THE world’s largest trade deal has been in labor for 72 months. Nonetheless, its parents—the 16 economies tackling the Regional Comprehensive Economic Partnership since 2013—remain optimistic the RCEP would be a blessing when it’s finally birthed.
For some experts, the RCEP would help the Philippines become fully liberalized from the shackles that restrict its trade performance—a flashpoint for economic growth.
This hope comes at a time of rising protectionism that challenges multilateral trade policies worldwide.
With the United States backing out of the Trans-Pacific Partnership (TPP), many economies were prompted to set their sights on RCEP. This deal, to note, is not a lightweight. It has the backing of the 10 member-states of the Association of Southeast Asian Nations (Asean) and their six Asia-Pacific trading partners, which include even the biggest economies, such as China and India.
But everything is easier said than done, especially when it comes to trade in goods and services, as the deadline for the full conclusion of the deal has been pushed back several times since negotiations began five years ago.
Half a decade later, RCEP economies reported in a joint statement during the Asean Summit in November that they are looking forward to the 2019 conclusion of the deal. The leaders of these economies said they are more than happy with the substantial progress reached for being able to conclude seven out of 18 chapters to date.
However, in his speech as 2018 Asean Summit chairman, Singaporean Prime Minister Lee Hsien Loong warned that further delays will lead to RCEP losing both its credibility and support from its stakeholders.
FOR Trade Secretary Ramon M. Lopez, the level of negotiations reached for the RCEP is the storm before the calm.
The 10 member-economies of the Asean, along with Australia, China, India, Japan, New Zealand and South Korea vowed to conclude the RCEP this year, but failed.
Five chapters were inked under Singapore’s leadership, but none of it included the critical provisions of the trade deal, including trade in goods, trade in services and investment.
Lopez confirmed that RCEP leaders are resolved to expedite negotiations to close the free-trade agreement (FTA) next year. The deadline is like a ticking time bomb, as failure to conclude will be to the further detriment of the multilateral trading system, he said.
Lopez argued there is no other time to close the RCEP but next year—for who knows, the trade conflict involving the world’s largest economies could worsen.
FORMER Tariff Commissioner George N. Manzano believes otherwise. Manzano also disagrees with Lee’s view, noting that RCEP won’t lose its credibility and support from its stakeholders, especially for businesses, because of delays.
“I think in the absence of the TPP, RCEP is the next best thing for as long as business wants to open up, wants to have more access, wants to expand; as long as the regional value chain needs to prosper, there will still be interest, so the credibility will still be okay,” he said.
However, for University of the Philippines Diliman Professor Ramon L. Clarete, who specializes in international economics and multilateral trade policy, the conclusion of the deal next year is a tall order. Nonetheless, Clarete considers the delays “understandable.”
“I think [with] the gravity of the negotiations between those big countries, big economies will take probably two years from now,” he said.
The RCEP negotiations are said to be easier for Asean countries but not for those outside the bloc, as some countries are about to forge their first free-trade agreement with each other.
“The problem is the bilateral between India and China, India and Japan, China and Japan,” Clarete said. “These are very big countries, economies, and they will be negotiating their first bilateral.”
He also noted these countries have large constituencies to please, which adds to the pressure to finish negotiations on time.
The Asean-led proposal for a regional free-trade area will comprise the 10 Asean member-states and economies the regional bloc has existing FTAs with: Australia, China, India, Japan, South Korea and New Zealand.
Figures from the Australian government’s Department of Foreign Affairs and Trade show that last year, RCEP economies accounted for a combined gross domestic product of $25.4 trillion and GDP per capita of $7,146. They also accounted for almost half of the world’s population, over 30 percent of global GDP, and more than 25 percent of world exports.
The RCEP will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, e-commerce, dispute settlement and other issues.
Lopez said that, as of November, seven chapters in the draft RCEP were concluded.
Two chapters—on small and medium enterprises and on economic and technical cooperation—were finalized in 2016.
The chapters in customs procedure and trade facilitation, in government procurement, in sanitary and phytosanitary measures, in standards, technical regulations and conformity assessment, and in institutional provisions were concluded this year under Singapore’s chairmanship.
STILL, Clarete warned that further delays in the implementation of RCEP may negatively affect the economic growth of East Asian countries as he noted a solid correlation between trade and growth.
“I think we would have, of course, dampened the growth in East Asia if we delay the implementation of RCEP,” Clarete said.
“You cannot have sustained high growth without trade,” he added. “Number one, being open means you have the wider market in the world, you can avail of scale economies. Number two, you can access materials you can’t produce here so that you can use for your businesses. And you can source your products with open trade most competitively.”
Although Manzano agreed that the delays are natural in the process of new free-trade deal negotiations since the countries are entering the more difficult stages of negotiations, he said he will not be very worried about its impact.
“It gets delayed because they are entering…a phase which is difficult, which is market access, which means you have to negotiate with India [which] is usually more protective compared to others. That is more difficult than customs administration, especially those on rules of origin, so they have to also go to the intellectual property, which is also not easy to do,” Manzano told BusinessMirror. “We trade with a lot of Asean countries, so if this one would not get concluded soon, the opportunity loss will not be that very great.”
Nevertheless, he said it would still be better if its gets concluded soon, as it will simplify trade facilitation.
“The benefit there is facilitation because you have one rule for all,” Manzano said. “Right now you have Asean-India, Asean-Japan, so each one with its own rules, with its own rules of origin. This mega free-trade agreement will put them all in one platform and that will hopefully simplify, and if it simplifies, then hopefully it simplifies things, it will facilitate more trade.”
WITH more trade also come more gains, especially under RCEP, according to Manzano.
This, as he explained that trade in services will also follow trade in goods, since transportation, insurance, handling of import facilities and trade financing all demand movement of goods.
However, Clarete conceded that RCEP is not a one-size-fits-all solution, as it may also come with the harsh reality that less competitive economies will be forced to exit and workers being displaced.
With these downside risks, RCEP economies are now more challenged to come up with better ideas of inclusion—more than what the TPP has come up with.
“It is expected that there will be industries that will exit because they are not competitive anymore. So it is important therefore to have programs that would address the adjustment of the displaced industries of the displaced workers,” he said. “Among economists, we teach that there are gains from trade, meaning to say, the gains are larger than the losses. But there is still a loss, and there are people in that loss. We sort of rest our advocacies for open trade with that net positive loss.”
THE net positive loss, according to Clarete, could somehow be addressed with the country being more open for investments which will create more opportunities for those who may lose their jobs.
Despite these risks, Clarete stood firm that the pros still outweigh the cons.
Although RCEP seems to be the jewel now, he still believes that it is better for the country to not restrict itself from joining other trade deals that would make it lose access to other markets.
Clarete said he will also support the government’s plan to join TPP in the future.
“While we negotiate with those mega-free trade deals, we should continue negotiating also [with other countries],” he added.
Not even the ongoing trade war between the United States and China should hold back the Philippines from joining RCEP.
“The trade war and the protectionism are temporary phenomena. If somebody is swimming against the current he will get tired,” Clarete explained. “The US economy and the Chinese economy will start to feel the disadvantages of that war so eventually they have to negotiate a deal; that won’t be for long.”
Still, he admits there is sentiment that globalization is not inclusive.
“We have to address that. I admit, in the process of globalization, displacement is there, the smaller ones, the less competitive lose jobs; then that is a problem alright,” Clarete said. “But you don’t solve that kind of problem by protecting because you are also punishing your consumers and the other industries that utilize imported materials. You have to change the solution. Bring down the protection but at the same time address the displacement problem.”
ALTHOUGH some sectors are worried about their country’s widening trade deficit, Clarete said this should also not be used to justify the Philippines’s retreating from RCEP negotiations.
Due to the 2.6-percent contraction of exports to $5.827 billion and imports growth of 26.1 percent to $9.753 billion—the highest since July 2018, the country’s trade deficit grew 124.1 percent to $3.927 billion in September, from $1.752 billion in September 2017. This was also higher than the $3.494 billion in August.
“Not really because the trade deficit can be managed by managing your fiscal deficit,” he said, adding that the government can either reduce its fiscal deficit, let its exchange rate depreciate or produce more exports.
“You can do that by being more open so you can bring the Philippines to more value chains,” he said.
LOPEZ told the BusinessMirror that “RCEP negotiations made substantial progress this year and are poised for conclusion next year.
“Other chapters that are still under negotiation include trade in goods, rules of origin, dispute settlement, investment, trade in services, competition, e-commerce and intellectual property,” he said.
The trade chief insisted, however, that the conclusion of the remaining chapters is within reach. He said these chapters “have undergone substantial negotiations and are also almost within the set parameters of the framework.”
“Negotiations are ongoing in the areas of market access, including trade in goods, investments and services, and rules, such as intellectual property,” Lopez argued. “These are usually the most difficult to conclude in any FTA negotiations.”
He added the difficulty in concluding the RCEP lies in the economic differences of the negotiating economies.
“The challenge of completing RCEP negotiations is compounded by the sheer size of the RCEP being a 16-party mega-regional free-trade area with countries at varying levels of development, diverse interests and domestic sensitivities,” Lopez explained.
He pointed as another hurdle the non-Asean negotiators, as some do not have existing bilateral FTAs with each other.
BUT just like in any other deal, the devil is in the details.
Manzano said more than the tariff reduction, the Philippines should also look into the nontariff barriers within RCEP economies, which he said is one of the usual pitfalls in negotiating a free-trade pact.
“The tariffs are easy because it’s visible but the nontariff barriers, their safety [nets], they might sell it very high so there is basically a barrier already,” he said.
He also said the Philippines should also be conscious on how other countries do their investments and their creation of profits. “There are pros and cons on being too open and too closed,” he said.
Although the RCEP economies are still not yet done negotiating on the deal’s chapter on trade in services, Clarete said he knows for a fact that a lot will change.
But for the country to maximize the gains especially on trade in services under RCEP, more still needs to be done especially on relaxing the restrictions.
ALTHOUGH the government has recently released the 11th Regular Foreign Investment Negative List reflecting the amendments in existing laws such as reciprocity provisions on certain laws on professions, Clarete said the country should still ramp up its efforts to ease restrictions.
“I think we miss a few opportunities because we are still restrictive in services trade,” he said.
“Our laws are very strict on foreigners practicing their professions here. Why is that not good? We could have been a hub for internationalization of education. We are but natural because we speak in English; but we lost that to Malaysia.”
Aside from education, he said the country is also competitive in business-process outsourcing (BPO) and tourism.
But the Philippines should also be wary of its competitors, especially on trade in services.
For example, Manzano said that although BPO and tourism industries are the strong suits of the Philippines, Thailand is also competitive in those sectors as well as in financial services.
FINALIZING the RCEP next year is a daunting task, but Lopez said it must be done to put pressure on large economies to return to free trade and globalization.
This is especially true as one of the RCEP negotiators, China, is engaged in a virtual trade war with the US. Last September the US slapped a 10-percent tariff on $200 billion worth of Chinese exports until the end of 2018. The tariff will increase to 25 percent later on.
Before that, the US had imposed tariffs left and right on products “offensive” to China’s export interests, including steel and aluminum.
China, for its part, is not taking the tariff war sitting down. It retaliated a couple of times, including raising import duties on $60 billion of US goods in September in response to the 10-percent tariff on $200 billion of their products.
“No, the US-China trade war is not affecting the negotiating dynamics,” Lopez replied, when sought if China’s involvement in trade tensions is taking a toll on the negotiations.
LOPEZ argues that the trade conflict is even working to the benefit of RCEP negotiations.
“On the contrary, the RCEP participating countries are encouraged to fast-track the final stage of the negotiations to support the path toward globalization,” the trade chief explained.
“The trade deals—such as RCEP—would instill discipline and ensure that markets remain open and transparent, amid overall uncertainty in economic and financial prospects and anxiety in the global trading system caused by trade wars and protectionist tendencies, are expected to contribute to the promotion of free and open trade,” he added.
Lopez said it is crucial for RCEP economies, especially the smaller negotiators, to have a safeguard in trade at a time the free trade is challenged.
“Concluding the RCEP is given impetus especially if current conditions persist,” he added.
THE Philippines, too, is looking forward to the conclusion of the RCEP, as it hopes partners will liberalize both their trade and services sectors.
As negotiations on the unfinished chapters continue, the country is seeking the more aggressive liberalization of RCEP economies on labor and employment. Lopez said this is to provide more overseas opportunities for Filipino skilled and nonskilled workers.
“The Philippines seeks to improve its position as a service supplier, as well as to deflect possible discrimination vis-à-vis competitors, through increased breadth [coverage] and depth in the services commitments of RCEP countries,” Lopez said in explaining the Philippine position on the trade in services chapter.
“The Philippines as a services exporter is pushing for the liberalization of sectors, such as computer-related services, health services, recreational services, business services, professional services, among others, that have not been opened up under the Asean FTAs. The Philippines is also looking at improving existing market access commitments in terms of depth in modes of supply,” he added.
The Philippines wants “greater transparency, streamlined processes and recognition of qualifications and standards” in the chapter on services, Lopez said.
Image credits: Nonie Reyes