalised, made more flexible and better administered through electronic means. In the area of investment rules – where no WTO agreement exists – the Partnership will even go beyond existing multilateral rules and promote easier FDI flows and technology transfer by multinational corporations.

Table 1. The Regional Comprehensive Economic Partnership in the global economy

Notes: Figures for population and GDP are IMF estimates. Sources: IMF World Economic Outlook Database; World Bank World Development Indicators; UNCTAD, (all accessed 20 February 2013).

It is noteworthy that the Partnership will provide other economic benefits such as increased market access for goods, services, skills and technology; large markets offering economies of scale and scope for specialisation; and insurance against protectionist sentiments. Furthermore, along with the Trans-Pacific Partnership, it will influence the emerging regional trade architecture towards achieving a free trade area of the Asia-Pacific.

Simulation modelling indicates that the Partnerhsip will bring significant economic benefits to the global economy in the long run. A recent comprehensive exercise, using a computable general equilibrium model, showed income gains reaching $644 billion (or 0.6% of world GDP) by 2025 (Petri, Plummer and Zhai 2012). The scenario modelled is that China, Japan and South Korea will enter into a trilateral agreement in 2013 and this will be followed by an agreement among China, South Korea and Japan, ASEAN 10 plus Australia, New Zealand, and India. Furthermore, all economies are projected to gain with the highest gains are likely to occur in Brunei, Malaysia, Vietnam and Korea.

Challenges

Realising these benefits depends on addressing several challenges during the negotiations and afterwards (Baldwin 2012, Basu Das 2012, Hiebert and Hanlon 2012, Kawai and Wignaraja 2013). First is the political challenge of respecting the central role of ASEAN in the negotiations amidst the presence of major regional economies. Second is overcoming the risk, arising from negotiating partners with different levels of development and interests, that the Partnership achieves limited trade and investment liberalisation and is hampered by exclusions to protect sensitive sectors. Third, is for the Partnership to gradually improve its coverage of new trade issues (such as competition policy, environment and labour standards) which are increasingly a feature in the most comprehensive regional trade agreements in Asia and internationally. Fourth is the risk that firms, particularly small and medium enterprises, may under-use the trade preferences due to limited understanding of the legal provisions. Fifth, is the possibility that the Partnership and other mega-regional RTAs may exacerbate the divergence between regional and WTO trade rules with continuing erosion of WTO centricity in global trade governance.

Way forward

The way forward for negotiations should be to take the best features of existing Asian FTAs and use them as a basis for negotiations to maximise quality, to have a clear timetable for concluding negotiations, and to actively involve the private sector in the negotiations. Afterwards significant outreach and business services would need to be provided to small and medium enterprises to maximise the benefits and lower the costs of using the trade preferences. Additionally, there is a case for WTO reforms to enhance its role in global trade governance with an agenda for supply chains and mega-regional trade agreements.

References

Baldwin, R (2012), “WTO 2.0: Global Governance of Supply Chain Trade”, CEPR Policy Insight 64, December.

Basu Das, S (2012) “RCEP: Going Beyond ASEAN+1 FTAs”, ISEAS Perspective, 17 August.

Hiebert, M and Hanlon, L (2012), “ASEAN and Partners Launch Regional Comprehensive Economic Partnership”, CSIS, 7 December.

Petri, P, G Plummer and F Zhai (2012), “Note on alternative Asian track scenarios”, Asia-Pacific Trade.

Kawai, M and G Wignaraja (2013) “Patterns of FTAs in Asia: A Review of Recent Evidence” Policy Studies 65, Honolulu: East West Center.

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Topics:  Global governance International trade

Tags:  regionalism, Asia, free trade agreements, RCEP