In a virtual press conference held today, new evidence from a United Nations economist shows that the Regional Comprehensive Economic Partnership (RCEP), a mega free trade agreement recently signed by ASEAN and five trading partners Australia, New Zealand, China, Japan and South Korea, will negatively impact ASEAN, especially its trade balance. A number of ASEAN countries will also face significant tariff revenue losses. Overall, this trade agreement is likely to damage economic prospects and ASEAN region’s financial capacity at a time when governments need it most to pull themselves out of the pandemic induced crisis.
Dr. Rashmi Banga of the United Nations Conference on Trade and Development (UNCTAD) launched her new study which revealed that ASEAN’s trade balance post RCEP will deteriorate significantly. As ASEAN countries set out to ratify RCEP Dr. Rashmi Banga, UNCTAD, Geneva said, “Free trade agreements (FTAs) are often signed by developing countries in the hope of increasing their market access to boost jobs and national prosperity. In this case our study shows that tariff liberalisation under RCEP will worsen ASEAN’s trade balance by 6% per year. While the trade balance will improve for some of the non-ASEAN countries in RCEP, the maximum gains in terms of increased net exports will go to Japan.”
Dr. Banga added that COVID-19 has increased the development challenges facing ASEAN countries and they will need to revive their industrial sectors and create jobs. “This will require generating additional financial resources. Tariffs are simple and effective tools in the hands of governments, not only to generate revenues but also to limit imports of luxury items that affect a country’s balance of payments. It is important for countries to make an informed decision with respect to signing or ratifying FTAs,” concluded Dr. Banga.
Cambodia, Malaysia, Myanmar and Thailand will see the greatest deterioration in their trade balances, while Malaysia, and Cambodia will face significant government revenue losses. Malaysia is expected to lose USD 2.2 billion a year in tariff revenue due to RCEP, which is equivalent to the yearly wage of more than 230,000 nurses and other health workers. Similarly, Cambodia’s revenue loss from RCEP is equivalent to 1.24% of it’s 2019 GDP which is almost the same as it’s entire public health expenditure of the country that stands at 1.28% of GDP.
According to the study, Indonesia’s clothing industry is one of the industries that is threatened by imports. Dr Ika Riswanti Putranti, Associate Professor, International Department Faculty of Social and Political Science Diponegoro University, Indonesia said, “There are hidden costs that must be reviewed in the RCEP agreement. Instead of increasing exports, based on Dr. Rashmi Banga’s study, post-RCEP ASEAN will face increased imports. In this regard, the industrial structure of ASEAN countries are not industries that produce finished goods.”
In Indonesia, textiles and garments contribute 5.4% of its GNI. “Post-COVID-19, many industries have already closed and are unable to develop their production capabilities and capacities. In this situation, there is a possibility that some ‘vulnerable industries’ will not be able to benefit from value added products,” added Dr. Putranti.
She explained further, “Needless to say, countries that benefit from the regional value chain scheme from RCEP are countries that are ready with know-how, have technology, a strong brand or are exporters of finished products where the main target market is ASEAN. There is a possibility that a country with an underdeveloped level of industrialisation will only become a place for the production of semi finished products by looking at low labour wages, and taxation. In addition, there is potential of trade circumvention in order to obtain tariff preferences from the aspect of goods nationality. This is the potential hidden cost from RCEP related to rules of origin, especially for ASEAN countries like Indonesia”.
Josua Mata, Secretary General, SENTRO, Philippines ended the press conference by saying, “Developing countries often hope to improve their goods trade balance from FTAs, but since this new study shows that there are no net benefits for ASEAN countries (except slightly for Brunei) from the goods chapter to offset the costs of the other RCEP chapters that are problematic for developing and least developed countries, ASEAN should not ratify RCEP.” Experts have highlighted that several provisions in RCEP would lead to governments losing the ability to make policy decisions in the public interest, warning against the ‘loss of policy space’ in a pandemic recovery scenario