The Regional Comprehensive Economic Partnership (RCEP) has come into force, but member countries have their work cut out for them in seeking to raise utilisation rates and exports.
The entry into force of the Regional Comprehensive Economic Partnership (RCEP) agreement in January 2022 is expected to bring gains to its members by increasing trade, especially intra-regional exports. However, the realisation of these gains depends on how well the agreement is implemented.
The effectiveness in implementing Free Trade Agreements (FTAs), including the RCEP, is measured by the share of trade under FTA schemes out of the total trade of products eligible for these schemes. In short, this is the utilisation rate. Unfortunately, measuring the utilisation rate in ASEAN is quite difficult because the data is not disclosed in most member states, except for Thailand.
Using either firm-level surveys or shipment level customs data, a number of studies show that utilisation rate by ASEAN countries is generally low. It also varies across agreements, with a large divergence across trading partners. Older agreements such as the ASEAN Free Trade Agreement (AFTA) tend to have higher utilisation rates as firms acquire learning on FTA usage over time. Thailand’s utilisation rate of AFTA is highest for its exports to the Philippines and Indonesia (69.4 per cent and 61.6 per cent, respectively) and lowest for Singapore (7.5 per cent). The utilisation rate for a newer agreement such as the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) is lower, ranging from 34 per cent for Indonesia to zero for Brunei. Overall, FTA utilisation remains a challenge, and more so for some ASEAN countries than others.
Non-ASEAN agreements which have some ASEAN countries as members also encounter FTA utilisation problems. The American Chamber of Commerce in Singapore conducted a survey of its members in 2020 and found that only 22 per cent of U.S.-based companies stated that they had used at least some part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which entered into force on 20 December 2018. The corresponding figures for Singapore-based business stood at a mere three per cent, and 15 per cent for firms based elsewhere have used some part of the agreement.
Two common problems identified in FTA utilisation are a lack of awareness and understanding of these agreements, including knowledge on how to meet the requirements for accessing the preferential tariff rates and the relatively high cost of compliance or administrative burden compared with the export volume of the firm.
The 2019 ASEAN survey also shows that for existing exporters, ‘finding a trade partner’ is the biggest challenge in internationalising their activities. RCEP can therefore become relevant for existing exporters if there are specific business matching programmes for helping SMEs find suitable trade partners in other RCEP member countries.
Given the importance of awareness, there are various ongoing public awareness campaigns on the RCEP, be it at the ASEAN or country level. Malaysia’s Ministry of International Trade and Industry, for example, has organised a series of talks for the private sector to explain the technicalities involved in accessing the preferential tariff rates. Dissemination is not confined to government agencies alone, as industry associations are also keen to inform their members of the market potential with the RCEP.
Despite these noble intentions, dissemination is only helpful if small and medium enterprises (SMEs) have the capacity to export or they are planning to export and/ or increase their volume of exports. After all, increasing market access and exports are important goals of the RCEP. A recent survey on the internationalisation of SMEs in the ten ASEAN economies, conducted by the ASEAN Secretariat in 2019, found that only 18.9 per cent of the companies surveyed in the region are exporting. Thus even with greater dissemination efforts, SMEs may not be able to reap the benefits from the agreement without additional efforts made to enhance SME exports.
The 2019 ASEAN survey results also shows that SMEs who have yet to conduct international activities cite ‘insufficient internationalisation knowledge’ as their biggest challenge for internationalising their activities. Many SMEs, unlike large firms, do not have the resources to conduct extensive market research to support exporting. This is particularly true for first-time exporters. For new exporters to emerge, SMEs need assistance from export support programmes that can provide the necessary market intelligence on RCEP markets.
For existing SME exporters, expansion to new markets in RCEP member countries can help them diversify risks that arise from depending on a single export destination and/or increase export volumes. Products on the downside of the sales cycle in one market may quickly take off in another where it was not available previously, especially outside ASEAN. Increasing export volumes will reduce the administrative costs incurred by SMEs for learning how to comply with the RCEP rules, since compliance costs are deemed as fixed costs. The 2019 ASEAN survey also shows that for existing exporters, ‘finding a trade partner’ is the biggest challenge in internationalising their activities. Therefore, the RCEP can become relevant for existing exporters if there are specific business matching programmes for helping SMEs find suitable trade partners in other RCEP member countries.
Creating export programmes that can nurture new exporters and assist existing exporters to increase their export volume and diversify their markets will help ASEAN’s SMEs reap the benefits of the RCEP, beyond merely enhancing its utilisation. While the RCEP is already in force, the fact remains that RCEP member states have their work cut out for them if they want to see an increase in utlitisation rates and exports to member countries.
Tham Siew Yean is Visiting Senior Fellow at the ISEAS – Yusof Ishak Institute and Professor Emeritus, Universiti Kebangsaan Malaysia.