Regional Comprehensive Economic Partnership (RCEP): An Asian Trade Agreement for a Value Chain World

BANGKOK—Negotiators from across 16 countries in Asia are meeting this week in Bangkok to try to put together a new trade agreement.  The Regional Comprehensive Economic Partnership (RCEP) is a megaregional trade agreement, like the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) discussed in last week’s blog.

What all three agreements have in common is a shared vision of creating trade arrangements that bring together ever-larger sets of countries.  RCEP includes 16 parties in Asia.  TPP spans 12 on both sides of the Pacific.  TTIP is trying to link the U.S. with the 28 members of the European Union.

These larger trade groupings are increasingly important given changing patterns of global trade.  In the past, governments worked mostly at the global level through the World Trade Organization (WTO) or bilaterally with like-minded partners.  Now, however, the WTO is clearly unable to move forward on any aspect of its agenda.  Bilateral trade deals, while welcome, do not accurately reflect the way the most dynamic companies operate on the ground.

The process through which goods and services are produced and consumed is shifting rapidly.  We are increasingly living in a world of global value chains (GVCs) or global supply chains.  We’ve had supply chains of one sort or another in trade for centuries, as firms have traded with one another for raw materials, components, or final, finished goods.  What is different now is that, with falling costs of communication and transportation, it is possible for companies to source exactly the right inputs from exactly the right geographic space to take advantage of different costs in materials, services, labor, and capital.  The world is literally the “oyster” for global companies.

Such a development often makes people uncomfortable, as it unleashes fears of being overrun by large multinational companies that are extremely competitive.  But this need not be the case.  A GVC world also makes it possible for the smallest firms in the most remote places on earth to fit into value or supply chains elsewhere in ways that were never possible in the past.  Firms can deliver services like translation, provide medical assistance, assist with customer service tasks, handle accounting, create new products, participate in the design of items large and small, and sell their own goods directly to consumers anywhere in the world with relative ease.  Even manufacturing is possible in places that could not participate in the past when transport costs were prohibitive. 

In this world, trade agreements have not kept pace with changes on the ground.  The WTO agenda is nearly 15 years old.  Bilateral agreements between two countries are not particularly helpful for value chains that span dozens of places. 

Hence the drive to create larger trade agreements.  In Asia, many governments have been very promiscuous, signing up to all sorts of trade deals.  Singapore, for example, has more than 20 in force with more under negotiation.  Such agreements can be helpful in spurring economic growth, especially for some companies or covered industries.

But the benefits of larger agreements cannot be ignored.  If a company had to fill out only one type of paperwork to, say, export pencils to up to 15 other markets, this would be extremely helpful (and, it should be noted, most helpful for the smallest firms without people or resources to try to fill out 15 different forms).  Creating a single platform and production base across the widest set of participants should make it easier for small and medium sized companies to participate.

This brings us back to the 7th round of RCEP negotiations taking place in Thailand.  The 10 member countries of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) already have agreements with their “Dialogue Partners” through what are called ASEAN+1 deals.  Under these trade agreements, ASEAN has hooked up with Japan, South Korea, China, India and Australia/New Zealand.  The intention now is to stitch these existing agreements together into one, comprehensive megaregional that covers all 16 countries.

Done well, the new RCEP should unleash significant economic growth in Asia.  Such an agreement ought to be particularly welcomed by smaller firms and poorer countries in the region, since they would have a platform to more easily hook into existing and new value chains. 

RCEP could be extremely helpful in creating a trade agreement better suited for a GVC environment.  Negotiations here in Bangkok include talks on goods, rules of origin, services, investment, competition, intellectual property rights, e-commerce, legal and institutional issues, and economic and technical cooperation.  The goal is to complete talks by the end of the year.  If successful, the potential for growth and development in this region is substantial.

The next post will focus on how well this vision is matching up with the reality taking shape in the negotiating rooms here in Bangkok.  Stay tuned!

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For updates on the ground in Bangkok, follow our Twitter posts at @RCEPNews or visit our website at www.asiantradecentre.org. 

The TTIP Paper Conundrum: A4 versus US Letter

This week American and European trade negotiators are meeting in Brussels for the 8th round of Trans-Atlantic Trade and Investment Partnership (TTIP) trade talks. 

TTIP is, perhaps, the most difficult trade negotiation ever. 

This statement will likely be met with complaints by current and former trade officials who will argue that other agreements were much more challenging.  The early global talks in the General Agreement on Tariffs and Trade (GATT) had to operate in a world with no rules at all governing international trade.  Each provision—every sentence and even every word—required careful thought since it was unclear what sort of implications might follow from different commitments. 

The GATT’s successor organization, the World Trade Organization (WTO), has been unable to bridge differences across what are now 160 different members.

The North American Free Trade Agreement (NAFTA) talks were no picnic, as the types of integration imagined in the deal were deeper and broader than most commitments to that point.  European Union (EU) market integration negotiations have also proven difficult since many of the regulations struck deep into domestic territories.

Even the parallel Trans-Pacific Partnership (TPP) negotiations with 12 parties across the Pacific have taken more than 20 rounds across nearly 5 years with conclusion still elusive.

In spite of the difficulties faced by officials in these other megaregional deals, TTIP is still more challenging.  Why?  Largely because the agreement on the table now has more win-lose, binary options than previous trade deals.

Since the EU and the United States have broadly similar approaches to trade and market liberalization, much of the normal “meat and potatoes” of a trade agreement are not so critical for these negotiations.  Tariffs (with some exceptions, especially in agriculture) are relatively low.  Services and investment (again with some exceptions) flow relatively freely.  Even the sorts of non-tariff barriers that confound trade in many places are relatively modest.

The real benefits from TTIP come from harmonized or reduced regulations and closer alignment of standards.  The economic payoff from getting companies to use only one set of standards or to comply with one broad set of regulations would be incredibly significant.  A producer could create one product to be bought and sold in all 28 individual member markets of the European Union and the United States.

Yet the costs of harmonization in TTIP are also potentially enormous.  As the most basic example of this problem, consider the paper conundrum.  When the deal is done, what sort of paper will it be printed on?  A4 or US Letter size?  The former is the European standard for paper and the latter is the American default.

A4 paper is 210 x 297 millimeters or 8.3 x 11.7 inches in size.  US Letter is 216 x 279 mm or 8.5 x 11 inches.  Even the approaches to measurement—metric versus imperial—are different.

To really unlock the economic benefits of TTIP, not having to produce, stock and carry two sets of paper sizes would be very important.  The harmonization of standards around paper size would allow firms to more easily shift from producing for the American market to the European market and vice versa. 

But note that this simple decision—to agree on the paper used for the agreement—also brings significant other changes to the economy.  Printers, printer software and copiers may need alteration.  Binders, three-hole punches, folders of every description would also need to change.  File cabinets would be made redundant if they do not fit the new paper size.

Most notably, however, the burden for this change would fall on only ONE side of the agreement.  There is no way to standardize or harmonize paper sizes in TTIP without putting one side at an advantage and imposing a major financial burden on the other party.

Officials in past deals will quickly argue that similar win-lose outcomes have taken place all the time in such trade negotiations.  But the difference, I think, is that past agreements like the GATT or NAFTA or even the EU itself had the potential to enlarge the pie and to create other types of win-win outcomes.  In other words, trade officials could think creatively about how to balance the benefits more broadly and the upside potential of new markets usually was sufficient to offset the relatively modest number of groups, firms, industries or sectors that suffered (or thought they might suffer) a particular loss from an agreement.

TTIP is wading deep into regulatory and standards territories where win-win outcomes are not likely.  A key point of the whole exercise, in fact, is to eliminate divergence between these powerful markets.  The only way to get to such an outcome is to either agree on one or the other existing standard or create some sort of new standard that imposes costs on both sides (and, presumably tries for equal costs to both parties).

Let me illustrate the problems again with several additional examples. 

In autos, there are clear differences of opinion over regulatory issues.  To take a small example, the very premise of EU and American rules over the safety of auto bumpers is different.  The EU side is primarily concerned about pedestrian safety in crafting bumper standards.  The Americans are worried about crashes between autos and have standards to cover higher speed impacts.  How can these two differences even be reconciled?  It is (as I understand it) not possible to create a bumper that simultaneously takes pedestrian safety and head-on collision safety as equally important in manufacturing.  If the TTIP chooses, it will automatically privilege one side over the other.  Yet, if officials do not make a decision, firms will have to pick one set of manufacturers to work with or the other or continue to manufacture completely different products for both markets.  The whole purpose of harmonization will have been lost.

Similar problems abound in TTIP.  On food safety issues, the regulatory principles behind the rules are often fundamentally different.  The EU side generally approaches food with the understanding that food must be proven safe before it can be sold.  The Americans generally argue that unless food is proven unsafe, it is suitable for distribution. 

In data privacy and protection, both sides approach the issue differently as well.  Again, reconciling the two approaches would have benefits for firms trying to operate in both key markets.  But it is not possible to somehow “split the difference” between the two regulatory approaches because they start from different points.

Officials are not oblivious to these challenges.  They are especially working in this round, it appears, on mutual recognition.  Under this approach, both parties would recognize, for example, that a product that meets safety standards in one market could be viewed as meeting the regulation in the other market.  Chemical products could be tested in one market and automatically approved in the other market. 

But this does not really get around any fundamental differences in the first place.  If I believe that chemicals can only be certified as safe under the rules that my regulators have created, why would I trust the safety of your product using a different set of rules (and ones that I, presumably, trust less or I would have incorporated them into my own rules in the first place)?

Hence, despite the renewed momentum behind the talks and potentially significant economic benefits, the TTIP faces the toughest set of challenges of any trade agreement.  If it somehow succeeds, it will be an entirely new kind of trade deal—closer to an imagined “21st century” agreement than anything else out there.  But the obstacles to closure are deeper and wider than seem to be appreciated thus far on either side.

Updated Update: Pork, Beef and Autos

News continues to flow out from last week's meetings between the United States and Japan over the five "sacred" items and automobiles.  The last post covered this ground in greater detail, but here's a few more pieces of useful information:

After more than a year of vigorously denying the possibility, it finally looks like Japan and the Americans have agreed to handle some or all of the sacred agricultural issues through tariff rate quotas (TRQs).  This is a somewhat complex administrative system that allows a country to import a certain quantitative amount of a good at one, lower, tariff rate.  Imports above that quota are charged a different, higher amount.  Such schemes are possible for agricultural products.

For pork, indications are that the in quota rate on low-value pork will be lowered from 482 yen (or roughly USD$4) a kilo to 50 yen across a ten year time period.  The out of quota rate (for pork in excess of, perhaps, 500,000-600,000 tons) will be charged 100 yen once the agreement is fully phased in.   For some context, Japan currently imports 760,000 tons of pork (with more than half of imports from the United States and Canada).  

However, as noted in my earlier post, the agreement will also have a snapback provision to allow tariffs to revert to 482 yen if imports surge.

Beef will also be subject to the same TRQ schemes, with the in-quota rate falling from 38.5% to just under 10%.

The primary issue with all these quotas now seems to be the specific provisions for the safeguards.  If defined too loosely, they will automatically be applied as imports go up post-TPP.  If defined too tightly, the Japanese are worried that they may never meet the criteria and may face crippling competition from American farmers with no remedy available.

In order to increase the leverage the United States has over these sensitive agricultural issues, the five sacreds were always tied to changes in automobiles.  The Americans now appear to have promised to drop auto tariffs, but to do so on the same schedule as the longest phase-out period permitted for agricultural products.  This keeps the pressure on Japan to implement tariff reductions in the shortest possible time period.

Because Japan was a late entrant into the TPP negotiations, it has been busily conducting bilateral market access talks with the other TPP member countries as well.  It looks like Japan is running into some resistance from Vietnam (also rice and autos), New Zealand (dairy), Canada (also dairy), and Malaysia (plywood and timber products).  Talks with other member countries where Japan already has existing trade agreements may be going more smoothly, although it is always difficult for governments to agree to additional concessions in the TPP negotiations that were not available in the bilateral talks.

Finally, I would like to close with a shout out to the Japanese media.  Although accusations of TPP secrecy have been flowing thick and fast (even from people who ought to know better as I pointed out on January 14), the Japanese media have done a solid job in providing regular updates on the state of the talks.

Beef, Pork and Butter in Japan: An Update on "Sacreds"

Multiple reports suggest that the United States and Japan are getting closer to resolution of the five "sacred" agricultural items discussed in my last post.  

Not all of the sectors are equally challenging to address.  For example, Japan placed sugar on the "sacred" list.  Given American sensitivities on sugar, it was never very likely that the United States would push Japan particularly hard in this sector.  It's the old "people who live in glass houses should not throw stones" problem for U.S. negotiators.  

Equally, it was never very likely that Japan would be asked to drop rice tariffs from more than 700% to zero in any short timeframe.  Each government can appreciate that doing so would have been economically and politically challenging.  Thus, it was always likely that Japan would be given a long timeline for rice.  In addition, since many Japanese believe deeply and passionately about the quality of domestically produced rice (and, indeed, most agricultural products), even if the rice market were completely tossed open it is highly likely that consumers would still opt to buy Japanese rice.  

The real fights have been over access to Japan's beef and pork markets. These are lucrative and have been highly sheltered in important ways.  Low priced pork items, for example, are assessed duties as high as $4.06 a kilogram (482 yen).  A duty of this magnitude can keep consumers from purchasing foreign pork--especially on lower value items.  Pork prices in Japan are managed by a complicated "gate price" system that the American pork industry has long sought to change.

Reports now suggest that Japan is prepared to slash tariffs on pork dramatically.  The duty on lower value pork products could fall to less than a fifth the current level.  High value pork may see the current 4.3% tariff finally reach zero.  

Beef is currently assessed tariff rates of 38.5% into Japan.  The cut being discussed would drop these rates to 20% and then to 9%.   

Of course, the cuts in both beef and pork are to be phased in over a long period of time.  In the case of beef, the 9% rate will not be in effect until 15 years after the agreement is first implemented.  Even then, the final deal will not lower rates all the way to 0, as many might have expected, given the long-standing discussions in the TPP of a "high quality, no exceptions" agreement that covered all goods.

Tariffs are not the only way of protecting markets either.  It is entirely possible to keep foreign cuts of meat limited in Japan through maneuvers like labeling requirements that make foreign beef and pork appear less savory than locally produced cuts of meat, or stringent health and safety inspections that take so long to complete for imported products that the food spoils.  There are a myriad other ways to use non-tariff barriers (NTBs) like these to limit what would otherwise appear to be more open markets in the future.

This is not to say that the Japanese government will turn to such measures, but simply to highlight that such possibilities exist.

Another potential tool (or NTB, depending on your perspective) being built into the agreement is something called a "snapback" provision.  This is a "safeguard" measure that is designed to give an industry "temporary breathing room" if imports suddenly surge.  In the TPP, the safeguard on beef could allow the government to raise tariffs from 9% all the way back to the current levels of 38.5% if imports of beef do surge after the deal is done.

This is deeply problematic, as it is highly likely that imports of beef (and pork) will, indeed, rise after the agreement is fully implemented.  After all, if foreign cuts of meat are not subjected to painful additional tariffs at the border, prices at the supermarket should fall.  The increase in foreign products could be defined as a "surge" and trigger the sudden imposition of safeguards or the snapback to the original tariff levels that were present prior to the TPP.  

Similar maneuvering can be expected in dairy where Japanese tariffs on various dairy products like butter are significantly higher.  It is certainly likely that a drop in butter tariffs from more than 200% will be met with a surge of imports since consumers will be buying cheaper American or TPP butter.  Shops were already running out of domestic butter at the end of the year as Japanese domestic herd sizes have fallen.  A similar shortage (and emergency lifting of quotas) took place in 2008.  Butter crises struck again in 2011, 2012 and imports were allowed under emergency rules twice in 2014.

The Japan Dairy Industry Association has argued that the domestic industry is set for a catastrophic fall once the TPP comes into effect, with the butter market falling from 83 million yen to less than 13 million yen.

Dairy is also an issue with Canada.  Thus far, the Canadians have been waiting on the resolution of agricultural issues with Japan before they get serious about their own promises to reduce protection to TPP members in dairy and poultry. 

TPP: The Importance of Resolving the “Sacred” Market Access Issues

I have been told for several years now that if TPP negotiators were stuck in a room with no food and no water, they would rather quickly come to an agreement.  We almost had a real-world test of this theory, as TPP chief negotiators and team members were stuck in New York City.  Fortunately, the snow was lighter than expected and the experiment ended before stocks of food and water ran out.

So, what are the issues that are holding up conclusion of the TPP?  This post will discuss the biggest sticking points—old-school fights over cows, pigs, butter, rice, and pickup trucks. 

These kinds of market access issues continue to confound the conclusion of the negotiations. 

What is particularly amazing about these topics is how long officials have been wrangling over them.  Wendy Cutler, acting deputy USTR, must be one of the world’s most unlucky bureaucrats. She’s been fighting over market access for the same narrow set of products with Japan for what must now have been most of her career.   Up until now, she has continued to bash her head against the same implacable forces with little to show for her efforts. 

When I started tracking U.S.-Japan trade disputes from the 1980s and 1990s, she was pushing for expanded access for autos, apples, insurance, and construction.  All these years later, she is still pushing for access for autos and assorted agricultural products.  (In the interest of full disclosure, we have never met and I grant that she is good at her job—the evidence from some specific Japanese agricultural markets notwithstanding.)

The specific context for negotiations has altered over the decades.  But the prospects for deep and substantial change have never been brighter.  She is currently holed up again with her Japanese counterparts in Washington DC, trying to sort out the bilateral concerns over Japan’s “five sacreds” and autos. 

Japan entered the TPP in July 2013.  When Japan got in, the signs for negotiations were somewhat ominous.  President Obama seems to have thought he had sufficient wiggle room by putting talks over a few key agricultural items and autos onto a separate, bilateral track.  This portion of the negotiations could take as long as necessary to resolve, since conclusion of the bilateral portion of the deal need not finish at the same time as the rest of the topics under negotiation.

Prime Minister Abe, for his part, promised to “take special care of” five sectors:  rice, wheat, beef/pork, dairy and sugar.  These so-called “sacred” sectors were swiftly declared to be off limits for bilateral discussions by Japan’s Diet. 

The deal that both sides thought they had mapped out quickly unraveled.  First, it is impossible for Japan and the United States to negotiate endlessly (or continue to negotiate for another 30 years) on the five sacreds and autos.  The other 10 TPP members need to see what sort of commitments the two players are willing to make.  If Japan, for example, is able to exclude or fail to completely open certain sectors like dairy or beef or butter, then other TPP parties will argue that they, likewise, do not need to fully liberalize their own most sensitive sectors.  Hence, it matters greatly what Wendy Cutler and her team manage to achieve in dialogue with her Japanese counterparts for the entire TPP negotiations.

Second, while the Japanese were likely to be given significant latitude to have extremely gradual market opening, government officials showed up with more than 500 tariff lines of products that were part of the original “sacred” list.  Japan has more than 60 tariff lines devoted to rice--including not just polished rice with current tariffs of more than 777%, but also all sorts of products made with rice. 

Again, quite clearly, for the TPP as a whole this laundry list of products was not going to be acceptable.  If Japan managed to exclude or minimize its commitments across hundreds of product lines, then every other member would try to do likewise. 

Even as the product list was slowly, painfully, peeled back to include a shorter list of products, the timelines for liberalization have remained long and the final outcome is less ambitious than promised.  

Following the Japan-Australia FTA, for example, would allow beef tariffs to remain at 19.5% for 18 years.  Nikkei just reported that beef tariffs in the TPP will be cut from 38.5% to 20%, with (as yet) unspecified plans to reduce further over time.  Such reductions may be significant, but such promises over beef are certainly far from 0 tariffs or a 10 year timeline, as the original levels of ambition specified.

These deviations from high ambition will now likely flow through elsewhere, particularly in market access for agricultural products.  Canada wants very much to exclude or minimize openings in its own dairy supply management system.  Supply management is a complicated system designed to ensure continued production of dairy and some poultry products in the face of strong competitive pressures from the Americans.  Under previous agreements like the North American Free Trade Agreement (NAFTA), the system was not addressed. 

If Japan ends up being able to shelter some or all of its sacred agricultural items in the end, then Canada will likely argue for maintaining, in whole or part, the dairy supply system.  The Americans will say that they need not open the domestic sugar market to greater competition from TPP parties.   Or that the tariff rates on autos into the United States can remain at 2.5% indefinitely.

To get the TPP across the finish line, negotiators need a breakthrough in U.S.-Japan bargaining over autos and the remaining agricultural items.  Until this portion of the final agreement is sorted out, the remaining sensitive products elsewhere cannot be properly addressed.  Every deviation from high ambition encourages similar swerving by other parties elsewhere. 

The stakes are high.  But with a little luck, Cutler may finally be listening to a different tune when she presses her Japanese counterparts to open market access.  After nearly a lifetime of waiting, it is past time to hear something other than “no.”