RCEP and ASEAN: old and new

Author: Jayant Menon, ISEAS–Yusof Ishak Institute

To understand the interrelationship between ASEAN and the Regional Comprehensive Economic Partnership (RCEP), it is useful to separate the newer, less developed members — Cambodia, Laos, Myanmar and Vietnam (CLMV) — from the older, more developed ones — Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand (ASEAN 6). RCEP has a diverse agenda and the opportunities and challenges differ across the two groups.

If there is an old and new ASEAN, then RCEP too covers old (tariff-related) and new (non-tariff-related) issues. The old issues encompass trade in goods, rules of origin (RoO), customs procedures and trade remedies. New issues are about WTO+ or WTO-x and include trade in services, e-commerce, intellectual property rights and competition.

Although it is still a challenge, ASEAN 6 are better placed to pursue the new issues in RCEP. CLMV are further behind and still struggle with the old issues. Analysis of the impacts of RCEP has typically focussed on how the new issues will affect more developed members, including ASEAN 6. Addressing this imbalance allows consideration of the opportunities that RCEP presents to CLMV.

ASEAN centrality was key to RCEP’s formation and will be to its continuation by striking geopolitical balance. If RCEP contributes to a further widening of the development gaps within ASEAN, ASEAN’s cohesion and ability to play an effective balancing role will be diminished. Ensuring that both old and new members benefit is important for the future of ASEAN and RCEP.

The interests of both old and new members will be best served by an open and outward-looking RCEP. It should be open to future members joining with relative ease and minimise discrimination against non-members. With most new (non-tariff) issues, it is either impractical or costly to exclude non-members from participating in accords once they are implemented. Problems arise when adherence requires enforcement — as only members have recourse to enforcement mechanisms — and when non-compliance reduces overall benefits. The difficulty of preventing free-riding with most of the new issues ensures that discrimination is minimised.

This is not true for tariffs, where explicit, voluntary efforts are required to minimise discrimination. RCEP provides an opportunity for CLMV to catch up with ASEAN 6 and clean up their tariff code.

While ASEAN 6 have multilateralised most of their ASEAN Trade in Goods Agreement (ATIGA) preferential tariffs by offering them to non-members on a most- favoured-nation (MFN) basis, CLMV have not. Multilateralisation underpins open regionalism and involves reducing and eventually removing the margins of preference (MOP) — the difference between ATIGA and MFN tariff rates. In 2018, the import-weighted MOP for CLMV was around 10 per cent, more than double that of ASEAN 6. The rationale for using RCEP to multilateralise regionalism is the same as that for participating in RCEP.

ASEAN countries already have multiple free trade agreements (FTAs) among each other and with other RCEP members. The value added from RCEP comes from increasing utilisation of preferential accords by unifying RoO and expanding rules of cumulation. When preferences are fully multilateralised, RoO are no longer required and members can source inputs from the cheapest supplier globally. This will support growth of supply chains and enable RCEP to deliver its greatest benefits.

The reluctance of CLMV to go beyond what is mandated and voluntarily offer tariff reductions to non-members relates to concerns over revenue loss. The contribution of trade taxes to CLMV government revenues has been declining over time but remains significant.

In 2019 in Cambodia, trade taxes constituted more than 10 per cent of government revenues, compared to 3 per cent and 1 per cent in Thailand and Malaysia. With most of Cambodia’s imports already covered by FTAs the high revenue share of trade taxes confirms the distortionary nature of the tariff regime. This is reflected in the large gap between mandatory, low preferential tariffs and discretionarily high MFN rates.

Countries that retain a different tariff regime for each FTA often do so to offset expected revenue losses. The revenue impacts of such a multiple-rate system, compared with a multilateralised or single-rate system, will depend on two factors — administration costs and tariff collection. In both cases, multilateralisation holds out brighter prospects.

The costs associated with administering the multiple-rate system are higher than the single-rate system. To operationalise the former, customs authorities must implement RoO to determine which rate to apply. Local capacity constraints and extensive global supply chains complicate these administrative tasks. Businesses will also face higher compliance costs in a multiple-rate system.

Additional tariff revenue will only be collected if non-FTA imports are charged higher tariff rates. If there is a significant difference between the rates, there will be trade deflection. Goods from outside RCEP may enter RCEP’s domain through a low MFN tariff country such as Singapore and then be re-exported to CLMV, precluding the CLMV countries from the intended tariff revenue.

Creating a system where multiple rates apply to each tariff line also increases the potential for corruption and smuggling. It is an open secret that some trade taxes are collected privately rather than publicly, and that the porous borders of the Mekong region facilitate illicit trade. A multilateralised single-rate system that eliminates the MOP addresses these issues while maximising the potential for trade creation and minimising trade diversion.

If CLMV resisted multilateralising ATIGA, why would it be different with RCEP? One reason is preference erosion: the competitive advantage that exporters enjoy in foreign markets declines as FTAs proliferate. CLMV countries, having concluded numerous FTAs, will begin to see the benefits of additional FTAs start to diminish. Since most of CLMV’s trade is conducted within RCEP, their resistance to multilateralisation is reduced.

Old and new members of ASEAN continue to pursue FTAs aggressively. Proliferation of FTAs can encumber trade and work against open regionalism, but multilateralising FTA accords mitigates these adverse effects. It is therefore important that RCEP’s technical and economic cooperation agenda includes multilateralisation. While ASEAN 6 used ATIGA to multilateralise their tariff preferences, RCEP now provides CLMV with the opportunity to make good on open regionalism.

Jayant Menon is Senior Fellow at the ISEAS–Yusof Ishak Institute, Singapore.

This article appears in the most recent edition of East Asia Forum Quarterly, ‘East Asia’s Economic Agreement’, Vol 14, No 1.

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