Asian Free Trade Proposal Is Broad in Scope, Narrow in Focus

11 MINS READMar 25, 2019 | 10:00 GMT
Leaders of the 16 countries negotiating the Regional Comprehensive Economic Partnership assemble for a group photo on Nov. 14, 2018, in Singapore.

Leaders of the 16 countries negotiating the Regional Comprehensive Economic Partnership assemble for a group photo on Nov. 14, 2018, in Singapore. The proposed trade agreement seeks to integrate the economies of Southeast Asia with China, India, Japan, South Korea, Australia and New Zealand.

  • The proposed Regional Comprehensive Economic Partnership (RCEP)'s comparatively narrow focus on tariffs to the exclusion of nontariff barriers would limit the agreement's boost to Asian trade.
  • The 16 countries negotiating RCEP likely will not reach consensus on a final deal until after the conclusion of 2019 elections in India, Australia and Indonesia.
  • Because India views free trade as a vehicle for economic growth in an era of rising protectionism, it will remain committed to negotiating an RCEP agreement, though its demands are likely to further delay a conclusive deal.
  • Despite its limitations, RCEP offers the Association of Southeast Asian Nations a chance to help promote intraregional trade.
  • China will demand a rapid resolution to negotiations so it can seek enhanced market access to offset a cooling economy against the backdrop of its trade war with the United States.

A long-running proposal to create the world's largest free trade zone has stagnated under the weight of its members' disagreements. The Regional Comprehensive Economic Partnership (RCEP) is a trade initiative between the Association of Southeast Asian Nations (ASEAN) and its six free trade partners: India, China, Australia, Japan, South Korea and New Zealand. Ambitious in scope, RCEP would encompass 3.6 billion people and account for a third of the world's total economic output. But 25 rounds of talks spanning six years have failed to produce a consensus. Now, lingering obstacles threaten to dash the prospects of sealing a final agreement by the time a high-level ASEAN summit is held in Thailand in November.

The Big Picture

The Regional Comprehensive Economic Partnership (RCEP) is a mega trade deal covering 16 countries in South Asia and the Asia Pacific. Although the proposal is aimed at integrating major regional economies with Southeast Asia, India's concerns over safeguarding its market from Chinese imports have proved a stumbling block. Yet even if all parties reach a consensus on RCEP, the deal's narrow focus on tariffs means regional trade growth will be modest until members address the nontariff barriers impeding trade flows.

India, in particular, is the main outlier in RCEP negotiations. Wary that the deal could worsen its politically sensitive trade deficit with China, India is drawing hard lines on the percentage of tariffs it will reduce. New Delhi is taking this position to forestall a surge in Chinese imports, which could hinder its attempts to build a competitive manufacturing base under Prime Minister Narendra Modi's "Make in India" campaign. Yet India also sees a glass half full: New Delhi hopes a well-negotiated agreement will enable it to tap into the burgeoning markets of Southeast Asia as a growing destination for its services exports, its strong suit in trade.

For ASEAN members — Indonesia, Malaysia, Thailand, Vietnam, Brunei, Cambodia, Myanmar, Laos, Singapore and the Philippines — RCEP offers a chance to boost low intraregional trade by easing tariff barriers. This task will grow all the more urgent in the face of rising protectionism and unilateralism at a time when the U.S.-China trade war is affecting ASEAN. And for China, the biggest economy involved in the trade negotiations, RCEP would enable it to tighten regional trade links, helping buffer Beijing against Washington while fostering greater economic interdependence with regional powers, which include Australia, South Korea, India and Japan.

A map showing the 16 nations of the proposed Regional Comprehensive Economic Partnership trade agreement.

Clinching an RCEP agreement is unlikely until after this year's elections in India, Australia and Indonesia. Nevertheless, India, which views free trade as a vehicle for economic growth in an increasingly protectionist era, will remain committed to negotiating an RCEP agreement, though its demands — especially in gaining services access — are likely to further delay a conclusive agreement. ASEAN and China, which share India's anxieties over rising protectionism, have stressed the urgency of finalizing a deal this year, suggesting they will smooth over their mutual concerns in order to sign a deal at the ASEAN summit in Thailand. But all these issues aside, as long as RCEP does not address the nontariff barriers that impede supply chain integration, the agreement will be modest in its impact, even if it comes through.

RCEP: A Response to the Asia Pivot

When informal discussions for RCEP began in 2012, the geopolitical currents in the Asia-Pacific were shifting. Then-U.S. President Barack Obama was pushing for the Trans-Pacific Partnership (TPP). The regional trade bloc — which excluded China — fit into Obama's "Asia pivot" of redirecting U.S. strategic attention from the wars in Iraq and Afghanistan to the Asia-Pacific. For the United States, this shift toward China was informed by a core tenet of its grand strategy: containing the rise of a rival power on the Eurasian landmass.

For China, the natural response to the TPP was to support another regional trade bloc, hence RCEP. India, also excluded from the TPP, threw its support behind RCEP, too. And for ASEAN, the initiative offered a new and more expansive trade proposal that would allow it to consolidate its bilateral free trade agreements with various Asian economies.

RCEP garnered widespread support as the first round of official talks began in 2013. More than two dozen rounds later, India has positioned itself as an outlier in the negotiations.

To Right the Wrongs: India's Approach

From India's point of view, RCEP is an opportunity to improve upon its existing free trade agreement with ASEAN. The 2010 India-ASEAN deal was meant to boost India's exports while deepening trade links with Southeast Asia — especially through India's stagnant northeastern wing — as part of New Delhi's "Act East" policy. While exports have grown, a parliamentary report found that India's trade deficit with ASEAN has doubled, jumping from $5 billion in 2010 to nearly $10 billion in 2017.

A chart showing India's trade deficit with China.

The report also highlighted concerns over the laggardly pace of services liberalization, a core concern given India's competitive advantage in this sector: Last year, India's booming information technology (IT) services industry earned $126 billion in export revenues. India will face an uphill battle in extracting concessions, though. Because the India-ASEAN free trade agreement has benefitted ASEAN, the bloc has few incentives to change its terms with India, placing the burden on New Delhi to demonstrate why services liberalization will benefit ASEAN. And in the past, Singapore — one of India's most important trade partners within ASEAN — has expressed concern that a liberal visa regime that enables Indian tech professionals to move about more freely could displace Singaporeans from local jobs.

For India, its trade concerns with ASEAN are all the more relevant to China. While India views China as its principal strategic rival, trade between the two countries is growing. In 2017, bilateral trade amounted to $84 billion in goods. Chinese exports to India — led by electronics, machinery and chemicals — amounted to $72 billion, yielding a $59 billion deficit (a decade ago, India's trade deficit with China was only $15 billion). For Indian politicians, a growing trade deficit matters because of its implications for jobs under Modi's Make in India campaign, which aims to boost manufacturing's share of the economy to 25 percent by 2025. Given these concerns, India is unlikely to offer further concessions on tariff liberalization unless it receives reciprocal access in services.

A Three-Layered Cake? India's Elaborate Proposal

RCEP is focused on eight areas of cooperation: goods, services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement, and a final category for other issues. In practice, trade in goods is the dominant issue. India was enticed by the so-called flexibility clause of RCEP, which allows for varying rules for countries according to their circumstances. New Delhi initially proposed a three-tiered tariff structure.

For ASEAN countries, India would reduce tariffs on 80 percent of its goods; 65 percent would be reduced immediately while the remaining 15 percent would be phased in over a decade. For Japan and South Korea, India would reduce tariffs on 65 percent of imports in exchange for an 80 percent reduction on Indian exports. And for China, Australia and New Zealand, India would offer a 42.5 percent liberalization phased in over two decades in exchange for 42.5 percent liberalization from China, 65 percent from New Zealand and 80 percent from Australia. Even so, India would exclude certain sectors from tariff liberalization akin to its free trade agreement with ASEAN, in which it shielded several goods, including potatoes, onions, rice, ginger, mustard, cardamom, sugar and wheat.

For India, the surest way to compensate for a continuing deficit in goods is to boost the export of its services.

Facing a backlash from China in a 2016 round of talks, India eventually moderated its tariff proposals. Today, New Delhi is willing to reduce tariffs on a range from 74 percent to 86 percent of goods for all RCEP members, though disagreements with China persist. The two sides have locked horns over a variety of issues, including the length of time during which India would phase in a tariff liberalization — with New Delhi seeking a longer timeline so it can bolster its competitiveness — and the number of tariffs. The remaining RCEP members are seeking a reduction on 92 percent of goods, while India isn't budging from 86 percent.

Then there are services. For India, the surest way to compensate for a continuing deficit in goods is to boost the export of its services. New Delhi will drive a hard bargain to achieve services liberalization, including the free movement of its IT professionals into RCEP nations. (While India earned a pledge from RCEP nations on services liberalization in September 2018, the actual details remain scant.)

Strength in Numbers: Why RCEP Matters for ASEAN

Though ASEAN is riven by internal bickering, its members broadly agree on the benefits of RCEP. For starters, unlike the TPP, RCEP includes all 10 ASEAN members. Its emphasis on tariff reduction appeals to the bloc's lesser-developed economies seeking to boost trade and attract investment. RCEP can also act as a hammer against high tariff barriers, one of the reasons only a quarter of ASEAN's total trade takes place within the bloc. Most ASEAN countries maintain relatively high tariff barriers on selective defensive interests. For instance, Thailand, Vietnam, Cambodia and Laos have high tariffs on agricultural goods, and countries such as Malaysia and Indonesia impose high tariffs on selective areas to insulate domestic industries.

RCEP would allow ASEAN to draw its six regional free trade agreements under a single tent. This would strengthen the bloc's bargaining power and enable greater trade and investments from China and Japan, Asia's largest economies. And while elections in Indonesia, Australia and Thailand may add a wrinkle to negotiations, these short-term political dynamics are unlikely to alter the deep-seated interest ASEAN nations collectively see in joining a vast free trade zone encompassing East Asia and South Asia, the world's two most populous regions.

China's Interests

For China, the importance of a regional free trade bloc like RCEP has only grown because of its ongoing trade war with the United States. Although Beijing's dominance in regional trade is undeniable — China is the largest trading partner of all RCEP members — expanded market access would help revive a cooling economy. RCEP is also rife with strategic implications for China as it tries to deflect World Trade Organization pressure from the European Union and the United States. Beijing also hopes to use the free flow of goods to improve its sometimes-frosty relations with neighboring powers.

And though China may be the economic giant in RCEP, its focus on rapidly reaching an agreement that emphasizes tariff reduction, while showing flexibility on some contested provisions, is squarely in line with most ASEAN economies — unlike the lobbies from more developed economies such as Australia, New Zealand and Japan. Beyond Southeast Asia, RCEP could pave the path for a de facto trade negotiation with Japan, as China looks to expand market access to Japan, with the two sharing concerns against U.S. protectionism policy.

Constraints on the Road Ahead

For all of its ambition, RCEP won't be a game changer, even if all 16 countries reach a consensus in November. With its laser focus on tariffs, RCEP overlooks the nontariff barriers that impede greater regional trade flows and supply chain integration. Its limited depth of coverage is another issue, with several of the tariff lines not dropping to zero even after liberalization. And unlike the TPP, RCEP is focused at a government-to-government level instead of penetrating deeper to the industry level, where market impulses that may be minimally affected by a free trade agreement's framework dictate key trends shaping trade demand. And in ASEAN, while lowering tariffs will stimulate trade, the redundancy of exports among several of the economies means that until more specialization takes place, the demand for ASEAN exports will remain greatest outside of Southeast Asia. And the limited inclusion of services and provisions for the free movement of labor also narrows the scope of what RCEP can accomplish in a region where all 16 economies are dominated by the services sector.

However, lower tariffs will still produce some benefits — at least enough to justify a continuous push from all countries to reach an agreement as they struggle to reconcile the realities of economic division with the hopes of a mutually beneficial trade zone.

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