Advice to RCEP Officials

Perth:  The talks in Perth between the 16 governments negotiating a free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), across Asia represent a curious mixture of building momentum for closure at the end of the year and a growing realization of the distance that has to be crossed to reach the finish line. 

On issue after issue, officials said that they were working towards ambitious goals but then went on the discuss the diversity of members, the complexity of the issues, the challenges of building a suitably enabling environment and so on. 

Each qualifying statement is both true, of course, and disheartening.  There is not much point in crafting yet another trade agreement in Asia that does not really respond to the needs of the business community. 

In Perth, the East Asian Business Council (EABC) got to present their recommendations to the Trade Negotiating Committee (TNC).  This is the top-level negotiating group for RCEP.  EABC also offered up a survey done by JETRO of businesses across the region that highlighted many of the problems companies currently have using existing FTAs.  These challenges will be familiar to any business operating in Asia—uncertain information, lack of benefits, hard to use, and so forth.

For RCEP to avoid making the same mistakes, it has got to involve more businesses into the process.  Allowing the EABC to present recommendations on behalf of companies is a good start.  Australia also included a number of what it terms “stakeholder” events for Perth.  At these sessions, a handful of companies were allowed to present information to different groups of officials. 

The total number of companies represented, however, remained microscopic.  Given the difficulties that businesses often have in getting information exchanged at the domestic level with government officials, it is not good enough to say that officials in the room already know what businesses need or want or do not need or do not want. 

RCEP is meant to close by the end of this year.  Leaders have said it shall be so and have already extended the deadline once.  To do so again would, apparently, be unacceptable.  

This is the truly difficult part of RCEP.  Negotiations are, apparently, accelerating.  But the gaps are still wide and the business community as a whole is going to be very disappointed in the outcomes if the agreement closes without crafting an agreement that is helpful in making it easier to do business across Asia for companies both large and small. 

Officials may decide to hive off a portion of the agreement and do an “early harvest” for 2016.  This is a time honored ASEAN tradition.  It would allow leaders to declare a partial victory in RCEP, meet the deadline, and continue negotiating. 

To be frank, however, it is not really clear what might be harvested.  Of course it is only April and there is still time to conclude more chapters.  At the moment, it looks like only the economic and technical cooperation chapter might be sufficiently teed up for finish by the next round in New Zealand in June.  Probably an SME chapter could be concluded, as such chapters are mostly arm waving around the importance of helping smaller companies with limited commitments for member governments. 

To make the package of benefits better, some tariff reductions will probably be announced.  My favorite examples, of course, of snow removal equipment, will undoubtedly be included in the tariff lines for early harvest.  Makers of snowshoes, snowplows and snow skis will be delighted with the zero tariffs coming from RCEP. 

Given the concentrated levels of trade between member countries, as shown in a new Policy Brief we have just drafted, limited tariff reductions in RCEP (below 90%) will deliver no new net benefits for most businesses.  Market access negotiations will need to continue—and industry will have push hard—before sectors like textiles can expect to see any benefits from this new deal.

The services negotiations are proceeding on the basis of a positive list (except for Australia).  This means that only sectors listed for opening will actually be opened for RCEP member firms.  It could be possible to find a handful of service subsectors that might be gathered up for the early harvest package. 

Positive lists also come with the modes of supply drawn from the World Trade Organization, so RCEP members can open up sectors like travel and tourism, but do so only, for example, for mode 2—for their own citizens to travel to other RCEP countries to use travel and tourism services.  In any case, it would be possible to craft an early harvest list for services that replicate commitments made already at the WTO or within existing ASEAN + 1 deals for most members. 

Investment, by contrast, is done on a negative list basis.  All sectors will be opened for investment, except for those listed.  This is generally more challenging for officials to do the first time, as they have to think more carefully about what specific reservations they might have.  Hence, an early harvest package may have extremely limited investment provisions.  (And, if companies do not push, the final agreement may also be quite modest.)

In short, an early harvest would likely offer up only the most limited benefits for companies while officials continue to wrestle with the hardest issues. 

However, this might actually be a desirable outcome for businesses and certainly, it should be seen as better than a race to conclude the entire agreement by the end of this year given the current status of talks.  As of now, negotiations are not at the point where most companies will be satisfied with the RCEP outcomes.

Recall again that officials are only going to meet once to craft an Asian trade agreement for a good long time—once RCEP is concluded, they will not meet again to have wholesale revisions.  (They might, some people fantasize, turn RCEP/TPP into the Free Trade Area of the Asia Pacific.)  So this is the trade deal that will stick in the region for at least a decade.  It very much matters that they get it right the first time.

We have, as usual, been heavily focused on e-commerce.  We believe this is the most important area for RCEP as the countries involved have a novel opportunity to be innovative and forward looking, especially for mobile.  An ambitious outcome here will unleash new opportunities for smaller firms across the region.

But e-commerce is also challenging as it is cross-cutting and requires sustained attention across different chapters.  We recommend giving responsibility to the e-commerce working group for the topic and letting them ensure that e-commerce provisions are included at the end of the day in various specific chapters, like intellectual property rights or customs or services, that facilitate trade for smaller firms in the e-commerce space. 

To really push RCEP officials to be more ambitious, however, businesses will have to urge governments in and across the region to take the entire project seriously.  This is an important opportunity for companies.  It should not be wasted. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Three Reasons for the WTO

As global members of the World Trade Organization (WTO) struggle to figure out where the multilateral trade system ought to go in the future, it is worth reposting an earlier brief on why we all need the WTO to be healthy.

The WTO is needed for at least three broad reasons: for businesses struggling to operate in an increasingly complex environment, for resolving disputes around trade, and for the smallest and most vulnerable countries in the global system.

To address the first issue, consider a question posed to me by my chiropractor.  He wanted to know whether or not trade agreements have made it easier for him to operate a chiropractic clinic in South Korea and Taiwan and whether it is possible to train people to deliver this service in both places. 

This sounds like a relatively straightforward question.  But answering it took me several hours and highlighted the difficulties that companies (and individuals) have in using the existing system of trade agreements. 

To begin with, services like chiropractic care were barely opened in the last, Uruguay round of multilateral trade talks.  Since medical services are often considered a sensitive sector, few governments made any commitments at all.  Chiropractic services do not appear to have been opened for foreign trade by most governments in the WTO.

This means that determining of these markets are open requires examining various preferential trade agreements (PTAs) to see if they have different rules.

Taiwan (Chinese Taipei), thus far, has only two PTAs with New Zealand and with Singapore. Taiwan appears to have taken up quite broad exceptions for medical care: “Foreigners are not allowed to set up clinics, pharmacy, physical therapy clinic, occupational therapy clinic, clinical laboratory, medical radiation clinic, dental laboratory, nursing institution, midwifery institution, hearing therapy clinic, speech therapy clinic, psychological therapy clinic, psychological counselling clinic, or other medical care institutions in Chinese Taipei.”

Companies can often use different PTAs to deliver services. South Korea has signed many PTAs and examining them all takes a lot of time.  South Korea and Singapore are covered by the ASEAN + Korea agreement, which does not appear to open up chiropractic care.   

The most comprehensive agreements signed by Korea have been with the European Union and another bilateral with the United States.  So determining whether the sector is likely to have been opened anywhere is made easier by starting with the most likely suspects.

The situation is still complicated.  The Europeans and the Americans negotiate services differently.  Understanding whether or not chiropractic care is open depends on knowing which approach has been used to schedule (or open) sectors. 

For the European agreement, if chiropractic care is listed, it means it might be opened for foreign competition from EU firms.  However, determining the extent of the openness requires both knowing and understanding four different modes of supply, as different methods for delivering the service might be differently opened.  Then, it requires knowledge of the apparently backwards use of terminology to determine if what appears to mean open really does mean that the sector is open.  (If it says “none” it means fully opened, with no limitations, while "unbound" means no commitments have been taken to open the market and government may impose limitations.)

In the American bilateral, if chiropractic care is NOT listed, it IS opened for foreign competition from American doctors.  Thus, my doctor would have had to find this agreement online, found the relevant annexes for services in the bilateral, and searched for his sector.   However, having not seen the service listed, he might have assumed it would be closed.  But this does not appear to be true in the case of chiropractic care into South Korea.  This situation is, to put it mildly, confusing for a company to sort out.

This takes us back to the need for robust agreements at the multilateral, system level.  A deal that includes 160 countries is infinitely easier to use for companies than a thicket of sometimes overlapping bilateral or regional deals.  It would have been far better for my chiropractor to only have to visit one place to discover the commitments for this service across every WTO member.  (This would be true even if not every member had identical pledges, since they would all at least be in one place with one method of understanding the outcome.)

A second good reason for wanting the global trading system to remain healthy has to do with what is often called the “crown jewel” of the system—the dispute settlement mechanism (DSU).  One thing the WTO has continued to do for the past 20 years while the negotiating function has been stuck is to adjudicate disputes over trade. 

The DSU allows one government to sue another if the rules outlined in the agreement have not been properly followed.  There is plenty to say about this system, but for now, the key point is that the rules and commitments that member states must follow at the global system are getting increasingly archaic.  A government can only sue in areas where a rule actually exists.

As larger and larger segments of the modern economy, including vast swathes of services, new goods, investments and other important aspects of economic life are outside the existing rulebook, the DSU will also become less and less relevant to companies and governments.  It is not possible to use the WTO DSU to argue about provisions contained in preferential trade agreements (unless a violation of the PTA rules is also mirrored by a violation in global rules). 

Finally, while countries are increasingly finding it necessary to open up areas like chiropractic care in bilateral or regional settings, this stampede is deeply problematic to the smaller and poorer countries in the international system.  Not all WTO members make attractive PTA partners.  For some countries, there is just not enough trade between parties to make it worthwhile to negotiate a PTA.  For the excluded parties, they are increasingly stuck with the older, out-of-date rulebook at the WTO and without the preferences that most of their potential rivals might receive into various trading partners.   This puts them further and further at a disadvantage, making it more likely that they remain stuck on the periphery. 

For at least three reasons then—ease of use by companies, increasing challenges in managing disputes and marginalization of the smallest and poorest—it is important that the global trading system continue to function.  Unfortunately, fixing what ails the WTO is a challenging task.

---Increasingly, countries are using regulatory barriers of all types to protect domestic markets.  However, the impact of such policies may be going well beyond what officials intend by dramatically reducing inward foreign investment in unrelated sectors as well.  Join us at the American Chamber of Commerce in Singapore on Monday, March 7, 9:00 am for a panel discussion on “What Investors Want:  Creating the Conditions for Start-Up Success.”  See you there!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Initial TPP Impressions: Trade in Services

While market access for goods in the Trans-Pacific Partnership (TPP) remains subject to some exceptions and complications, the TPP exceeds my expectations for the quality of the services commitments. 

TPP member states might have been expected to exclude some services subsectors, but generally this did not happen.  The services elements of the TPP may turn out to be the most ambitious aspect overall.

Services are increasingly important to today’s globalized economy.  Our research shows that even for manufacturing firms, services account for somewhere between 30-70 percent of the total value embedded in supply chains.  Failure to provide market access with minimal conditions attached would have strangled the efforts of many firms trying to compete across the TPP. 

Services are also a critical mechanism for smaller firms or companies in more remote, geographically distant locations to plug into larger supply chains.  Even micro enterprises can deliver services via e-commerce platforms.

Trade in services is divided into 12 sectors and approximately 160 subsectors, ranging from business services to construction to travel to retail.  In many Asian free trade agreements (FTAs), services commitments are woeful.  Members have opted to keep many sectors and subsectors closed to foreign participation or have opened only areas with limited or even zero commercial importance. 

The TPP does not take the same approach.  Companies should find it easier to deliver services across member states, particularly because the TPP does not allow, for example, quantitative limits to be placed on services.  In other FTAs, members frequently allow in foreign medical clinics, but may limit the total number of such clinics to one or two facilities.  Or caps may be placed on the total number of employees or boards of directors. 

In the TPP, by contrast, foreign companies can deliver services without having to have a representative office or be a resident to serve the market.  The TPP requires that members treat foreign service suppliers just like local service suppliers.

To understand TPP commitments, it is necessary to do two things.  First, the text of Chapter 10 applies to all TPP members.  This section lays out the rules and regulations that member states agree to follow for services.  Note that services and investment provisions are often bound together, particularly in the annex schedules, as some services are difficult to deliver without a presence locally.

Second, in cases where members know that they are not in compliance with these sweeping rules and have no aspirations to change the domestic situation to come into compliance, members can schedule, in their annex, any areas where they are out of line with the incoming rules.  This is called a list of non-conforming measures (NCMs) and they are subject to negotiation among all 12 parties.

Reading these schedules to help determine what services can actually be supplied to any TPP market from another TPP market is trickier than it appears.  If your subsector is NOT listed, then it is opened for foreign competition from TPP partners. 

This mechanism for scheduling TPP openness is actually a far more progressive method than the one used in most other FTAs.  Under the “negative list” approach, members are obligated to open everything, unless they specifically note their objections in the annex at the outset. 

Using a negative list does two important things.  First, it ensures that new services are automatically opened for TPP competition without the necessity of tedious negotiations that might take years to conclude.  Second, it helps governments be more ambitious, since every exception to the rule has to be noted in full and new barriers cannot be easily created later. 

Negotiating on a negative list can be intimidating the first time officials try to use this approach.  The automatic response is to simply list all 160 subsectors as closed and then slowly, slowly peel off subsectors from the initial list as negotiations progress. 

Note that, mirroring World Trade Organization (WTO) handling of services, financial services and telecommunications have their own chapters in the TPP.  Both have long been regarded as “backbone” service sectors which warrants special handling.

Some TPP countries appear to have been extremely cautious in their scheduling and to hedge against potential problems and gain future policy space by claiming a broad NCM.  Note that, for some TPP members, these exceptions may not ever be used. 

In other countries, the NCM may not matter overly much, as they are taken in areas of likely limited interest to other members.  For instance, Japan requires that persons in the motor vehicle disassembling repair business must have a business in Japan.  Assuming that electronic repairs do not count, it could be hard to imagine how a person might disassemble a car from overseas.  Individuals engaged in specifying measurement instruments have a host of rules to continue to follow in Japan.

For countries like Vietnam and Malaysia that have never used a negative list before, I would have expected that the peeling off restrictions exercise would have still left an extremely long NCM list.  However, a glance at Annex 1 shows that both members largely matched the ambition levels of other partners. 

For example, Vietnam (like many other TPP member countries) will continue to have some restrictions in place on foreign lawyers.  Tour guides continues to be a sensitive area for some members, with limited (or no) foreign access. 

But an examination of the schedules also throws up some surprises.  Vietnam has an odd rule that appears to make it more difficult to open up a second (or more) retail establishment, although the measure is meant to expire within five years after the agreement takes effect.  Services attached to agriculture, hunting and forestry still require a local partner.  Major anniversaries in Vietnam must be marked with local film screenings only.  Canada has a surprising number of rules around owning duty free shops. 

My personal favorite—so far—is a rule that allows amusement park investors to come into Vietnam, but only if they invest more than US$1 billion.  Less than that and you are subject to onerous criteria that will likely to make it impossible to build the amusement park of your dreams.   

Other restrictions across TPP members could be more problematic, including a host of rules around broadcasting rights, some restrictions on services and investment in energy or mining, and rules on internal land and sea transport that can prevent TPP parties from delivering these services. 

Over time, it is possible that some of these restrictions will be relaxed.  In the meantime, if a country did not schedule a NCM, it cannot easily create a new one to block market access to TPP member countries in the future. 

In short, like other elements of the agreement, the basic texts have to be read carefully with the country-specific annexes.  While the TPP may appear to have extensive carve-outs or broad exceptions in some specific areas, these are actually significantly fewer in number and cover a handful of subsectors that may be viewed as commercially meaningful to some TPP members.  Certainly, compared to other agreements on services, the TPP may be setting the standard for high quality in this area.

[Note that Japan’s market access schedule for goods is now fixed—it no longer ends, as noted in my last post, at chapter 65 but includes all industrial goods.]

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***