RCEP trade deal fails in areas where smaller bilateral pacts in Asia-Pacific shine

Kandy Wong, South China Morning Post

Posted at Aug 02 2022 01:08 PM

Seven months after the world’s largest free-trade agreement (FTA) took effect, its critics say that member nations would be better off if they also signed separate bilateral trade deals with each other, because the scope of the regional deal is not comprehensive enough.

Even though the Regional Comprehensive Economic Partnership (RCEP) involves China and 14 other Asia-Pacific nations – covering nearly a third of the global population and about 30 per cent of the world’s gross domestic product – some trade experts say that relying solely on it for trade in the region leaves much to be desired.

“RCEP will not be a game changer for any of its members,” said Stephen Olson, a senior research fellow at Hong Kong’s Hinrich Foundation, which strives to advance mutually beneficial and sustainable global trade. “It is a low-ambition agreement that leaves a significant number of barriers and restrictions.

“Many members already have bilateral FTAs in place that provide the same or a higher level of benefit. The primary upside of RCEP is that it tidies up these various agreements by providing a single umbrella.”

As an example, the Asian Development Bank pointed to an FTA between China and Cambodia. It similarly took effect on January 1, and the bank said the bilateral agreement offers greater advantages in terms of tariff offers.

Pramila A. Crivelli, an economist with Asian Development Bank’s Economic Research and Regional Cooperation Department, wrote in a blog post on the lender’s official knowledge platform last month that the bilateral pact between China and Cambodia provides “deeper tariff liberalisation” than RCEP.

“Zero tariffs are implemented on more than 90 per cent of tariff lines under the Cambodia-[China] FTA, while it will take 20 years to reach a similar proportion under RCEP,” she explained.

Tariffs on more than 65 per cent of trade in products immediately reached zero under the regional agreement when it entered effect.

In December, the United Nations Conference on Trade and Development predicted that RCEP’s tariff reductions would immediately boost intraregional trade by nearly 2 per cent, equivalent to about US$42 billion, upon taking effect.

Deborah Elms, founder and executive director at the Singapore-based Asian Trade Centre, said that most RCEP members have been upgrading bilateral deals, or at least had negotiations with one another, since RCEP talks began in 2012.

“It is often possible to have specific commitments bilaterally that you do not want to share with a much bigger group,” she added. “Across the range of RCEP members, there are already FTAs that go beyond RCEP, as well as those that could be upgraded to go beyond RCEP.”

China already has an existing FTA with the 10-member Association of Southeast Asian Nations (Asean) bloc, as well as individual deals with fellow RCEP members South Korea, Japan, Australia, Singapore and New Zealand. It is also negotiating the second phase of its deal with South Korea.

Crivelli explained in her blog post that the “more liberal nature” of the bilateral FTA between China and Cambodia has benefited the textile industry, which is the largest sector in terms of import value for goods from China.

“Cambodia entirely removed customs duties on nine out of 10 textile tariff lines when the bilateral FTA entered into force. However, this proportion was less than half under RCEP,” she added. “For example, tariffs on knitted or crocheted fabrics have been reduced to [zero] under the bilateral FTA, while it will take 15 years under RCEP.”

Wing Chu, business advisory head at the Hong Kong Trade Development Council, said that RCEP gives countries one more option to secure advantages in trade.

“RCEP and FTAs are not mutually exclusive. Business owners can choose the one that is convenient to them,” he added. “Bilateral agreements [look] better than RCEP because the parties involved are fewer, but [such deals] may not cater to the needs of some complicated supply chains.”

Nonetheless, there are also drawbacks to bilateral FTAs.

Crivelli cited product-specific rules of origin for agricultural and agro-processed products as examples of the limitations in the China-Cambodia bilateral agreement.

Such restrictions require dairy products to be wholly obtained from domestic Cambodian firms, she said, and this means the bilateral FTA may deter Australian and New Zealand firms from producing dairy products in Cambodia and selling them in the Chinese market.

“The Cambodia-[China] FTA needs better rules-of-origin provisions … and review of product-specific rules of origin,” she said.

Olson from the Hinrich Foundation also said that RCEP, as a regional agreement, provides “some marginal benefit” with a single set of rules rather than multiple rules under the various bilateral FTAs.

“The most important thing that can be done to help [small and medium-sized] companies in developing countries benefit from trade agreements is to ensure that rules of origin and other FTA-related regulations are clear and simple,” he added. “Otherwise, only larger companies with greater expertise and staff will be able to participate and benefit.”

China said that RCEP would serve as “powerful leverage” for keeping trade and foreign investment stable this year, as it will expand exports of Chinese products while helping speed up China’s industrial transformation.

Chu with the Hong Kong Trade Development Council said that, in addition to tariff reductions and eliminations, RCEP also provides other measures such as customs cooperation and facilitation, the removal of non-tariff technical barriers, and e-commerce facilitation.

“China can help advance trade liberalisation among RCEP members, which would help developing countries in the region conduct trade in a more efficient manner,” he added.

And despite the potentially “modest” economic impacts of RCEP, Olson said the trade framework will still be “quite useful” for China as it strengthens perceptions about China’s pre-eminence in the Asia-Pacific region.
 

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