Tortoises and Trade: The RCEP in 2017

Tortoises and Trade: The RCEP in 2017

Tortoises and Trade: The RCEP in 2017

By Michael Zhou from Perth USAsia Centre | 23 Aug 2017

Tortoises and Trade: The RCEP in 2017 teaser
With the Trans-Pacific Partnership (TPP) heading back to the drawing board by the exit of the US, governments in the Indo-Pacific region are increasingly looking towards alternative multilateral trade agreements. The Regional Comprehensive Economic Partnership (RCEP) is considered one candidate to deliver the trade liberalisation previously promised by the TPP.

Currently under negotiation between ASEAN and its ‘Plus Six’ partners, RCEP is a competing model for multilateral trade liberalisation. It aims to significantly reduce tariff and nontariff barriers to trade (including in services), and create a desirable investment environment throughout the Indo-Pacific region. Though perceived as a ‘TPP-lite’ – because it promises less regulatory reform than the TPP – the successful completion of RCEP would deliver substantial trade benefits for Australia and other regional economies.

RCEP member states account for over 30% of world GDP, approximately 50% of the world’s population, and approximately 30% of global trade in goods. Seven of Australia’s top-ten trading partners are currently involved in the RCEP negotiations. If successful, RCEP could offer Australia far greater access to markets like India, benefitting the agricultural sector. Australian businesses would also gain from the simplification of trade architecture in the region as governments adopt consistent regulations and tariffs.
TPP RCEP
High level of reform ambition – includes ‘WTO Plus’ provisions for policy areas not covered in existing international trade law Lower reform ambition – a ‘WTO consistent’ agreement focussed primarily on reducing trade barriers
Open to all APEC members; (formerly) included the US but not China or India Currently open only to ASEAN members and its six FTA partners; includes China and India but not the US

The tortoise and the hare
Launched on the sidelines of the East Asia Summit in Phnom Penh in November 2012, RCEP has been comparatively out of the limelight, overshadowed by its more prominent sibling – the TPP. Given the TPP’s favourability towards developed economies, and RCEP’s exclusion of the US, Australia has previously focused on the more ambitious TPP process. In comparison, progress on RCEP negotiations has been slower.

RCEP has for years been mired in disputes over the level of tariff reductions between partners and the scope of regulatory reforms. With nineteen rounds of negotiations having already taken place, including six in 2016 and three thus far in 2017, negotiations have increased in frequency yet yielded a less-than-desired level of progress. Many issues remain to be resolved before a final agreement can be settled on.

Can China lead trade negotiations?
The RCEP negotiations represent a test of China’s aspirations for leadership in the Indo-Pacific region. China has been seen as competing with the US for regional leadership in recent years. Meanwhile, Donald Trump’s withdrawal of the US from the TPP has been perceived by many as a step back from its historic leadership role, presenting China a chance to showcase its credentials. President Xi Jinping promptly capitalised on this opportunity, using the 2017 Davos Summit to reiterate China’s support of free trade and globalisation.

Though RCEP is officially led by ASEAN, many observers have identified China as the behind-the-scenes driver of negotiations. Indeed, RCEP is officially linked to China’s ‘Belt and Road’ initiative as a complementary free trade framework. China has publicly announced its intent to hasten negotiations, with Xi declaring China’s commitment to “early conclusion of the negotiations” at the APEC CEO Summit in Lima in November 2016, cementing China’s leadership in building RCEP.

Progress in 2017
With a clear impetus for early conclusion of negotiations from both China and ASEAN – which hopes to complete RCEP in time for ASEAN’s 50th anniversary – negotiations have taken on more urgency in 2017.

As at the end of the 19th round of negotiations, negotiations for two out of the 12-15 chapters of RCEP have been completed. The chapters – on economic and technical cooperation, and small and medium enterprises – were completed in 2016 and 2017 respectively. Other chapters, such as the one on competition, are said to be nearing completion. India has also agreed to participate in the newly established Working Group on Government Procurement, which it had previously refused to do.

However, a substantial portion of the agreement remains under negotiation. The Third Intersessional RCEP Ministerial Meeting in Hanoi in May 2017 emphasised the need to increase action in facilitating successful negotiation. Iman Pambagyo, chair of the Trade Negotiating Committee (TNC), has been quoted saying that “negotiations could be concluded sometime in 2018 provided the countries accept some more flexibility to help address issues”.

Roadblocks remain
This need for flexibility is not surprising, as significant barriers to early completion remain. Although RCEP should be easier to negotiate than the TPP (due to it being less ambitious on regulatory reforms), the diverse interests of member states continue to be an impediment. There are wide disparities between both development levels and economic size, which have led to disagreements on issues such as the implementation schedules for tariff reductions.

In particular, India has been reluctant to meet tariff reduction goals. With RCEP increasing India and China’s trade in goods, and a trade deficit of over $50 billion with China, India is concerned with the effects of competition from Chinese manufacturing imports. Greater access to the Indian market would offer Australia’s dairy industry a lifeline in the face of weakening demand from China, but would increase competition for Indian dairy producers. This has led to domestic opposition in the form of protests against RCEP.

On the other hand, India has been eager to promote liberalisation in services trade, which would allow greater exports from India’s professional sector. This has been met with resistance by other members over concerns about large influxes of migrant labour, further delaying negotiations and dampening Australia’s hopes of further integrating its own services sector into regional value-chains.

Several other issues remain contentious. As with the TPP, regulations on intellectual property rights (IPR) and investor-state dispute settlement (ISDS) mechanisms have proved to be controversial. Developed economies favour more restrictive provisions on IPR, while developing countries such as India prefer the existing provisions set by the WTO. India and Indonesia are also wary of ISDS mechanisms, with India already facing twenty investor treaty cases in international tribunals.


The final countdown
The official timeframe for completion of RCEP remains the end of 2017. Negotiators are committed to a swift conclusion, and China is unlikely to abandon its quest for a ‘win-win’ outcome that will reinforce its regional leadership aspirations. Meeting the ambitious deadline is possible, but there is only one Ministerial meeting and one round of negotiation scheduled for 2017.

Unless more political will is exhibited, RCEP is highly unlikely to be completed by the end of the year. China alone will not be able to lead negotiations to a swift conclusion. The issues to be resolved are extremely complex, with the diverging interests of members being far beyond the capacity of any individual party to manage. Officials from all member nations involved will need to adopt more compromising stances for the agreement to be finalised.

It is also unlikely that RCEP will entirely meet its original ambitions. Hastened completion will likely necessitate watering-down some aspects. Nonetheless, as the old adage goes, “something is better than nothing.” For Australia, deeper trade engagement with growing middle-class wealth in Asia is vital to long-term economic prosperity.

Barring an unlikely resuscitation of the TPP, RCEP remains the only vehicle for multilateral trade liberalisation in Asia which is a going concern. Thus it may yet be the free trade vehicle Australia – and the region – has long waited for.
 

Michael Zhou is an intern at the Perth USAsia Centre.

[Editor’s Note: This is the second part in a Perth USAsia Centre series After the Trump Shock: Australia’s trade policy options in a new world. Other instalments explore Australia’s ongoing FTA negotiations with the remaining TPP members and Indonesia.]
 

Back To News Stories