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Significant Barriers Remain for Asia’s RCEP deal

On the 24th of July India hosted the 19th round of negotiations for the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement covering 16 countries in the Asia-Pacific region. India’s commerce secretary has said that there is “enough political will to expedite the conclusion of the talks” but in reality many barriers, both economic and political, remain.

The Regional Comprehensive Economic Partnership (RCEP) is a free trade deal encompassing 16 countries including China, India, Japan, South Korea, Australia, New Zealand, as well as ASEAN member countries. Together this group represents more than 3.5 billion people and about a third of global GDP. The deal is heralded as an opportunity to unite trade in the Asia Pacific and overcome some overlapping bilateral trade deals which obfuscate trade rules and regulations.

Despite political will from all sides to conclude the deal several significant barriers remain. The lack of pre-existing free trade deals between certain countries means RCEP could have drastic effects. India and China, India and Korea, and Japan and Korea, for example, currently have no existing mutual FTAs. Furthermore, the wide variety of economies included in the deal means that while some countries would prefer a shallow manufacturing oriented deal, others are seeking liberalization of services and freedom of movement for professionals. Finally, many of the included countries face growing tensions over disputed borders and territories which threaten to slow or halt the deal if they are not resolved.

Made in China

India’s concerns about an influx of cheap Chinese goods appears to be one of the largest barriers. Corruption, internal barriers to trade, and weaker infrastructure have made Indian manufacturing less competitive than China’s. These features, along with the fact that India’s farms tend to be smaller and less efficient means that India’s agriculture industry is also threatened by RCEP. This makes an FTA with China a risky move which contradicts Modi’s “Make in India” campaign.

This is further aggravated by the fact that India currently has no free trade relationships and a $50 billion trade deficit with China. Such a deal could be a jolt to India’s economy. As a result India has sought fewer reductions on goods tariffs and longer implementation periods for tariff reductions with China and other nations.

India has offered to liberalize approximately 80% of tariffs (varying by country depending on whether there are pre-existing mutual FTAs or not). This is far below the 92% tariff liberalization sought by China and ASEAN nations. The difference in desired outcome threatens to slow the talks down significantly and is likely to result in a shallower deal.

Give and take

Trade deals, however, inevitably involve compromises. India still has significant incentives to take part in RCEP if it can gain from the liberalization of services and freedom of movement for professionals. India’s has a significant trade surplus in services which would likely benefit from deeper integration. The question for India is whether growth in services would outweigh potential losses in manufacturing.

Other RCEP nations will not easily agree to the level of services liberalization sought by India. India would like greater freedom of movement for professionals, such as an ‘RCEP Travel Card’ for businesspeople. But many RCEP nations are concerned that greater freedom of movement for professionals would result in a flood of Indian migrant workers. This is an especially controversial issue for countries facing public perceptions that migrant workers are taking jobs from locals.

Try again next year

Geopolitical issues such as territorial disputes in the South China Sea and the Doklam Plateau border dispute between China and India also threaten to impede the talks. In 2012 a trilateral deal between China, Japan, and South Korea was nearly derailed due to Sino-Japanese tensions over the Diaoyu/Senkaku Islands. Escalation of territorial conflicts between China and other RCEP members could easily have the same effect.

RCEP has already missed two deadlines to conclude the talks: end-2015 and end-2016. The aim of concluding the deal by the end of 2017 appears likely to fail as well. Complex issues such as services liberalization and implementation schedules will continue to occupy negotiators at least until 2018 if not longer.

Source: Global Risk Insights

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