RCEP and a Slower, More Incremental Approach to Trade Liberalization
With a wide range of signatories at dissimilar levels of development, how does the newly-signed plurilateral free trade agreement address rising protectionism and income inequality?
A container ship under the flag of Hong Kong sails to its destination.
By: Mingqian ding, Staff Member
On November 15, 2020, fifteen nations across the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP). The signatories are ten member states of the Association of Southeast Asian Nations (ASEAN) and five of its regional partners, including China, Japan, South Korea, Australia, and New Zealand. Combined, they represent about 2.2 billion people and 30 percent of global economic output, making the pact the largest plurilateral free trade agreement in the world.
What are the provisions of the RCEP?
Comprising 20 chapters, RCEP covers areas such as trade in goods and services, investment, movement of natural persons, intellectual property, e-commerce, trade remedies, competition, government procurement, and economic and technical cooperation.
In terms of trade in goods, the fifteen nations have made tariff reduction arrangements through offers in bilateral pairs. Upon ratification by at least six ASEAN and three non-ASEAN signatories, over 90% of the trade in goods in the region will gradually become duty-free. Most notably, the RCEP will reduce non-tariff barriers by standardizing the disparate rules-of-origin provisions in preexisting bilateral trade agreements. This arrangement has two potential benefits. First, some goods previously excluded from preferential tariffs will be recognized as originating in the RCEP region after regional value accumulation. Second, it will facilitate supply-chain management by requiring a single certificate of origin to ship the same products between the 15 member states. The resulting annual increase to merchandise exports is estimated at around ninety-billion U.S. dollars.
In terms of trade in services, seven countries, including Australia, Brunei, Indonesia, Japan, Korea, Malaysia, and Singapore made commitments using the negative list approach. Under this approach, countries specifically list which services they will maintain trade barriers on. If a service category is not listed, no restrictions exist and the product will be traded openly. The remaining eight parties, including China, adopted the positive list (explicitly listing the services that they agree to lower tariffs on), which will be converted to the negative list in six years after the effectuation of the agreement (Article 8.12). As for liberalization level, all 15 parties made commitments higher than the level of their 10+1 FTAs, i.e., preexisting preferential trade agreements signed between the ASEAN members and each of the regional partners.
How does RCEP compare with CPTPP or TPP?
RCEP’s passage recalls another comparable treaty signed by nations in the Asia-Pacific region — the Comprehensive and Progressive Agreement for Trans-Pacific Partnerships (CPTPP). CPTPP began as the Trans-Pacific Partnership (TPP), backed by the Obama administration, but morphed into the current CPTPP after President Trump withdrew the United States from the pact in 2017. Signed in March 2018, CPTPP took effect on December 30, 2018 upon ratification by a majority of signatories. In its latest form, the pact includes ASEAN members Brunei, Malaysia, Singapore, and Vietnam, as well as Australia, Canada, Japan, Mexico, New Zealand, and Peru.
RCEP is less rigorous than CPTPP in multiple respects, but will still significantly lower trade barriers in Asia. In fact, there are several indications that a lower standard might be necessary or advisable in negotiations with countries of different levels of development and varying interest.
First, in the context of developing economies, a slower approach to globalization could address or mitigate the risk of destructive inequality. Destructive inequality is defined as inequality that reflects privileges for the already rich and blocks potential for productive contributions of the less-privileged. For example, premature opening of the capital market could force a developing economy to adopt austerity measures during a financial crisis, which are the opposite of pro-recovery, stimulative fiscal and monetary policies that developed economies adopt in similar circumstances. Austerity measures would in turn lead to a disproportionately negative impact on the incomes of the poorer households, leading to income redistribution costs and other economic inefficiencies. Furthermore, some heterodox economic studies have suggested that rapid trade liberalization can lead to rapidly falling real wages in certain cases, worsening income distribution.
RCEP addresses the concern of destructive inequality by accounting for “the different levels of development among the Parties, [and] the need for appropriate forms of flexibility, including provision for special and different treatment” for certain developing economies, particularly Least Developed Countries. This is reflected in gradual tariff liberalization and longer transition times, where countries can prevent further reduction of customs duty or increase the duty “to the extent necessary to prevent or remedy the serious injury to its domestic industry and to facilitate its domestic industry’s adjustment” (Articles 7.2-5). Least Developed Country members are also given special attention in provisions regarding development assistance through RCEP’s economic and cooperation provisions (Articles 15.5 and 15.6).
Second, the adoption of strict rules and regulations may interfere with a nation’s internal policy, leading to withdrawal from an otherwise mutually beneficial agreement. One of the key reasons that China has been absent from TPP talks even after the United States’ withdrawal was that some CPTPP regulations are unfavorable to the advancement of China’s economy. Chapter 17 of the CPTPP, for example, sets forth a series of obligations on governments and SOEs principally engaged in commercial activities, including extensive transparency rules and prohibitions of “non-commercial assistance” under certain circumstances. Given the scale and fragmentation of its state sector, China likely considered these provisions too onerous to accept.
In contrast, the RCEP framework adequately accommodates signatories’ varying interests. To illustrate, the pact accommodates Japan’s focus on preservation of the functions of farming communities. Under the current RCEP, Japan will retain tariffs on its five sensitive agricultural product categories — rice, beef and pork, wheat, dairy, and sugar — to protect domestic farmers from a potential influx of cheap imports.
Third, for developed countries with high average wages, removing all tariffs could generate perceptions of aggravated inequality by threatening workers’ short-term job security in less efficient sectors. In the case of TPP, despite studies showing that it promotes global trade and generates considerable net gains for participating nations, demagogic populists have attacked it as favoring investors of international firms and disfavoring working families in sectors threatened by the removal of tariffs. The negative perception has generated political pressure for far-reaching populist reforms, evidenced by President Trump’s withdrawal from the TPP in 2017.
In conclusion, for the three reasons discussed above, RCEP vindicates a slower, more incremental approach to trade liberalization. While this approach seems less ambitious, it could effectively address the concerns of participating nations with different levels of development and varying interests, and to some extent hedge against the risk of shifting trade policy in the face of rising protectionism.
Mingqian Ding is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. She graduated from New York University Leonard N. Stern School of Business in 2015. Before law school, Mingqian worked in the financial services industry as an auditor and a credit rating analyst.