World’s biggest trade deal expected to be inked by mid-2020

By Ranjit Singh

It’s all systems go for Malaysia to be a participant in the Regional Comprehensive Economic Partnership (RCEP) after six long years of negotiations.

The meeting of leaders of RCEP nations in Bangkok on Nov 4 declared that the agreement was nearing closure and a deal could be sealed by the middle of next year.

Deputy Secretary-General (Trade) of the Ministry of International Trade and Industry and Malaysia’s chief negotiator to the RCEP talks, Datuk Seri Norazman Ayob, tells FocusM that Malaysia stands to benefit from signing the trade agreement.

“Currently, Asean members have to refer to their separate trade agreements when they deal with partner countries (South Korea, Japan, China, Australia and New Zealand) but under the RCEP, trade will be facilitated as there will only be one agreement which serves as a reference point.

“The RCEP will see a lowering of tariffs and the import and export of products from member countries will be subject to preferential rates. It will also provide for greater exchange of information and mutual recognition of standards and regulations,” says Norazman.

Sensitive chapter left out

He adds that the sensitive chapter on ISDS (Investor State Dispute Settlement) mechanism has been left out of the negotiations.

The ISDS is a mechanism included in investment and trade agreements that allows an investor of a state party to initiate a claim against another state party which is providing the investment, if that state has allegedly run foul of a term in the agreement.

The chapter on ISDS was a point of contention in earlier negotiations as it potentially allows investors and powerful multinational companies to file suits against governments if they find themselves aggrieved and could come at a great cost to taxpayers.

These cases are held in secretive private arbitration courts and can bring massive losses to the state being sued in terms of taxpayer dollars. Some cases brought against governments under the ISDS provision include a Swedish energy firm suing Germany for introducing policies to curtail water pollution; US pharmaceutical giant Eli Lilly suing Canada for attempting to keep medicines affordable and French multinational Veolia suing the Egyptian government for increasing its national minimum wage.

The participants of RCEP are the 10 Asean countries, Japan, China, South Korea, Australia and New Zealand.

The RCEP talks started with 16 countries but India decided not to proceed over concerns that it would hurt its domestic producers.

The negotiations began in 2013 when talks for another major trade pact, the Trans-Pacific Partnership or TPP, were underway. Given China’s absence in the then US-led TPP, which was slated to be the world’s largest trade deal, many observers considered RCEP a way for Beijing to counter American influence in the region.

However, in 2017, US President Donald Trump pulled his country out of the TPP and slapped punitive tariffs on several US trading partners for what he said were unfair trade practices.

But RCEP is said to lack the quality and scope seen in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. The latter is the agreement that replaced the TPP after the US withdrawal.

According to Norazman, Malaysia is still reviewing its participation in the CPTPP.

The TPP was a more ambitious plan as it also covered market access for goods and services as well as regulations on labour, the environment, intellectual property and state-owned companies.

In Malaysia, the TPP faced strong opposition due to the chapter on government procurement which would allow foreign contractors to bid for projects in the country on a level playing field and this would question the policy on special Bumiputera rights.

According to Norazman, under the RCEP the special Bumiputera status will be preserved when it comes to tendering for contracts.

Significance of RCEP

Together, the 15 RCEP member countries represent close to one-third of the world population and global gross domestic product. That is larger than other regional trading blocs such as the European Union (EU) and the United States-Mexico-Canada Agreement (USMCA).

In a joint communique issued by the leaders of the participating countries during their meeting in Bangkok on Nov 4, it was stated that RCEP was “intended to further expand and deepen regional value chains for the benefit of our businesses, including small and medium enterprises, as well as our workers, producers, and consumers. RCEP will significantly boost the region’s future growth prospects and contribute positively to the global economy, while serving as a supporting pillar to a strong multilateral trading system and promoting development in economies across the region.”

The other six participants – Australia, China, India, Japan, New Zealand and South Korea – already have standalone free trade agreements with Asean members. Coming together under RCEP would enhance commerce across the group by lowering tariffs, standardising customs rules and procedures, and widening market access, especially among countries that don’t have existing trade deals.

When signed, the RCEP will be the biggest trade deal brokered by the Pakatan Harapan government.

What will RCEP do?

Media and analyst reports say RCEP is primarily beneficial for the goods trade because it will progressively reduce tariffs on many products. In addition, the deal will allow businesses to sell the same goods within the bloc but do away with the need to fill out separate paperwork for each export destination.

Even for companies that export goods outside the bloc, there will be incentives to build their supply chains across RCEP member countries.

India, which was involved in RCEP negotiations from the start, declined to join the trade pact over concerns that the deal would hurt its domestic producers. Its apprehension had been one of the main hurdles in the RCEP talks.

Some RCEP members, such as Japan, considered New Delhi’s participation crucial “both for economic reasons and as another counterweight to China”, according to analysts from risk consultancy Eurasia Group.

India is Asia’s third-largest economy and a large consumer market.

But the remaining 15 countries are still expected to bring RCEP into force, according to another consultancy, The Economist Intelligence Unit (EIU).

“Without India, RCEP will be less significant, but its path to implementation has become much smoother,” the EIU said in a report.

The way forward

The text of the agreement has not been made public and will not be available until the signing, making critical analysis and a realistic assessment of the pact’s impact difficult at this stage.

RCEP could address the low level of intra-Asean trade which currently stands at 25% of total trade compared to the 60% of intra-European trade in the European Union. The low level of intra-Asean trade could be due to the reliance of SMEs in their economies which have been traditionally inward looking and the members being at different levels of development (for example, Singapore is a developed economy while Laos and Cambodia belong in the Third World).

The issue of China’s dominance under the RCEP cannot be downplayed. According to the World Bank, the country’s manufacturing value-added stood at US$4 tril in 2018, four times its nearest RCEP rival, Japan at US$1 tril and nine times larger than South Korea at US$450 bil.

Will China’s economic dominance of the bloc be interpreted as a “monopoly” of standards, rules and compliance or are the provisions under RCEP strong enough to enforce a more globally compliant system?

RCEP’s rules in areas such as customs procedures, quarantine and technical standards will address non-tariff barriers by promoting greater transparency and cooperation among RCEP countries, while reaffirming existing World Trade Organisation rights and obligations.

RCEP will also establish procedures for technical consultations on non-tariff measures that adversely affect trade, and provide for possible future work on sector-specific initiatives to facilitate trade.

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