Work has been going on for what could become a game-changer for all of the economies of the world.
Should India overcome her hesitation to participate, the Regional Comprehensive Economic Partnership (RCEP) could emerge the largest regional free trade bloc ever. It will be composed of 16 countries with a total population of 3.4 billion. This is 45 percent of the world population. Its aggregate GDP will amount to over $49.5 trillion, a full 39 percent of total world production.
At the core of this initiative is the ASEAN and China. These are countries well on their way to forming a free trade area. We, of course, already have the ASEAN Free Trade Area (AFTA) that was formed several years ago and further consolidated through harmonization of customs unions and business policies.
Apart from the 10 ASEAN countries, the RCEP initiative includes five free trade partners: Australia, China, Japan, New Zealand and South Korea. The five are in various stages of concluding free trade arrangements with the ASEAN countries.
The RCEP initiative puts the ASEAN bloc squarely at the front and center of keeping the free flow of trade and investments open. Within the regional association, efforts have been underway to harmonize customs procedures and business policies. Along with China, the group is currently negotiating a framework for electronic payments and settlements systems. This will help make trade more efficient, bringing benefits to consumers across all participating countries.
The idea for a broad free trade agreement began in 2011 at the joint initiative of China and Japan to speed up the formation of an East Asian FTA. During the 19th ASEAN Summit in November 2011, the initiative began to be referred to as the RCEP.
Dozens of negotiations since then have clarified the points of consensus and the institutional requirements for such an arrangement. As in all similar initiatives, the free exchange of services proves to be a sticking point.
Earlier this month, during the ASEAN+3 Summit in Bangkok, India opted out of the looming trade arrangement. The Modi government in New Delhi feels that inclusion in the arrangement will have adverse impacts on its citizens. The other participating countries are still hoping India would reconsider its decision.
India, with its very large domestic market, has a long history of protectionism. Understandably, there are powerful interests in Indian society lobbying against opening up the economy fully.
For a while, the RCEP initiative took a backseat to the Trans-Pacific Partnership (TPP) initiated by the US during the Obama administration. It was a way for the US to be part of an emerging Asian free trade bloc.
The accession to power of the protectionist Trump administration, however, led to the abandonment of the TPP initiative. Trump would have nothing of it. With TPP out of the picture, it is only RCEP on the table.
Sanctuary
The staunchest supporters of the RCEP, the Philippines included, want the RCEP initiative to move forward quickly.
The countries of the region have been growing at the fastest rates anywhere in the world. That remarkable performance is due principally to the Asian economies being trade driven. It was during the free trade regime provided by the General Agreement on Tariff and Trade (GATT) and presided over by the World Trade Organization (WTO) that the emerging economies of the region grew at their fastest rate.
While the economies of the region continue expanding at a respectable rate, they face strong headwinds from increasingly stagnant global growth. If the global economy was growing at the rate it was five or six years ago, it would have been easy for the Philippine economy to be posting 7 percent or even 8 percent rates of GDP expansion.
The stagnant global economy provides headwinds to sustained Asian growth. Having benefited much under the aegis of free trade, the Asians think that rising protectionism in the West has much to do with the slowdown.
Protectionism is expressed in the tariff wars and increased restrictions on the flow of investments. Britain’s withdrawal from the free-trading European Union bloc is an example of growing protectionism. The tariff war initiated by the Trump government against both the Europeans and China is another example.
In the name of “making America great again”, the Trump government has not only fenced off immigrants but also frowned on American capital moving to other economies. In Trump’s mind, such movements of capital steal jobs from Americans. His policies have protected dying economic sectors while choking the supply chains of sunrise sectors.
For the Asian economies that grew on the basis of more intensive trading relations, the rising protectionism in other economies is a peril. A free-trading arrangement such RCEP will provide some sort of sanctuary against the plague of protectionism.
With the large combined market of the RCEP economies, emerging countries will be able to nurture their industries by freely trading with neighboring economies. The development of a payments/settlement system based on the region’s currencies will cut much unnecessary transaction costs. With little or no tariff barriers, the region’s consumers from lower prices for goods.
These advantages explain why China, once a closed economy, has become among the most outspoken advocates of free trade.
With strong multilateral financing institutions such as the Asian Development Bank and the Asian Infrastructure Investment Bank, the region has the institutional capacity to finance its development.
Of course, China, with its large domestic market, a cutting edge technology sector, a competitive manufacturing sector and awesome financial clout will play a dominant role in this arrangement. But this is preferable to the scourge of protectionism.