Creating Conditions for E-Commerce to Flourish in Asia Through RCEP

BUSAN—The 10th round of negotiations in the Regional Comprehensive Economic Partnership (RCEP) are finishing up in Busan, South Korea, this week.  Sixteen Asian economies are taking part (Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand, and Vietnam).

One of the more innovative areas under discussion in RCEP has been the launch of negotiations in e-commerce.  These discussions have the potential to create new rules and regulations governing an increasingly vital portion of 21st century trade in the region.

Our overall proposal for e-commerce negotiations within RCEP is broad, encompassing specific rules for goods, services and payments, as well as including necessary background conditions for e-commerce to flourish.  Without careful consideration of the rapidly evolving environment for e-commerce and digital trade, RCEP officials might slow the spread of new channels of delivery for goods and services and undermine growth opportunities for many small and large firms.

Officials must think carefully about the range of e-commerce activities.  The sector provides more opportunities than simply buying a book online and having it delivered to a customer’s home.  Firms can be buying and selling both goods and services to one another (B2B), to consumers (B2C) and even from consumers to other consumers (C2C). 

The Asian Trade Centre held a stakeholder outreach session in Busan on October 14, followed by a discussion session on e-commerce.  The setting of the workshop in Korea was important.  Korean companies are at the forefront of delivering many new digital trade services and consumers here are extremely savvy customers of a wide range of e-commerce options.  The subway trains, for instance, are full of young and not-so-young people consuming digital services.

These digital services cannot provide information if necessary frameworks are not put into place.  For example, without ease of movement for information across borders, many firms will struggle to reach outside markets where many valuable commercial opportunities can be found.

In the past, firms that wanted to export goods and services had to invest significant resources.  With the advent of the internet and digital trade, however, even the smallest companies in the most far-flung locations can find customers and plug into regional and global markets.  Connecting to these new business opportunities and expanding the customer base can happen relatively easily and inexpensively.

Asia is at the forefront in many ways of the coming e-commerce and digital revolutions.  Asian companies are increasingly becoming global powerhouses in various settings.  More consumers are online or connected via mobile than nearly anywhere else in the world.

Much of this growth has taken place in a largely unregulated environment.  Governments have not yet created a thicket of rules, licenses and procedures to govern e-commerce trade in the region in similar ways to their approach to off-line trade and commerce.  However, as e-commerce continues to boom and as more goods and services are migrating to digital platforms, the incentives for Asian governments to try to create policy are growing.

Creating smart policies can be challenging, in part because e-commerce sits at the intersection of multiple areas and falls between jurisdictions of ministries.  For trade negotiators, as an example, effective e-commerce rules are likely to require sensible policies in intellectual property rights.  Tight protection and enforcement of copyright can get complicated very quickly in the digital world.  At a time, for example, when hundreds of hours of content and videos are uploaded every minute of every day, policing all this information is going to be difficult or impossible to do effectively.

It is therefore necessary for officials in RCEP to consider e-commerce and portions of the intellectual property rights chapter in conjunction.  The areas of particular interest from the perspective of digital trade, besides careful consideration of copyright rules, include rules to determine who is responsible (or not) for particular types of content, and what levels of protection are appropriate. 

What makes this especially tricky for officials is that determining appropriate policy measures may create new, distorting effects on markets.  For example, a determination that one set of measures is acceptable for solving a specific problem—such as requiring that information and data can only be held or stored domestically—could rapidly lead to unintended consequences.  Firms might find that local providers of data storage are less careful with information or companies may face significantly higher prices.  Policies designed to determine which types of information must remain onshore are also likely to prove problematic in practice. 

In rapidly shifting markets with evolving technology, whatever specific solution or technology officials promote may ultimately turn out badly.  This is not to suggest that regulations are never a good idea.  Rather, officials should be encouraged to think about the end-goals and legitimate policy objectives that they want companies to meet.

Company experiences can highlight the shifts in market opportunities created by new regulatory frameworks.  For example, changes in payment systems have allowed many firms to flourish in foreign markets and build up their brands with new buyers.  New regulatory environments can encourage direct purchasing from online vendors of all stripes.  Poor policy choices can stifle growth and development, leaving smaller firms unable to compete. Speed to market and lower costs are critical to the success of small companies. 

As RCEP officials wrap up their sessions in Busan, it is important to consider cross-cutting policies for e-commerce and digital trade that connect across and between multiple chapters.  Taking a holistic view of the changing nature of trade will help ensure that RCEP is and remains relevant in the future.  Greater engagement with e-commerce and digital companies is also needed to help officials craft the best types of policy outcomes to meet business and consumer needs in this dynamic environment.

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

Pop Open the Sparkling Wine! The Conclusion of the TPP Negotiations

The deal is done.  Negotiations on the Trans-Pacific Partnership (TPP) trade agreement that started in Australia in March 2010 have finally been brought to conclusion.  The 12 negotiating parties of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam) managed at last to lock together nearly 30 chapters covering a wide array of topics.

The TPP is a different kind of trade agreement from the myriad other free trade deals because:

·      It is broader.  The TPP covers 29 chapters including typical topics like goods, services, and investment provisions.  It also includes new rules on intellectual property rights, opens up government procurement markets, creates common understandings for e-commerce trade, and includes some new regulations for food, food safety and other types of technical standards. 

·      It is deeper.  Past free trade agreements (FTAs) between members may have opened up trade in goods.  But the TPP is likely to reduce barriers to trade further.  This includes opening up highly sensitive agricultural markets that are traditionally carved out, or excluded entirely from FTAs.  Even in areas where coverage is incomplete and duties do not drop to zero, products are included that are normally not discussed or where existing FTA reductions can be extremely modest (like rice, dairy, and sugar). 

·      It includes shared norms and commitments for all members.  Unlike other agreements, the TPP rules apply equally to everyone.  The least developed country members have longer time frames to implement some of the commitments, but the same basic rules will apply.  Members opted to join the TPP and, by doing so, signaled their own internal commitment to implementing high quality pledges in every aspect of the agreement.

Is this agreement perfect?  Of course not.  If we put a dozen people in a room, each would likely have their own definition of perfection.  The TPP negotiators never defined what they meant by their own mantra of “21st century, high quality” either.  But the deal on the table is likely to be the very best agreement that could be achieved given the constellation of members, interests and topics. 

Much will be written in the coming days about the gaps between the outcome and the aspirational goals.  It is likely that various groups will target specific sections for criticism.  Some groups that have been complaining loudly will continue to do so no matter what sort of outcome was achieved. 

At the end, however, the deal had to satisfy domestic constituents in 12 countries in nearly 30 different topics.  Getting it done necessarily required some compromises from everyone.  Importantly, this agreement was not simply a deal cut between the United States and Japan (their bilateral portion covered 6 agricultural items and autos only). 

The TPP was genuinely crafted by members from all participating countries and the final outcome reflects many hard-fought compromises. 

To examine just one challenging aspect of the TPP, consider the market for beef.  Beef is often viewed as a sensitive topic in many of the TPP member countries.  Government policies have long favored beef producers.  These policies have included tariff barriers that have been resistant to change despite repeated rounds of negotiations in the multilateral setting as well as in various bilateral agreements. 

The TPP does not drop tariffs in beef to 0 in all member countries.  Nor does it drop tariffs this low even at the end of full implementation.  Yet the TPP result remains an improvement (and even a potentially dramatic improvement) off the status quo.  The TPP provides new benefits for beef exporters--even in markets with existing FTAs. 

Something similar is likely in nearly every area under negotiation.  For market access in goods across the board, the TPP drops tariffs to 0 on entry into force for 90% of tariff lines.  Over a relatively short timeline, most of the remaining tariffs will also drop to 0. 

Compare this to the alternatives.  As I have explained in the past, the Regional Comprehensive Economic Partnership (RCEP) in Asia is meant to start with less than half of all tariff lines included for some members and—at the end of full implementation at some likely very distant time horizon—tariff coverage may top out at 80% of lines.  This means that 20% of goods are not going to receive any tariff cut benefits at all.  Beef is one sector that is highly likely to remain out of RCEP commitments (certainly absent significant industry involvement to promote improved outcomes).

For more complex products, the TPP greatly simplifies business on the ground.  Currently, companies trading between TPP member states may have access to some existing preferences from FTAs.  However, the cumulation of rules of origin in the TPP means that companies can aggregate inputs from all TPP countries to count towards the origin of more complex goods.  The ability to “count” more under TPP content makes it much easier to import and export goods (mostly duty free) between member countries.

There are also a host of other benefits to speed up and reduce costs associated with moving goods, including new commitments on trade facilitation and changes in customs procedures. 

The TPP, of course, goes well beyond trade in goods.  For the creation of today’s modern supply chains, the TPP includes meaningful openings in services markets of all types.  Most manufactured goods include substantial inputs of services—some are delivered directly by the firms while others are outsourced.  Many of these outsourced services are now opened to large and small TPP member firms.  The TPP expands access and protection for investments of various types. 

For more information on what the TPP means for business, please check out our latest publication, available for download on our website.  As the texts become available, we will update our information.  Future blog posts will also examine some more of the specific commitments of the agreement in greater detail.

If you or your company would like to discuss possible benefits that arise from the TPP, please do not hesitate to contact us.  We are very much looking forward to moving into the ratification and implementation phases for the TPP.

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

Why Business Needs to Remain Involved in Trade Agreements

While we wait for the possible closure of the Trans-Pacific Partnership (TPP) negotiations next week (fingers crossed!), it is worth pondering why businesses must be engaged as much as possible in the process of negotiations.  Without business input and pressure, officials are likely to create a final agreement that does not suit the needs of companies on the ground.

Completing an agreement is only half the battle.  Once the texts are finished, participating countries must take steps to implement their commitments.  Without business pressure, implementation measures are often half-hearted or even non-existent. 

We can see these problems in different settings across Asia.  Take, for example, trade facilitation efforts.  Asian governments have made promises to speed up and reduce costs associated with moving goods across borders in this region. 

The trade facilitation agreement (TFA) signed with great fanfare in Bali, Indonesia, in December 2013, is still awaiting ratification and implementation.  This is a signature achievement of the World Trade Organization (WTO) after more than a decade of negotiations. 

On September 18, Liechtenstein became the 17th country to have taken official steps to move the agreement towards implementation.  The agreement requires 2/3 of the WTO membership before the deal actually enters into force.  This means that more than 140 additional countries must agree to participate—preferably before the end of this year—before any of the provisions in the agreement can be activated.

While this agreement may bring substantial benefits for businesses, especially in many developing countries where getting goods across borders remains slow and expensive, businesses have not been particularly active in pushing TFA. 

In general, businesses long ago lost interest in most of the agenda under discussion at the WTO.  This is not, I will hasten to add, necessarily because the agenda itself is unimportant.  Mostly, I think, it’s because companies do not have the same type of time horizons that the WTO seems to operate on these days.  No firm can afford to spend a decade pushing topics without any clear returns from this investment.

But the net result is a bit of a chicken-and-egg dilemma.  Governments are not going to rush to negotiate or implement an agreement like TFA absent business interest.  However, businesses are loath to push on TFA without clear signs that the payoff will arrive shortly.  There is frankly little upside to convincing corporate bosses that your efforts helped Liechtenstein sign an agreement.

Another problematic area of trade facilitation can be found in ASEAN.  Although the 10 members of ASEAN made a commitment in 2005 to create by 2012 what are called National Single Windows (NSWs) for trade, not all members have actually implemented these provisions.  NSWs are intended to make it easier for firms to move goods by allowing the entry of data only once and the simultaneous processing of that information by all the relevant agencies so that arriving goods can clear customs speedily. (Note that NSWs are only the first step, as ASEAN also pledged to hook them together and create an ASEAN-wide Single Window.)

Despite significant efforts and the involvement of the ASEAN Secretariat and various ASEAN Dialogue Partners like the United States, Vietnam’s launch of its own NSW earlier this month meant that only 7 of 10 members officially have active systems.   Even here, the record from the ground is less impressive, as many businesses report obstacles to using NSWs.

Again, part of the problem has been getting significant business pressure mobilized to ensure that ASEAN governments implement commitments in a timely manner.  Businesses that have been active in this issue could be feeling burned by the extensive time it has taken for their efforts to bear fruit in the form of faster and easier trade facilitation in ASEAN.

Ironically, however, trade facilitation ought to be one of the easier topics for mobilizing business engagement with trade officials.  After all, delays at the border are obvious and costly.  It is relatively easy for a firm to show the impact of reducing barriers to their own supplies and goods at customs. 

Other elements of the trade agenda can be much harder for businesses to push.  For example, while it may be true that opening up services sectors will result in substantial benefits, even for manufacturing companies, it is harder to show clearly the bottom line impact of doing so.  Hence, getting firms to mobilize behind broader trade negotiations can be tough.

Larger agreements could result in greater benefits for companies, but they come with a trade-off:  bigger deals take longer to produce an impact.  The TPP negotiations have been under way for more than five years.  Even if we get a deal next week, the fastest timelines for implementation and entry into force is likely to be in mid-2017. 

One thing, however, is quite clear.  Absent business interest and mobilization, trade agreements are less likely to meet the needs of businesses today.  Officials will try to negotiate better deals, of course.  No one ever announced their intention to create “low quality, 19th century” outcomes. 

But getting better provisions requires sustained attention from businesses and governments.  The other megaregional agreement under negotiation in Asia, the Regional Comprehensive Economic Partnership (RCEP), is going into the 10th round of talks in Busan, South Korea.  Officials have largely had limited contact with many of the companies in this region that are likely to have an interest in RCEP rules.

We are holding an event at RCEP on October 14 in Busan that seeks to bring together regional businesses and government officials engaged in this trade negotiation for the first time.  (To register to attend, please visit our website http://www.asiantradecentre.org/event-registration/ )  

Without better connections between government and businesses in the region, RCEP runs the risk of creating a trade agreement not particularly well suited to the demands and interests of the business community.  Given that trade agreements are primary intended to be a vehicle for facilitating trade by companies, a low-quality outcome in RCEP accompanied by little business interest would be an enormous missed opportunity. 

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

Doesn’t Always Take Two to Tango: Unilateral Trade Policies and Indonesia

The current obsession with trade negotiations (okay, maybe it’s mostly our obsession) may have obscured the fastest, often easiest way for governments to make their domestic economies more competitive:  governments can act on their own to create more favorable trade environments. 

In the past, many Asian governments were at the forefront of making unilateral changes to their domestic economies.  Singapore and Hong Kong, for example, slashed applied tariffs to zero absent external demands for them do so.  Others opened or liberalized sector after sector to promote inward investment or spur domestic competition.

But much of this unilateral spirit of reform appears to have dissipated.  Governments now prefer to wait to make changes until some foreign partner requests reform.  It may appear to be easier to make politically and economically hard choices with a foreign party to absorb some of the “blame” for any short-term pain. 

One government official said me a few years ago, “Yes, we know that a 2% tariff is really just a nuisance.  It probably costs us more to collect the tariff than the revenue it generates.  It is an administrative hassle for firms.  But if we get rid of it, what will we use as a bargaining chip when we engage in trade negotiations?”

I tried to argue that eliminating nuisance tariffs does not automatically mean that no one will do a free trade “dance” with you in the future.  Singapore did not get more than 20 active FTAs by stripping away 2% tariff levels for preferred partners in an FTA.  There is more to a trade deal than tariff reductions, after all, and win-win outcomes can be achieved in a whole range of sectors and issue areas.

One particularly promising area for unilateral reforms can be found in regulations.  For most companies today, the biggest headaches are not tariff levels or official customs procedures or registering for protection of intellectual property rights.  Instead, the hassle factors that are most pertinent to firms tend to be regulatory in nature.

Such regulations may include rules for licensing of all sorts.  Such rules may mean that you can import this item, but only if you first hold a valid permit for doing so or you may invest in a sector but only after appropriate licenses for operation are in place.   Other regulatory barriers could be rules that require goods be transshipped through only one port or only after inspection of paperwork or goods by specific ministries.

This is not to argue that regulations are not needed or necessary.  Government, as always, retains the right to regulate in the public interest and to safeguard the interests of human, animal and plant life and health. 

However, the thicket of regulations in many markets clearly extends well beyond what is strictly necessary in many countries around the region.

For example, nearly every firm that speaks to us can relate some good stories about nightmare regulations in Indonesia.  These range from the large to the small hassles, time and cost needed to try to comply with the rules.  The forest of regulations ensnares firms in nearly every sector and applies to both big and small companies.

The Indonesian government of Joko Widodo (Jokowi) has recognized some of the problems.  The National Development Planning Minister Sofyan Djalil just highlighted more than 2700 regulations and presidential and ministerial decrees that were “inimical to economic activity.” 

That is surely an impressive number of identified obstacles to trade and economic growth. 

Partly in response, Jokowi has begun rolling out a three-part package of unilateral economic reforms to tackle the problems of excessive regulation.  The first package was revealed with great fanfare last week.

It includes the drafting of 91 new regulations and 89 regulations to be amended. 

It could be argued that the creation of nearly 100 new regulations is not a particularly promising way to start clearing away 2700 existing, identified problematic rules.  But, of course, much depends on which rules are being tackled and whether or not the first set of reforms gets at some of the key obstacles to growth or simply nibble around the edges.

Indonesia has ample room for improvement.  It ranks 114 of 189 on the World Bank’s ease of doing business (well below most other ASEAN members) and has been hit by a sharp decline in the value of the rupiah and reduction in the amount of inward foreign direct investment.  Arianto Patunru and Sjamsu Rahardja highlight some selected non-tariff measures and local content requirement rules imposed in Indonesia since 2009.

Last week’s announced policy changes are largely intended to push up demand and not, as Chris Manning has argued, to increase competitiveness of domestic companies.  Changes include greater collaboration between central and local governments around price controls for products like beef, changes in banking to allow easier foreign currency account creation, and the provision of funds to citizens by raising the tax-free thresholds for the poorest citizens as well as newly expanded cash-for-work schemes.  The reform policies are not completely worked out yet, so it is not entirely clear what will be on the table, nor the level of implementation to be expected.

This package of reforms are meant to be overseen by a new economic policy deregulation center set up at the Office of the Coordinating Economic Minister.  The office will also assist with the roll out of two additional packages of reforms due in the next few months. 

The Jakarta Post responded with an editorial to urge the government to take the new deregulation center seriously.  It could implement reforms urged by the OECD in 2012 to evaluate regulations across ministries and to improve regulatory outcomes.

The consequences of successful reform could be quite substantial.  Indonesia’s large, youthful population and ample natural resources provides a platform for significant rewards.  McKinsey and Company has suggested that the country might become a Group of Seven economy by 2030.

As our conversations with companies have revealed, getting there will require unilateral reforms.   The announced regulatory changes are important, but must go substantially deeper and further for the real payoff to occur. 

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

Bargaining Over Services in TiSA

This week, President Tabare Vazquez agreed to withdraw his country from ongoing negotiations over services.  Uruguay will now notify the other 24 members[1] of the Trade in Services (TiSA).

This presents a good opportunity to examine TiSA.  Negotiations got underway in 2013 out of a shared frustration with a lack of progress in global trade talks for services coupled with a desire to push forward new, better suited rules for today’s interconnected, globalized economy and to give services an improved platform for growth. 

Services are an increasingly vital part of international trade.  The Asian Trade Centre has been part of an ongoing research project to track how much of the content of manufactured items like auto parts, aircraft engines, printer dyes, outdoor jackets, watches, whiskey, or making a table comes from services.  The full project will be out soon, but what has been particularly striking from this case study research is how much value is tied up in services content.

We often think of goods as physical items only—something you can drop on your foot and have to transport across borders in trucks, trains or ships.  But it turns out that for many value or supply chains today, at least half and perhaps as much as 80 percent of the value of a good is actually derived from services.

Such services can include research and product development, managing human resources, cleaning, security, distribution, logistics, warehousing, retail, and even after sales service and repair. 

TiSA members together contribute more than 70% of global trade in services.  For most, services also constitute a significant portion of domestic output contributing substantial numbers of jobs and generating important revenue for companies both large and small.   

Despite the critical importance of services, global rules for services remain underdeveloped and often lacking.  In part this is because services are devilishly hard to see and measure. 

Take examples from the Asian Trade Centre.  Our brochure was designed by a graphic artist in Pakistan, connected to us through an Australian online platform (www.freelancer.com).  Our website is hosted by an American company (Squarespace) and this blog is distributed by a different US company (MailChimp).  [All are receiving unsolicited endorsements.]  The blog content is written by me sitting in my lovely office today in Singapore and distributed to readers all across the globe. 

So how would available data capture all these services?  The short answer is not very well at all. 

In the mid-1980s when government officials were trying to design the first batch of global rules to govern trade in services,[2] most of what I just described would have been unimaginable.  Or, rather, some of the services might have been possible but the methods of delivery, the scale and the scope would not.

Consider Freelancer.  This company currently brings together more than 16 million people in 247 countries to provide a wide range of services from software writing and data development to engineering and accounting.  Connections can happen instantly and millions of files, pages, images, and data points are moving around and across borders daily.

At the time of the Uruguay Round negotiations, however, officials could mostly imagine delivering services via post, land line telephones or, perhaps, fax machines.  Otherwise, the primary methods of getting services to travel across borders meant the movement of people—I might travel to another country for medical treatment or to deliver a stakeholder workshop in Korea for the next RCEP round (currently planned for October 14 in Busan, by the way!  Stay tuned for details).  Or I might invest directly in a company, or travel temporarily as a business employee of a big firm to set up a project.

In short, officials were struggling with how to categorize services and to understand how they might be delivered across borders.  Hence the rules they created in the 1980s and early 1990s were rather crude.  Whenever I have to explain to businesses how services are broken up in the rulebook, I am usually met with blank stares.  In addition, services commitments suffered because governments were reluctant to commit to much, as no one was entirely certain about what might happen.

This is a long way round to explaining why services were part of the “built in” agenda for the start of a new round of global trade negotiations.  These talks started in Doha, Qatar, in November 2001, and have been moribund for a very long time.

Countries that are active in services trade became increasingly unsatisfied with old rules and limited market access commitments.  Unable to push forward the broader global negotiations, a handful of key countries decided to start parallel talks outside the WTO in Geneva.  These parallel talks, now called TiSA, might eventually be brought back into the WTO.

I don’t have room here to delve into trade geek obsessions with how TiSA can be reconnected with the WTO, but suffice to say that officials are trying to craft an agreement that unleashes more economic growth for services for the members while remaining conscious of likely issues and interests from the broader community. 

After 13 rounds of TiSA, the jury remains out on how successful officials are likely to be in meeting their ambitions.  The basic idea is to continue to build on existing commitments at the WTO but expand market access and to try to reduce domestic level regulations that make it hard for services to be competitive.  For example, one goal is to try to get foreign service providers to receive the same treatment as domestic service firms as much as possible.  Many similar rules do exist in various free trade agreements.

Yet TiSA talks are challenging.  Uruguay just became the first country to withdraw from negotiations, citing concerns about its ability to regulate sectors like financial services and telecommunications.  Frankly, this is likely to be overblown, as officials do not give up their right to regulate easily and these sectors are seen as highly sensitive in most countries.  TiSA will not violate a government's right to regulate for health, safety, and environmental outcomes, nor will it alter all qualifications for service providers or allow for unfettered access to job markets.

In a rapidly changing environment, designing appropriate services rules are both necessary and difficult to do well.  We will have to watch and see how successfully TiSA manages the task.

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

[1] Remaining TiSA members include: Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the United States.

[2] As part of the Uruguay Round negotiations in what was then the Global Agreement on Tariffs and Trade (GATT) and is now the World Trade Organization (WTO).