Country leaders pose for a group photo during the 3rd Regional Comprehensive Economic Partnership (RCEP) Summit in Bangkok on November 4, 2019, on the sidelines of the 35th Association of Southeast Asian Nations (ASEAN) Summit. (Photo: Manan Vatsyayana, AFP)

Tariff Reductions In RCEP: They Still Matter for ASEAN Trade

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Exporters in ASEAN are likely to face lower demand for their goods under the 15-nation Regional Comprehensive Economic Partnership, as three ASEAN dialogue partners – China, Japan and the Republic of Korea – are likely to intensify trade flows among them. This does not mean there is no room for ASEAN to accrue gains from the trade deal.

In November 2019, negotiations on the Regional Comprehensive Economic Partnership (RCEP) was concluded with 15 countries in Asia and the Pacific. RCEP comprises the 10 countries of the Association of Southeast Asian Nations (ASEAN) and ASEAN’s five dialogue partners (Australia, China, Japan, New Zealand and the Republic of Korea). The emergence of RCEP will overlap with numerous existing ASEAN free trade agreements (FTAs). They include the ASEAN Free Trade Agreement (AFTA), ASEAN+1 FTAs such as ASEAN-Australia and New Zealand FTA, the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), the ASEAN-People’s Republic of China Comprehensive Economic Cooperation Agreement, and ASEAN-Republic of Korea Comprehensive Economic Cooperation Agreement (AKFTA).

Given the proliferation of FTAs in East Asia, one might ask whether there is space for further tariff reductions under RCEP; and whether tariff reductions will have any impact on ASEAN trade. Tariff barriers for intra-ASEAN trade today are already small on average, suggesting only limited welfare gains from their removal under RCEP. Such perceptions, however, miss the forest for the trees; they overlook important sources of gains or losses from trade. They neglect the depth of existing ASEAN FTAs, and the indirect effect of tariff reductions among the dialogue partners for ASEAN trade.

As it stands, existing ASEAN FTAs have not yet achieved 100 per cent tariff eliminations on imports of FTA partners. ASEAN countries have made substantial progress in tariff reductions, but the degree of tariff eliminations (zero tariffs) varies across ASEAN countries. To promote intra-ASEAN trade, ASEAN countries established AFTA in 1992 to eliminate tariffs on imports among its members. AFTA was then replaced by the ASEAN Trade in Goods Agreement (ATIGA) in 2010. Under AFTA, member countries identified sensitive sectors in which they do not fully eliminate tariffs, especially for rice. The more trade is covered by the sensitive sectors, the smaller are the economic benefits from tariff elimination under the AFTA.

In 2019, zero tariffs on imports among ASEAN-10 countries were averaged at 98.6 per cent of total tariff lines (number of products). The ASEAN-6 countries – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand – eliminated 99.3 per cent of total tariff lines. This was 1.6 percentage points greater than that of the ASEAN-4 countries (Cambodia, Laos, Myanmar and Vietnam) with the record of tariff eliminations at 97.7 per cent of total tariff lines.

To promote extra-ASEAN trade, ASEAN countries have formed regional FTAs with their dialogue partners, but they have different commitments on tariff reductions depending on their FTA partners. On average, ASEAN committed to eliminate 94.9 per cent and 92.9 per cent of total tariff lines under the AKFTA and AJCEP, respectively. For each ASEAN+1 FTA, commitments of tariff eliminations also vary across ASEAN countries. Under the AJCEP, for instance, Singapore, Brunei and the Philippines committed to eliminate 100 per cent, 97.7 per cent and 97.4 per cent of total tariff lines, respectively. These levels are higher than those made by Laos, Cambodia and Myanmar, which have committed to eliminate 86.9 per cent, 85.7 per cent, and 85.2 per cent of total tariff lines, respectively.

Addressing the issues such as non-tariff barriers, intellectual property rights and e-commerce, among others, will enhance trade competitiveness and stimulate innovation of ASEAN firms, the benefits of which are likely to be greater than potential export losses of tariff cuts.

Furthermore, after the formation of RCEP, ASEAN’s preferential access to the markets of its dialogue partners will be reduced because RCEP will set the same threshold of tariff reductions on imports among its partners. China, Japan and the Republic of Korea will have preferential access to each other’s markets in addition to ASEAN. This is particularly important for Japan, which has not yet formed any FTA with China and the Republic of Korea. In 2018, the top-ranked export destination of Japan was China, followed by the United States and the Republic of Korea. The RCEP will reduce or even eliminate tariffs among the three Northeast Asian economies. In this scenario, exporters in ASEAN are likely to face lower demand for their goods in these markets as these three dialogue partners are likely to intensify trade flows among them.

However, the unfavorable effect of tariff cuts considered here does not necessarily mean that there is no room for ASEAN to gain from RCEP. If RCEP achieves its objective of going well beyond these tariff reductions, it may be that potential export losses will be the least important implication. Addressing the issues such as non-tariff barriers, intellectual property rights and e-commerce, among others, will enhance trade competitiveness and stimulate innovation of ASEAN firms, the benefits of which are likely to be greater than potential export losses of tariff cuts.

Different degrees of tariff reductions in ASEAN+1 FTAs and the lack of an FTA between Japan and its key trading partners in East Asia suggest that there is room for RCEP to further reduce tariffs on imports among its members. Although the full text of RCEP has not yet publicly released, the depth of RCEP can be expected for three reasons. Firstly, RCEP should emerge as a region-wide trade agreement to consolidate the existing ASEAN+1 FTAs and hence reduce the negative impact of complicated rules of origin on trade flows. In addition, the threshold of tariff reductions in RCEP should be set more comparable to its regional FTA competitor such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which aims for 99 per cent tariff elimination. Finally, RCEP will also be an FTA, and it seems likely that the reductions of tariff among the RCEP countries will be more complete and more general than those of ASEAN+1 FTAs.

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