Regional Comprehensive Economic Partnership Agreement (RCEP) was signed on November 15, 2020 as the world’s largest plurilateral trade agreement consisting of fifteen countries – China, Japan, South Korea, Australia and New Zealand, and 10 members of the ASEAN, which has virtually created the world’s largest trading bloc that promises to help speed up the members’ post-pandemic growth. The trade deal is also viewed as a step towards a new world order which is predicted to be dominated by Asia. There is no denying the fact that it will obviously make effects on the regional trade architecture. From Bangladesh perspective, a question arises: how does it matter for Bangladesh and its economic diplomacy when the country is making efforts to graduate from LDC to Developing Nation (DC) status by 2024. Moreover, Vietnam, Myanmar, Cambodia, Laos as the competitors of Bangladesh in apparel and RMG sectors, and China, Japan, South Korea as the major sources of FDI inflows and trading partners are the members of the trading bloc. Against this backdrop, this brief examines the significance of RCEP and assesses its implications for Bangladesh.
What is RCEP?
RCEP is an agreement that goes beyond trade and tariff liberalization, into cooperation in areas of e-commerce, removal of technical barriers to trade and non-tariff barriers and setting of common standards and various measures to promote intra-regional trade and investment. The idea is to take advantage of comparative advantages through initiatives to promote and foster deeper economic integration. It will progressively lower tariffs and aims to counter protectionism, boost investment and allow freer movement of goods within the region. The RCEP region constitutes about 40 per cent of global trade and 2.2 billion consumers. It is estimated that RCEP will add US$200 billion to global GDP annually by 2030 and 0.2 per cent to its member countries GDP. Together, they account for around 30% of the world’s gross domestic product and population. The RCEP brings together 15 APEC countries, including China, Japan and South Korea. It covers 28 per cent of global trade and 50 per cent of textile and apparel exports, valued at $374 billion and one-third of the world’s population.
RCEP was officially proposed in 2012. Progress was especially slow in the early years, but the discussions gained momentum after Donald Trump became the U.S. president in 2017 and finally it was signed on November 15, 2020. The agreement, which the members described as “modern, comprehensive, high quality, and mutually beneficial,” includes 20 chapters of rules covering everything from trade in goods, investment and e-commerce to intellectual property and government procurement. Such trade agreements often bring about increased intra-regional and extra-regional investment as well as exchange of technology which facilitates the creation of a robust value chain and a widespread production network. Apart from that, the e-commerce chapter aims to enhance consumer protection and safeguard personal information, as well as promote acceptance of electronic signatures.
Why does RCEP matter?
Perspectives vary about the significance of RCEP for its member nations and the world economy. Some see RCEP as so unambitious as to be largely symbolic. Others see it as an important building block in a new world order, in which China calls the shots all over Asia. Li Keqiang, China’s prime minister, reveled in the signing, calling RCEP “a victory of multilateralism and free trade” and, more lyrically, “a ray of light and hope amid the clouds”. As a result, RCEP is expected to have a noticeable economic impact. With a combined GDP of $25.8 trillion, the newly formed trade alliance is bigger than the United States-Mexico-Canada Agreement (USMCA, successor to NAFTA) and the European Economic Area.
RCEP accounts for not only one-third of the global economy – about US$26 trillion (S$34.7 trillion) of global output – but also one-third of the world’s young middle-income population – a market of 2.2 billion people. Analysts argue that real incomes are expected to increase by about one per cent in Japan, South Korea and China. Moreover, trade will naturally be diverted to less efficient regional blocs due to tariff elimination, liberal rules of origin and the easing of other non-tariff measures. Vietnam, Cambodia and Malaysia will export more to the region while China, Japan and Korea will be in a better position to integrate their supply chains.
RCEP will lead to a more integrated T&A (Textile and apparel) supply chain among its members. After the implementation of the agreement, as much as 78.5% of RCEP members’ textile imports measured by value will come from within the RCEP area. The RCEP will particularly strengthen the role of Japan, South Korea, and China as the primary textile suppliers in the regional T&A supply chain that involves RCEP members. Measured by value, approximately 65.8% of textiles imported by RCEP members will come from these three countries. Considering the positive impacts of expanded investment and other trade facilitation provisions of the agreement, they expect a further integration of the regional T&A supply chain among RCEP members in the long-term.
Critics argue that the agreement overemphasizes some areas while escaping vital issues like climate change and labor standard. First, it has only focused on tariffs and rudimentary trade-facilitation measures, in contrast to the TPP, with its coverage of areas such as environmental and labor standards, and rules for state-owned enterprises. Second, it has lesser focus on agriculture which will allow countries like China, Japan and South Korea to maintain their subsidies and state supports to this sector depriving other members who have comparative advantages. Third, RCEP may make it even harder for non-RCEP members to get involved in the regional T&A supply chain in the Asia-Pacific. The discriminatory tariff elimination under the RCEP will put T&A producers that are not members of the agreement at a greater disadvantage in the competition. Only around 21.5% of RCEP members’ textile imports will come from outside the area after the implementation of the agreement. Finally, RCEP is thought to be a vehicle of strengthening China’s influence in the Asia-Pacific region in the absence of the USA in similar trade deals in the region. With India’s withdrawal from the pact in November 2019, China will gain influence through further value chain integration in the 14 RCEP markets.
Significance for Bangladesh
The RCEP trade bloc is likely to put Bangladesh on the critical foot after LDC graduation when the country will lose preferential trade benefits. Importantly, it necessary to assess the significance of RCEP for Bangladesh when the country is heading towards graduating from LDC giving special attention to economic connectivity at regional and sub-regional levels keeping in mind of her “Look East” policy orientation to Asia-Pacific. Some have expressed concerns and others do not see risks. One of the significant concerns of Bangladesh is that ASEAN countries especially Vietnam will get preferential trade benefits in China, Japan, South Korea and Australia. It will affect Bangladesh’s prospects of expanding markets in these countries. The specific challenges that Bangladesh may face in the coming days from the RCEP deal may be highlighted for a policy guideline. First, Bangladesh may lose its comparative edge over its competitors like Vietnam, Myanmar, Cambodia and Lao PDR in terms of exports and luring foreign investment. Bangladesh’s biggest worry will be how to compete with Vietnam.
With the ease of trading, low tariff barrier and increased availability of low-cost raw materials, exports from these countries (especially from competitors like Vietnam, Cambodia etc.) may become less expensive and therefore, more competitive than Bangladesh. Moreover, domestic consumers from Bangladesh will be able to import goods from these countries at a more competitive price putting domestic producers at risk. Second, Bangladesh has to compete with other Asian countries like Vietnam, Myanmar, Malaysia, Cambodia, Thailand for attracting FDI. Since these countries now belong to a trade bloc, they will offer better competitiveness to foreign investors in their countries. Third, RCEP includes a number of LDCs, two of which, Myanmar and Lao PDR, to be graduating in coming years. It will give these graduating LDCs access to a large market, on preferential market access terms, at a time when Bangladesh will no longer be eligible to enjoy preferential access under the LDC schemes of RCEP members.
Fourth, the readymade garment sector accounts for 85% of Bangladesh’s total exports but Vietnam, its arch competitor in the global apparel market, appears to be lagging behind Bangladesh in recent times. Vietnam will get more access to those markets as part of the trading bloc and will also get a big advantage in sourcing raw materials. Fifth, the reduction of tariff rates to zero for most textile and apparel trade between RCEP members will have a ripple effect for non-RCEP members. Specifically, the trade deal is likely to incentivize the use of textiles from member suppliers like Japan, South Korea and China to the detriment of textile exports from outside the bloc. As a manufacturer, Bangladesh may be in a disadvantageous position in competing with Vietnam or other ASEAN countries in becoming the local manufacturers for international brands. Sixth, there is already a strong growth of Chinese, Japanese and Korean investments in Hanoi and Yangon. The deal will further increase their investment outflows to these countries that may again deprive non-RCEP countries like Bangladesh.
Finally, in geopolitical terms, RCEP creates a challenge for Bangladesh as Myanmar would further integrate into the regional process to its advantages in maneuvering her strategic interests. ASEAN allies of Myanmar will find a new space to strengthen her position in the time of its diplomatic challenge due to perpetrating genocide against the Rohingyas. Also, Bangladesh may face it difficult to promote its Asia focused foreign policy, economic diplomacy and strategic maneuverings with the ASEAN and East Asian countries.
While these concerns are critical, it is subject to the full implementation of the deal which is going to face a tremendous challenge both from within and outside the bloc. Analysts argue that the realization of benefits from such multi-country trade deals takes time. Indeed, elimination of 90 percent tariffs in RCEP economies will take two decades from the time it comes into force. USA, EU and India would keep their diplomatic pressure to dilute the possible gains of RCEP. However, the deal may bring about prospects for Bangladesh. First, with the present LDC Bangladesh enjoys various types of preferential treatments from a number of RCEP countries. Besides, Bangladesh has a small share of its export markets of RMG in the RCEP bloc. In fiscal 2019-20, of the total exports amounting to $33.7 billion, the RCEP countries accounted for about 10.4 per cent. Besides, simple theory of trade says that factories tend to migrate to the cheapest areas where Bangladesh has an edge. Second, as the deal will put pressure on Bangladesh, domestic manufacturers in the country will be more competitive and innovative that will benefit Bangladesh. Bangladesh will engage more efforts for trade negotiations that is a lacking in the country. Third, the deal will benefit Bangladesh in the sense that becoming a collective entity like EU, RCEP will provide a regional process to make an economic deal. Bangladesh may avoid bilateral negotiations in trade matters which are sometimes more challenging and harder. Fourth, with such a huge market in Asia, the largest in the world, Bangladesh will enjoy the benefit of proximity as a neighboring and Asian country. As a result, RCEP rather offers tremendous opportunities for Bangladesh to boost its exports. Finally, RCEP creates a new opportunity for Bangladesh to apply its economic diplomacy for advancing national interests.
In the conclusion, faced with a situation of tradeoffs in terms of benefits and concerns, Bangladesh may need to think of a couple of measures. First, in order to thrive in such an increasingly competitive environment, Bangladesh must simultaneously diversify its exports, offer low prices and ensure robust quality control mechanisms, prepare its Special Economic Zones, make these regions more business-friendly and ease the business practices. Bangladesh will have to focus more on increasing the quality of products and raise standards of labor, copyright, e-commerce and other relevant things. Second, to address the situation, Bangladesh should try to use the channels of BIMSTEC and APTA to expand its export markets in RCEP. Third, Bangladesh may seek membership to RCEP eventually for which the country should have strategic planning at this moment. Finally, Bangladesh must keep an eye on the geopolitical implications of this deal as Myanmar is a member of RCEP.