Regional Comprehensive Economic Partnership: why should it involve the excluded LDCs?

By Mustafizur Rahman, Distinguished Fellow, Centre for Policy Dialogue (CPD)

The world’s largest trading bloc, the Regional Comprehensive Economic Partnership (RCEP), was signed in November 2020, counting 15 Asian member countries. Should the excluded countries, more specifically the low income and least developed countries (LDCs) of Asia, be worried about this development?

In recent years, the number of regional trading arrangements of various types, dealing with trade in goods or services or both, has been on the rise. 305 regional trade arrangements are already in force and the World Trade Organisation has been notified of another 496 currently under negotiation. However, the RCEP stands out for several reasons. The ten original members of the ASEAN Free Trade Area (Brunei, Indonesia, Philippines, Cambodia, Singapore, Lao PDR, Malaysia, Myanmar, Thailand and Vietnam) have now joined hands with five of the six countries with which ASEAN had bilateral free trade areas – China, Japan, South Korea, Australia and New Zealand. India opted out at the last moment, but the door has been kept open.

“Negotiating comprehensive partnership agreements is central to sustainable graduation strategies for LDCs.” #DevMatters

The RCEP countries have a population of 2.3 billion, about one-third of world population; their combined GDP is about US$ 24.8 trillion in purchasing power parity, equivalent to about 29 percent of global GDP. As a trading bloc it will be larger than the EU, the CPTPP (the Comprehensive and Progressive Trans-pacific Partnership Agreement) or the United States-Mexico-Canada Agreement (previously NAFTA). As the name implies, the RCEP is envisaged to be a comprehensive agreement, with regional co-operation going beyond areas of trade and tariff liberalisation. The agreement covers the removal of technical barriers to trade and non-tariff barriers, e-commerce, intellectual property rights, and the set-up of common standards and measures that will promote intra-regional investment. The aim being to take advantage of member countries’ comparative advantages through initiatives to promote production networks and value chains and foster deeper regional economic integration.

Not surprisingly, the signing of the RCEP agreement is being closely followed by non-RCEP countries of the Asian region, including low-income countries and LDCs. The RCEP includes three LDCs, two of which – Myanmar and Lao PDR – will be graduating out of the LDC group in the next few years, and Cambodia. Bangladesh, Bhutan, Nepal, Afghanistan, South Yemen and Timor-Leste are Asian LDCs that are not members of the RCEP. Timor-Leste is however another graduating LDC in the South-East Asia region, and a candidate for ASEAN membership. Bangladesh, Nepal and Bhutan are slated for graduation in the next few years. What lessons can these countries draw from the RCEP?

No doubt, RCEP membership will give the three included LDCs significant economic benefits in the form of access to the large regional market, including the Chinese market, on preferential market access terms. At a time when the graduating LDCs will lose preferential access in the markets of the EU and North America, preferential access to RCEP countries will be a crucial advantage for them. On the other hand, countries outside the RCEP –  Bangladesh, Bhutan and Nepal – will no longer be eligible upon graduation to enjoy preferential access under the LDC schemes of RCEP members such as China, Japan, Australia, South Korea and Thailand. This will no doubt put them at a disadvantage vis-à-vis the RCEP LDCs.

The RCEP is expected to create a conducive environment for investment and larger flow of FDI. Member countries like China, Japan, Australia and South Korea will have an added incentive to invest in the three RCEP LDCs due to their comparative advantages and the preferential market access offered to them under the regional arrangement. Many RCEP members are eyeing the lucrative Chinese market. Indeed, there is a high likelihood of trade and investment diversion away from the excluded Asian countries.

“It will be in the interest of non-RCEP Asian LDCs to carefully examine the option of joining RCEP as part of their strategy towards sustainable graduation.” #DevMatters

Bangladesh exemplifies the challenges facing the excluded LDCs. The country is slated for LDC graduation in 2024. Upon graduation, it is likely to lose preferential LDC market access to EU and North American markets, which account for most of its exports. Eroding preferences are estimated to result in a reduction of the country’s export earnings by about 14.0 percent according to a study carried out by the WTO. The average tariffs the country faces will go up by about 9.0 per cent. The country will lose the preferential market access it currently enjoys under the LDC schemes of China, Japan, Australia and other RCEP members.

Meanwhile, Vietnam, a developing member country of the RCEP, and a major competitor of Bangladesh in its main export market, apparels, will continue to enjoy preferential access in the RCEP countries. Moreover, Vietnam is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership  and has already signed a bilateral free trade agreement with the EU. Membership in mega-regionals will give Vietnam significant competitive edge over LDCs such as Bangladesh. What will happen to Bangladesh’s competitiveness when apparel exports from Vietnam enter key markets duty-free while those from Bangladesh face high import duties in those same markets?

Several lessons can be drawn from the RCEP particularly for the non-member graduating Asian LDCs. One key lesson is that negotiating comprehensive partnership agreements is central to sustainable graduation strategies for LDCs. These LDCs will need to pursue proactive policies to deepen bilateral and regional economic partnerships to compensate for the inevitable preference erosion and loss of flexibilities enjoyed as an LDC. However, they will be required to take into account that such partnerships will entail a certain degree of reciprocity, commitments and obligations. As LDCs, these countries enjoy preferential treatment mostly on a non-reciprocal basis. The three RCEP LDCs have demonstrated their readiness to deal with these challenges, by undertaking the required economic reforms, policy changes and institutional strengthening. They have committed to undertaking trade liberalisation measures and ensuring compliance with obligations in areas of non-tariff barriers, e-commerce, patents, copyrights, international property rights, labour and environmental standards and others.

The RCEP allows for other countries to join the grouping eighteen months after the agreement came into force. It will be in the interest of non-RCEP Asian LDCs to carefully examine the option of joining RCEP as part of their strategy towards sustainable graduation. Now is the time for these countries to take serious action in the areas of policy reform and institutional strengthening, to adjust to the evolving regional and global trading scenario, and take advantage of potential opportunities.