While the TPP tries to find its feet, many have been looking to the Regional Comprehensive Economic Partnership (RCEP) to stand up for global trade. Agnes Vargas, regional head, Greater China & ASEAN at Commerzbank, explores the deal and its potential to effect change.
While the TPP tries to find its feet, many have been looking to the Regional Comprehensive Economic Partnership (RCEP) to stand up for global trade. Agnes Vargas, regional head, Greater China & ASEAN at Commerzbank, explores the deal and its potential to effect change. Global trade growth has been somewhat lacklustre of late. The World Trade Organization (WTO) has predicted that, for the first time in 15 years, world trade is likely to have grown more slowly than global GDP in 2017. The Asian Development Bank has also estimated that a huge $1.6trn of global trade remains unfinanced.
Risks only increased in January 2017, when the United States announced its withdrawal from the Trans-Pacific Partnership (TPP), an ambitious trade agreement originally signed in February 2016 with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
November 2017 has, encouragingly, seen these countries determine to press on with the deal without American participation. But it is Asia’s trading performance that has bolstered recent global trade growth. After the 2008 crash, Asia did more than any other region for the recovery of world trade, by contributing significantly to merchandise export volume growth in the post-crisis years. The WTO predicted 3.4% export growth for Asia in 2016: this was the fastest of any region that year, and in spite of China’s economic slowdown. So it is in Asia that chances for reviving global trade lie – with many looking to the Regional Comprehensive Economic Partnership (RCEP) especially to stand up for globalisation.
The RCEP is a proposed free trade agreement (FTA), which (if realised) would constitute the largest in the world. It is tasked with the economic integration of 16 nations and – to do this – it aims to lower import/export tariffs and increase trade flows. Under the RCEP’s mandate are the 10 countries of the ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and the six countries with which the ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand).
As a combined market, the potential might of the RCEP cannot be underestimated. The free trade area would cover a population of 3.5bn, and boast a GDP of $23.8trn – that is equivalent to 1/3 of the global whole. With such an extensive scope, the RCEP may well be the key to reinvigorating global trade.
One specific target of the RCEP is to support SME growth and inclusion in the international business landscape. According to OECD statistics, SMEs account for 95-99% of all businesses in the ASEAN – they truly are the key drivers of economic growth in the region. And it must be remembered that it is SMEs that have been hit hardest by what is known in the banking world as the “trade finance gap”: some 56% of trade finance transaction requests from SMEs are rejected worldwide. So, if the RCEP can boost financial inclusion by opening up new markets it could benefit both the intra-Asian and international trade landscapes. In light of our own history of financing SMEs and facilitating their global expansion, this is certainly something we at Commerzbank will be watching closely.
Progress continues – but hurdles remain
Six years, five ministerial meetings and twenty rounds of negotiations on since the deal was first mooted, where is progress with the RCEP?
Negotiations have been subject to delays and talks have now missed deadlines for three years in a row, 2017 included. Last year, for instance, was intended to be the year of the RCEP – something which in hindsight seems rather too optimistic.
Yet there has been renewed impetus to talks in recent months. The latest talks held in Manila in November, at a dedicated RCEP summit following the city’s hosting of the 31st ASEAN summit, saw ministers from the constituent nations determine that negotiations on the deal be wrapped up in and signed in November 2018. This month, India’s Prime Minister Modi met the heads of state of the ASEAN members and reiterated the aim to “intensify efforts in 2018” towards the “swift conclusion of the RCEP”. But we shall have to wait to see what progress this year will actually bring.
Emerging markets poised to benefit
The less-developed economies in the RCEP – Myanmar, Cambodia, and Laos in particular – are best placed to gain from the trade agreement. The reasons are three-fold.
First, these economies are largely reliant on low-cost manufacturing sectors – especially the textile industry. As part of the RCEP, exporters in these countries stand to enjoy increased market access to the deep markets of wealthy consumers in Australia, New Zealand and China.
Second is the flexibility of the RCEP deal itself. With 16 nations involved in the deal, there is little existing standardisation when it comes to regulations. But the agreement is being designed in such a way as to protect less-developed nations from having to match larger economies’ tariff reductions for intellectual property, copyright and patents (TRIPS provisions) and others.
A third benefit these emerging markets will gain is a strengthened economic relationship with China. They could attract increased flows of foreign direct investment (FDI) from capital-rich investors eager for new, untapped opportunities abroad.
With the US’ exit from leadership of the TPP, of course, comes the rise in importance of the RCEP – as well as the increased influence on the global stage of its Chinese patron. Indeed, it was a sign of the times that China’s premier, Xi Jinping, delivered a landmark speech in praise of globalisation and free trade at the World Economic Forum in Davos in January 2017 – the very same month in which President Trump announced the US’ withdrawal from in the TPP. Therefore, while emerging economies such as Vietnam, Brunei and Malaysia have fallen victim to the stalling of the TPP, they stand to gain enormously from the RCEP.
Notably, seven RCEP nations are also members of the TPP, some of which stood to gain enormously from that deal. Vietnam, for example, had been predicted to enjoy an 11% GDP increase from the TPP alone. Despite signatories’ determination to carry on with the TPP, given the increased degree of risk arising from the US’ departure, success with the RCEP will be increasingly on Vietnam, Brunei and Malaysia’s agendas. China, for its own part, will doubtless strive to make progress with the RCEP as Japan and the 10 other Asian-Pacific countries throw a lifeline to the TPP – the trade deal from which Beijing is conspicuously absent.
Political will demanded from the Philippines
As the most recent host of talks on the RCEP, and last year’s chair of the ASEAN, the Philippines has been among the most vocal for making progress with the deal. President Rodrigo Duterte has exhorted fellow leaders to show the political will necessary to finish talks, explaining that the “changing global economic landscape requires us to urgently bring the negotiations to a close”, but that he is “optimistic” of building the “much-needed political momentum”.
The Philippine premier also explained that the RCEP is intended to be more than a mere free trade area: “[The RCEP] is not simply an added trade agreement, but a trade agreement that could provide the size and scale to unleash new growth potentials and write the new rules of the game of the international trade order.”
India’s reservations
One particular obstacle facing the deal, it seems, is India’s reservations about high tariff cuts. Both Singapore and Malaysia boast near 90% negligible trade tariffs. Yet export and import duties account for a significant amount of government revenue, and ratification of the RCEP at present would require a considerable reduction for India’s, which are currently relatively high. Another Indian concern seems to rest with the prospect of opening up its service industries to competition from the other more developed nations, and its manufacturing sector to foreign investment. While committed to the RCEP, it is evident that India seeks a “balanced” outcome to the talks.
However, the RCEP has been careful to include a great number of caveats. These ensure that nations with unequally sized economies are not dealt an unfair hand. Thanks to such versatility, the RCEP’s member nations hope to reconcile with India’s concerns very soon.
Source: FTSE Global Markets
Key words: RCEP, promise, renewed, global trade, Asia, leading
