The pandemic is depressing demand, disrupting global supply chains and spurring export restrictions on medical and food supplies.

THE Covid-19 pandemic is hindering the progress on the Regional Comprehensive Economic Partnership (RCEP) negotiations which may cause the agreement to not conclude by year-end as envisioned.

Moody’s Investors Service Inc, in its latest Global Trade Monitor report, stated that negotiators of the Asean-led trade pact are walking a tightrope.

“A shift in focus to domestic coronavirus issues is distracting RCEP’s negotiations. It aims to create the world’s largest free trade bloc, but the coronavirus shock, in addition to diverging interests, highlights the difficulties in completing the agreement by the end of 2020,” it said.

Moody’s also highlighted India’s absence during negotiations in Indonesia that had already stalled the discussions.

“And Japan announced it will not sign the deal without India’s participation. The parties have aimed to finalise the pact by the end of 2020,” it added.

RCEP is a proposed free trade agreement (FTA) in the Asia-Pacific region between the 10-member states of Asean, namely, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Five of Asean’s FTA partners including Australia, China, Japan, New Zealand and South Korea are also part of RCEP.

India, which is also Asean’s FTA partner, opted out of RCEP in November 2019, claiming its key concerns were not addressed.

The key issues behind India’s decision to not be part of RCEP included inadequate protection against import surge, insufficient differential with China, possible circumvention of rules of origin, keeping the base year as 2014 and no credible assurances on market access and non-tariff barriers.

In general, Moody’s added that Covid-19 is depressing demand, disrupting global supply chains and spurring export restrictions on medical and food supplies, on top of complicating ongoing trade negotiations.

“Coronavirus adds to uncertainty over Brexit negotiations during the short transition period. Our base case is that the UK and the European Union will agree to a looser trade relationship, resulting in structurally weaker economic fundamentals in the UK.

“As for the US and China, the virus brings new challenges to fulfilling the commitments outlined in Phase 1 of the economic and trade agreement. The negative effect of the coronavirus on trade could lead to renegotiation of the Phase 1 deal,” said Moody’s.

Overall, as global trade growth is sinking deeper into negative territory, the rating agency stated that trade-reliant emerging markets like Malaysia will be most vulnerable to a prolonged fall in activity.

According to the World Trade Organisation, global trade will contract between 13% and 32% this year amid a sharp decline in consumer demand, investment and supply disruptions.

Key reasons, according to Moody’s, are the coronavirus-induced drop in consumer demand and investment in the current quarter, and disruptions along supply chains and shipping routes resulting from lockdowns.

The rating agency expects consumer demand to only recover gradually in the second half of the year.

Covid-19 will also lead to more fragmentation of trade in essential goods as more than 90 countries have imposed restrictions or bans on exports of medical and food supplies, as shortages pose unprecedented challenges for governments and health systems.

“Ongoing shifts in supply chains will likely accelerate. A move to more regional supply chains, which was already occurring in the auto and electronics sectors, could also accelerate, as well as further shifts toward domestic production of critical goods such as pharmaceuticals and food.

“The crisis has also laid bare the vulnerabilities of just-in-time supply chain management and could prompt companies to consider moving supply chains closer to their final markets and building redundancies. Data flows and trade in digital services may accelerate as more consumption and work shift online,” it added.

Source: The Malaysian Reserve

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