Better late to the party than never?

The Regional Comprehensive Economic Partnership and Sri Lanka

Ganeshan Wignaraja

Economics and finance, Trade and industry | Asia, East Asia, South Asia, Southeast Asia

6 December 2017

The Regional Comprehensive Economic Partnership offers challenges and potentially significant rewards. Sri Lanka needs to get on board, Ganeshan Wignaraja writes.

Concerns about losing sectors and unemployment have made trade agreements unfashionable in the post-global financial crisis era. The World Trade Organization’s (WTO) Doha Round has effectively ended after years of negotiations. The US has left the ambitious Trans-Pacific Partnership (TPP), signed early last year. Brexit has made European Union trade policy uncertain. Unilateral trade liberalisation has slowed.

Yet negotiations are proceeding in Asia and the Pacific on its own mega trade agreement – the Regional Comprehensive Economic Partnership (RCEP) – where an agreement could be reached by 2019, with notable economic implications for the region.

Although many are pessimistic about trade policy outcomes, the RCEP offers hope for continuing preferential trade liberalisation in Asia and the Pacific in challenging economic times.

Sri Lanka has recently emerged from a 30-year civil war and adopted a new trade policy. Alongside tariff reduction, it is pursuing a more proactive free trade agreement (FTA) strategy to reduce trade barriers with major regional economies. FTA negotiations are ongoing with China, India, and Singapore, and there is also talk of FTAs with Bangladesh and Thailand. However, Sri Lanka is not a member of RCEP and risks losing trade once an RCEP agreement takes effect.

RCEP parties aim to achieve a modern and comprehensive trade agreement, covering trade in goods, services, investment, economic and technical cooperation, and dispute settlement.

More on this: China is reshaping the liberal order, and it’s for the better

The RCEP seeks to reconcile two long-standing proposals into a large, region-wide trade deal: the East Asian Free Trade Agreement, which includes ASEAN, China, Japan, and Korea, and the Comprehensive Economic Partnership for East Asia, which adds Australia, India, and New Zealand. The RCEP bridges the two proposals by giving ASEAN a central role in coordinating regional trade while also adopting an open accession scheme.

The RCEP can help regionalise the sophisticated global value chains that make Asia the world’s factory. It will also reduce the overlap among Asian FTAs and the risk that Asia becomes a confusing ‘noodle bowl’ of multiple trade rules.

If a comprehensive agreement can be reached, trade barriers in Asia will come down and the new rules can be made consistent with WTO agreements. Rules of origin could be rationalised and made more flexible, and be better administered through electronic means. In investment rules, where no WTO agreement exists, the RCEP will promote easier foreign direct investment (FDI) flows and technology transfers by multinational corporations.

Since the RCEP will contain three of the largest economies in the world — China, India, and Japan—it is globally important. The RCEP bloc represents 49 per cent of the world’s population and accounts for 30 per cent of global GDP. It also makes up 29 per cent of global trade and 26 per cent of global FDI inflows.

Our conservative estimates suggest that if the RCEP were implemented it would bring income gains to the world economy of at least $260 billion within a decade. Other estimates suggest an even higher figure of around $600 billion. India – the only South Asian economy in the RCEP – is projected to gain from the agreement, while outsiders to the RCEP like Sri Lanka and the rest of South Asia would lose from trade diversion.

However, there are some challenges to the RCEP negotiations and their aftermath.

First, smaller ASEAN economies may find it difficult to stay in the driving seat of the RCEP amidst China’s economic dominance.

Second, the RCEP may only achieve limited trade and investment liberalisation if parties with different levels of development and interests negotiate exclusions to protect sensitive sectors.

More on this: The TPP won't be the end of US involvement in regional trade deals

Third, there is a risk that businesses, particularly small and medium-sized enterprises (SMEs), may underuse the RCEP tariff preferences and other rules due to a limited understanding of its legal provisions.

Finally, many countries will find it difficult to finance physical infrastructure and improve trade facilitation so goods and services can be transported smoothly across RCEP member countries.

For RCEP negotiations to succeed, they will need to focus on a template with the best features of existing Asian FTAs, including ASEAN+1 FTAs and the Korea-US FTA. On difficult issues, the minus-X formula could be used to permit an RCEP member to opt out of agreed commitments until it is ready.

Once the RCEP is eventually in force, it is envisaged that new members may join the agreement and reap economic benefits. Joining the RCEP offers Sri Lanka the prize of simultaneous access to an enormous regional market and dynamic Asian FDI.

It is also arguably simpler to attain, and is less draining on Sri Lanka’s scarce negotiating capacity than separately negotiating bilateral FTAs with each of the 16 members.

Through its membership of the ASEAN Regional Forum, Sri Lanka is involved in informal multilateral discussions on security issues in Asia and the Pacific but not on economic issues. Observer status of ASEAN is an important first step in Sri Lanka’s quest for RCEP membership and should be pursued through enhanced diplomatic efforts with ASEAN economies. Furthermore, think tanks in Sri Lanka should study the economic effects of RCEP on Sri Lanka and explore using RCEP provisions to “lock in” structural reforms.

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