Like all members of the Regional Comprehensive Economic Partnership (RCEP), Cambodia, Laos, Myanmar and Vietnam will enjoy preferential access to the expansive region’s markets. As the least developed members, however, they will have to undergo the greatest changes in reforming their tariff and non-tariff policies to meet the requirements of this modern agreement.
When the Regional Comprehensive Economic Partnership (RCEP) agreement came into force on 1 January 2022, it created the largest free trade agreement (FTA) in history. The newer members of ASEAN — Cambodia, Laos, Myanmar and Vietnam (CLMV) — are likely to be the most affected by it, for several reasons. Like all RCEP members, they will enjoy preferential access to the expansive region’s markets, but as the least developed members, they will have to undergo the greatest changes in reforming their tariff and non-tariff policies to meet the requirements of this modern agreement.
RCEP membership also provides the CLMV countries the opportunity to pursue open regionalism. This entails embracing non-discriminatory liberalisation, as the other ASEAN countries have done, by multilateralising the preferential terms of the trade accords they are party to. More specifically, multilateralisation involves reducing and eventually removing the margin of preference (MOP) — the difference between preferential and Most-Favoured-Nation (MFN) rates — to cease discriminating across trading partners.
While the original members of ASEAN adopted open regionalism by multilateralising most of their ASEAN Trade in Goods Agreement (ATIGA) preferential tariffs — offering them to all countries on an MFN basis — the CLMV countries have not. In 2018, the import-weighted MOP for Cambodia, Laos and Vietnam was around 10 per cent, more than double that for the original ASEAN members.
Proliferation of FTAs can encumber trade and work against open regionalism; multilateralising FTA accords can mitigate these adverse effects.
The RCEP will require the CLMV countries to extend preferential tariffs beyond ASEAN to all RCEP countries. Although this process of extending preferential treatment to other RCEP countries started with the ASEAN+1 FTAs, RCEP ensures that it will happen in a more consistent manner. But CLMV countries should go further and multilateralise their trade preferences beyond RCEP, as the original ASEAN members did with ATIGA.
The rationale for multilateralising based on RCEP is the same as for participating in RCEP. ASEAN countries already have multiple FTAs among each other and with other RCEP members. The value addition from RCEP comes from harmonising across agreements, and from increasing utilisation of preferential accords and thus yielding the benefits of unified rules of origin and expanded rules of cumulation, which govern the combination of inputs from different originating countries. A similar type of benefit, but on a much larger scale, would accrue if RCEP accords were multilateralised and offered to non-members.
CLMV countries continue to pursue FTAs aggressively, even beyond RCEP. For instance, as of 2021, Vietnam had FTAs covering 56 economies, and this number continues to grow. There is a tendency to confuse such second-best selective liberalisation through FTAs with open regionalism, which is first-best and unambigiously welfare-improving. Proliferation of FTAs can encumber trade and work against open regionalism; multilateralising FTA accords can mitigate these adverse effects.
The reluctance of the CLMV countries to go beyond what is mandated and voluntarily offer tariff reductions to non-members is due mainly to concerns over revenue loss. Trade taxes’ contribution to CLMV government revenue has been declining over time, but remains significant. In 2019 in Cambodia, for instance, trade taxes constituted more than 10 per cent of government revenue, compared to 3 per cent and 1 per cent in Thailand and Malaysia, respectively, and a world average of 2.4 per cent.
Countries that retain a different tariff regime for each FTA often do so to offset revenue losses associated with participating in other FTAs, including RCEP. 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, multilateralization holds out brighter prospects.
First, the costs associated with administering the multiple-rate system are clearly higher compared to the single-rate system. To operationalise the multiple-rate system, customs authorities must implement rules of origin in order to determine which rate to apply. The growth and spread of global supply chains complicates these public administration tasks, while businesses will face higher compliance costs in a multiple-rate system.
Second, additional tariff revenue will only be collected if non-FTA imports are charged higher MFN rates. If there is a significant difference between the rates, however, there will be a strong incentive for trade deflection. Goods from outside RCEP will likely enter RCEP’s domain through a low or zero MFN tariff country, such as Singapore, and then be re-exported to CLMV, thereby precluding these countries from the intended tariff revenue.
Creating a system whereby multiple rates apply to each tariff line also increases the potential for smuggling or rent-seeking behaviour. It is an open secret that the porous borders of the Mekong region facilitate illicit trade, and that some trade taxes are collected privately rather than publicly.
If CLMV resisted multilateralising ATIGA, why should it be different with RCEP? One reason relates to 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, the resistance to multilateralisation is reduced.
For these reasons, RCEP provides the newer members of ASEAN an easier opportunity than ATIGA to make good on open regionalism and reap the greater fruits of globalisation, but they need to grasp it.
Jayant Menon is Senior Fellow at ISEAS – Yusof Ishak Institute.