The Biggest Free Trade Agreement You’ve Never Heard Of

At a Glance

  • The Asia-focused RCEP agreement covers half the world's population and 40 percent of its trade volumes
  • Some member countries of TPP are beginning to focus more on RCEP

Measured in terms of column inches, digital exposure and plain old-fashioned newsworthiness, the Regional Comprehensive Economic Partnership (RCEP) – Asia’s response to the rise of the mega-free trade agreement – has barely rated a mention.

But what the free trade agreement lacks in controversy, it more than makes up for in size.

The RCEP, which could move a step closer to ratification following a ministerial meeting later this year, will be the biggest free trade agreement in the world.

And next to the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) – the European and United States free trade agreements that have become mired in politics – it has made relatively swift progress.

“Whoever I talk to who is not an academic or a professional in this area does not know what the RCEP is, but they know about the TPP,” Giovanni Di Lieto, lecturer in International Trade Law at Melbourne’s Monash University says.

“To me that’s quite staggering.”

Taking in 16 countries – the 10 ASEAN countries plus six with which ASEAN has existing FTAs: Australia, China, India, New Zealand, Japan and South Korea – the agreement will cover a population of 3.5 billion (more than half the world’s population) and account for 40 percent of the world’s trade volumes.

In many categories it already dwarfs the TPP which covers just 11 percent of the world’s population and represents just 25 percent of the world’s trade albeit the TPP carves out a richer slice of the pie, covering 36 percent of the world’s GDP against the RCEP’s 29 percent.

Even so, countries that have signed both the TPP and the RCEP – namely New Zealand, Japan, Singapore, Malaysia, Brunei and Vietnam – are beginning to intensify their focus on the Asian economic partnership.

“Even the Japanese see the TPP as doomed,” Di Lieto says. “On this side of the world the TPP is losing traction to the RCEP because India’s major involvement is making it more and more attractive.”

He said a free trade agreement with India, with its traditionally highly protected markets, is likely to be a regional game changer.

“It’s been quite a few years now that Americans have tried to negotiate investment trade with India but they’re on different planets,” he says, adding that countries such as Canada and Australia had been waiting for a breakthrough from the U.S. before setting up their own FTAs with India.

But now with the RCEP, previous sticking points – in particular dairy for Australia – are likely to be resolved within the region.

“The American model is pretty much asset-based, and also light on regulation for financial markets, and the Indian model is enterprise-based in terms of investment law so it’s really night and day.”

Traditionally, China had always been easier to deal with in terms of trade and investment, but now India is hungry for cash, and are ready to take on the tariffs that underpin their industries, according to Di Lieto.

 

India’s Sea Change

India, which previously had wanted to group trading partners in the region into different tiers, has signalled that it wants to be flexible on this issue, instead adopting a single-tier approach on tariff reduction in exchange for increased foreign direct investment.

While India has not been without its RCEP skeptics, it nevertheless has allowed its economy, rather than politics, to dominate the debate.

“At this stage, it’s not really about the democratic processes, but rather how competitive its economy is and India is really low on that ranking,” Di Lieto says.

Peter Drysdale, Emeritus Professor of Economics at the Crawford School of Economics and Government at the Australian National University, says India’s sea change was now the power behind the momentum in RCEP.

“Certainly there were dismissive noises earlier on that RCEP was going nowhere,” he says. “India was seen as lead in the saddle, but there’s been a dramatic change in strategic direction at the top in India, even if it’s a bit slow catching up at the negotiating level.”

China was also a strong protagonist in RCEP, seeing the free trade agreement (FTA) as a way of moving some of its political problems with its regional partners forward.

“But the reality is that it won’t reach an effective conclusion unless there are some actors in the process,” Drysdale says. “A critical player in that respect in Southeast Asia is Indonesia which has been a bit ambivalent on the trade policy front since Jokowi became president.”

With Australia and New Zealand keen to take RCEP forward in a region that dominates their trade, only Japan stands to slow ratification.

“Japan has been hanging back because its preoccupation has been on the settlement of the TPP process,” says Drysdale.

“It’s now more actively engaged too. So the settings where RCEP has got legs is the setting in which China, India, Southeast Asia and Japan all have powerful interest in pushing supply-oriented reform.”

 

A Lever for Reform

RCEP is being seen as a lever to domestic reform, particularly in the case of India where labor market reforms and reforms to access by foreign investors have been viewed as a long overdue prerequisite to freeing up its markets to international free trade.

“RCEP will address some of these issues because it’s not just an at-the-border negotiation,” Drysdale says. “I think the distinction in respect of RCEP as with other regional FTAs is it takes forward services more strongly than FTAs in the East Asian regions have ever done before.”

Even though change in some of Asia’s most protected economies is likely to be slow, the fact that huge players such as India have been willing to address issues of domestic reform in the light of RCEP had made for a more positive change of mood at negotiations.

Drysdale says India-negotiated FTAs were backward-looking, exchange-of-concession oriented and not strategically directed towards opening the Indian economy. That approach has changed.

“Now there’s been a big strategic change and that has made all the difference. However, while the ship is turning around, it’s like turning around a tanker; it’s going to take a long time.”

Peter Shadbolt is a writer based in London.

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