RCEP: Low Quality, Low Ambition Beckons?

BANGKOK—The 16 Asian countries in the Regional Comprehensive Economic Partnership (RCEP) trade negotiations have continued to meet in Bangkok.  As the last post suggested, getting an ambitious outcome from this trade agreement could bring significant benefits for member countries and the region as a whole.

A strong RCEP would provide new opportunities for large and small firms to connect to one another and to their customers and consumers across the region.  It could include better transparency of rules and regulations so that companies find operating businesses less challenging.  The deal could save time and money for firms by speeding up barriers to trade at the borders and address new sets of issues that previous agreements left out.

In short, the rhetoric surrounding a possible RCEP deal is very helpful.  However, seven rounds into the negotiations, the reality of what might emerge from these rooms is less optimistic. 

In part, I would argue, low ambition stems from a particular chicken-and-egg problem in RCEP.  That is, while businesses stand to benefit in important ways from an agreement that ties together the region from Japan and China to India and New Zealand, and includes all of ASEAN, business groups are not engaged in the talks.  Because business groups are not here and are not pushing for ambitious outcomes, government officials do not feel especially compelled to deliver much. 

Of course, a post like this might not galvanize firms to pay greater attention either.  However, in the absence of feedback from businesses and others about what is needed or what is lacking, officials are likely to continue to bump along the bottom of the ambition scale.

A few businesses have managed to present materials here.  A couple of firms or industry associations were able to speak directly to officials in the experts meetings on e-commerce and non-tariff barriers, for example.  [For the sake of transparency, I should note that the Asian Trade Centre also presented a proposal on e-commerce.]  But business is largely absent and uninterested.  Consumer groups and other NGOs are equally unengaged. 

I have always joked that trade officials have never deliberately embarked on a low quality, low ambition agreement.  But precisely this mindset seems to be seeping into negotiations in several ways.  Start with the most basic element of a free trade agreement (FTA):  market access for goods.  In general, an FTA tries to deliver better benefits for members than non-members receive.  The single easiest deliverable is to grant lower tariff (or duty) rates to member companies. 

Talks have been hamstrung around this issue in RCEP.  India, South Korea and China showed up at the last round with a proposal to open only 40% of their tariff lines for benefits.  Things got even worse this round, when India further suggested that concessions on the 40% of items covered would vary, depending on the member country.

This is even more depressing than it first appears.  India does not actually trade much in goods with the other RCEP members.  Thus, much of India’s trade takes place in a very narrow band of tariff lines or product categories.  A 40% offer could easily exclude from the outset all the items that might conceivably be traded with anyone and certainly would carve out all the items of particular interest for most trading partners. 

The latest offer made things even worse, as the specific content of India’s 40% offer could shift between RCEP member countries.  Recall that the whole point of an agreement like RCEP is to make it easier for companies to source, buy and sell from and across members.  If every country has different sets of sensitive items that are completely excluded from coverage, it becomes so complicated for companies that many will just skip using the agreement at all. 

To add further fuel to the low ambition fire, India has also suggested deeply unhelpful provisions in the rules of origin (ROOs) discussions.  Tariffs and ROOs work in tandem.  I could create fantastic tariff reductions but make it so difficult for products to qualify for these lower rates that no one will use them.  Conversely, I can recommend easier ROOs that help business take advantage of even relatively higher tariff levels.  One of the best things about previous ASEAN agreements was that their ROO regimes were generally quite good.

For RCEP, India is suggesting applying the rules only to “wholly obtained” goods.  These are items that are 100% sourced from inside one (and only one) country—mostly things that are grown, harvested, dug up or fished out of the country’s territory.  This completely negates a primary purpose of a deal like RCEP, which is to connect together supply or value chains across the region.  Firms almost never source goods only from one territory anymore.  Further harm comes from such rules, as they would condemn the poorer members in the agreement to stick to exporting only raw materials and (mostly) unprocessed agricultural products where the value is often lowest.

Outside of goods, things are not shaping up much better either.  In services, for example, many members are pushing to use a negotiating method (a positive list) that is frequently a route to low-quality outcomes.  Under this method, countries open only the sectors explicitly listed in the agreement. 

The track record of ASEAN and the Dialogue Partners (or ASEAN Foreign Partners, AFPs, as they are called here) is not great.  Most members barely agreed to open services in the existing ASEAN+1 deals.  Thus, although it might be possible to have an ambitious, positive list approach to services, the signs are not promising.  This sort of list is stubbornly resistant to change later as well, making it harder to ratchet up quality over time in services.

In several other areas like competition, intellectual property rights, or sanitary and phytosanitary (SPS) rules over food and food safety, talks are progressing extremely slowly with wide gaps between member positions.   These splits are not always between ASEAN and its Dialogue Partners either.  Often, the disagreement is greatest between ASEAN members or, especially, between some Partners. 

Lest I be accused of picking only on India, let me say that other members are also pursuing low ambition outcomes.  In e-commerce, for example, it was the Malaysian lead trade official (joined, however, by India) who apparently helped kill off a unanimous suggestion of the experts group to proceed with setting up a working group on the topic.  E-commerce was one promising avenue for helping small and medium sized firms take advantage of the agreement and plug into larger chains for greater growth and job prospects.

Officials continue to work around a schedule that calls for conclusion by the end of the year.  The next round, however, is not until June.  Given how relatively little has been decided, getting a deal done a few months from now will be a major challenge.  The prospects for more ambition are not bright either, without substantial pressure for improved outcomes.

This is not an easy negotiation for many countries.  It is expensive to send delegates to far-flung locations and keep them away from their offices for a week or more.  Many of the RCEP participants only have small trade offices in the first place and putting a dozen or more people in Bangkok is a huge strain on resources. 

Given the apparently clear low trajectory of the talks after 7 rounds of negotiations, it seems to me that it is time to take bold action.  If, in the end, officials can’t craft an agreement that businesses use, what is the point?  Countries should be thinking seriously about walking away from this deal until the time is “ripe.” If this is not possible, then members should at least admit by the end of the next round that if higher ambition is not forthcoming quickly, then the agreement cannot and should not be done on the current timeline.  This would allow time for countries to improve their knowledge and understanding of some key issues.  It would give an opportunity to dramatically improve the offers on the table before a deal is sealed.  The alternative could be a 16 party low quality, low ambition trade agreement in Asia.

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Before I close for today, I would like to note one extremely positive development from RCEP—participating countries have all sent large delegations of women.  A purely unscientific guess would put the gender balance at 50/50?  In any case, there are many, many smart, articulate women here.  Many are lead negotiators in various chapters.  Perhaps they will speak up more loudly in the media and on stage in the future, so we might avoid the extremely depressing problem highlighted here in the New York Times of a lack of female voices in public around issues of foreign and economic policy.  I’ve lost track of the number of times I am the only woman on the stage or in the room!

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.