Author: Jayant Menon, ISEAS–Yusof Ishak Institute
To understand the interrelationship between ASEAN and the Regional Comprehensive Economic Partnership (RCEP), it is useful to separate the newer and less developed members – Cambodia, Laos, Myanmar and Vietnam (CLMV) – from the older and more developed – Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand (ASEAN 6). RCEP has a diverse program and the opportunities and challenges differ between the two groups.
If there is old and new ASEAN, RCEP also covers old (tariff-related) and new (non-tariff-related) issues. Old issues include trade in goods, rules of origin (RoO), customs procedures and trade remedies. The new issues concern the WTO+ or the WTO-x and include trade in services, electronic commerce, intellectual property rights and competition.
Although this remains a challenge, ASEAN 6 is better placed to pursue the new challenges of RCEP. CLMV is even further behind and still struggling with old issues. RCEP’s impact analysis has generally concentrate on how new issues will affect more developed members, including ASEAN 6. Resolving this imbalance allows for consideration of the opportunities that RCEP presents to CLMV.
The centrality of ASEAN was key to the formation of RCEP and will be for its continuation by finding a geopolitical balance. If RCEP contributes to further widening development gaps within ASEAN, ASEAN’s cohesion and ability to play an effective balancing role will be undermined. Ensuring that old and new members benefit is important for the future of ASEAN and RCEP.
The interests of old and new members will be best served by an RCEP that is open and outward looking. It should be open to future members who join with relative ease and minimize discrimination against non-members. With most new (non-tariff) issues, it is either impractical or costly to prevent non-members from participating in agreements once they are implemented. Problems arise when compliance requires enforcement — since only members have recourse to enforcement mechanisms — and when non-compliance reduces overall benefits. The difficulty of preventing free-riding with most new issues ensures that discrimination is minimized.
This is not true for tariffs, where explicit and voluntary efforts are needed to minimize discrimination. The RCEP gives the CLMV the opportunity to catch up with ASEAN 6 and clean up its tariff code.
While ASEAN 6 has multilateralized most of its preferential tariffs under the ASEAN Trade in Goods Agreement (ATIGA) by offering them to non-members on a most favored nation basis ( NPF), CLMV did not. Multilateralization underpins open regionalism and involves reducing and possibly eliminating margins of preference (MOP) — the difference between ATIGA and MFN tariff rates. In 2018, the import-weighted MOP for CLMV was around 10 percentmore than double that of ASEAN 6. The rationale for using RCEP to multilateralize regionalism is the same as for participating in RCEP.
ASEAN countries already have several Free Trade Agreements (FTAs) with each other and with other RCEP members. RCEP’s added value comes from the increasing use of preferential agreements by unifying rules of origin and expanding cumulation rules. When preferences are fully multilateralized, rules of origin are no longer needed and members can source from the cheapest supplier in the world. This will support the growth of supply chains and enable RCEP to deliver its greatest benefits.
The CLMV’s reluctance to go beyond what is mandated and voluntarily offer rate reductions to non-members is linked to concerns on loss of income. The contribution of trade taxes to public revenues of CLMVs has decreased over time, but remains significant.
In 2019 in Cambodia, trade taxes accounted for more than 10% of government revenue, compared to 3% and 1% in Thailand and Malaysia. Since most Cambodian imports are already covered by FTAs, the high share of revenue from trade taxes confirms the distorting nature of the tariff regime. This is reflected in the large gap between low mandatory preferential tariffs and high discretionary MFN rates.
Countries that maintain a different tariff regime for each FTA often do so to compensate for expected revenue losses. The revenue implications of such a multiple rate system, as compared to a multilateralized or single rate system, will depend on two factors: administration costs and tariff collection. In both cases, multilateralization offers better prospects.
The costs associated with the administration of the multiple rate system are higher than those of the single rate system. To operationalize the first, customs authorities must implement the rules of origin to determine the rate to be applied. Local capacity constraints and extensive global supply chains complicate these administrative tasks. Businesses will also face higher compliance costs in a multi-rate system.
Additional tariff revenue will only be collected if non-FTA imports are subject to higher tariff rates. If there is a significant difference between the rates, there will be diversion of traffic. Goods from outside the RCEP may enter the RCEP domain via a low MFN tariff country such as Singapore and then be re-exported to CLMV, excluding CLMV countries from the expected tariff revenue.
Creating a system where multiple rates apply to each tariff line also increases the potential for corruption and smuggling. It is an open secret that some trade taxes are collected privately rather than publicly, and that the porous borders of the Mekong region facilitate illicit trade. A single-rate multilateralized system that eliminates the MOP addresses these issues while maximizing the potential for trade creation and minimizing trade diversion.
If the CLMV resisted the multilateralization of the ATIGA, why would it be otherwise with the RCEP? One reason is preference erosion: the competitive advantage enjoyed by exporters in foreign markets diminishes as FTAs proliferate. CLMV countries, having entered into many FTAs, will begin to see the benefits of additional FTAs begin to diminish. Since most of CLMV’s exchanges are carried out within the RCEP, their resistance to multilateralization is reduced.
Both old and new ASEAN members continue to aggressively pursue FTAs. The proliferation of FTAs can impede trade and work against open regionalism, but the multilateralization of free trade agreements mitigates these negative effects. It is therefore important that RCEP’s technical and economic cooperation agenda incorporates multilateralization. While ASEAN 6 used ATIGA to multilateralize its tariff preferences, RCEP now offers CLMV the opportunity to take advantage of open regionalism.
Jayant Menon is Senior Fellow at ISEAS–Yusof Ishak Institute, Singapore.
This article appeared in the latest edition of East Asia Quarterly Forum“East Asia Economic Agreement”, vol 14, n° 1.