Asia’s huge Trade Pact is a Paper Tiger in the making

The withdrawal of India from the broad but shallow agreement reinforces its very limited nature.

By guest author Mike Bird from Wall Street Journal

Asia’s Regional Comprehensive Economic Partnership, billed as a mammoth that could be China’s alternative to the Trans-Pacific Partnership, is shaping up to look more like a mouse.

A market in Ahmedabad, India. Asia’s Regional Comprehensive Economic Partnership became less impressive when the country bailed out (caption and graph courtesy by Wall Street Journal)

It became even less impressive on Monday as the second-biggest economy involved, India, bailed out. Even the modest tariff-related liberalizations at stake were too much for policy makers in Delhi.

The deal, which now looks likely to be signed in 2020, adds China to Asia’s alphabet soup of trade agreements. Ten countries involved are the members of the Association of Southeast Asian Nations. Four of those 10 joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership with Australia, New Zealand and Japan. Many have bilateral and supplementary agreements in place.

The CPTPP was pursued by Japanese Prime Minister Shinzo Abe after the U.S. exit from Trans-Pacific Partnership negotiations and came into force at the end of 2018. While the RCEP mostly deals with tariff reductions, the CPTPP had a much broader scope, including labour, intellectual property, competition and investment policies.

For countries involved in tight agreements with one another, the RCEP means little to nothing. Asean members’ average tariffs against one another are already a hair’s breadth from zero.

The most comprehensive study into the deal, by Renuka Mahadevan of the University of Queensland and Anda Nugroho of Indonesia’s Ministry of Finance, shows just how limited gains are likely to be. An RCEP excluding India would add just 0.08% to China’s 2030 gross domestic product, according to their study.

The only two countries for which the deal would be worth more than 0.5% of GDP over the same period are South Korea, which is slashing tariffs by the largest amount, and Vietnam, where the agreement offers a particular boost to textiles and electronics exports.

India’s decision to opt out should prompt some soul-searching in Delhi. The country has higher average tariffs than the other large economies in the negotiations. If Delhi can’t stomach even such a limited pact, a more integrated Asian trading network to its east will only grow in size and influence.

It is not the only trade deal India has failed to complete: Over 10 years of talks with the European Union have produced nothing. According to reports by Indian newspaper the Economic Times, the country’s Finance Ministry is even reviewing existing deals on the basis that they offer too much to other nations.

Since the RCEP would not meaningfully expand trade cooperation for nations that already have low bilateral tariff rates and now no longer includes the nation with the most scope to reduce tariffs, it will have a limited impact. Adjust your expectations downward.

www.wsj.com

A market in Ahmedabad, India. Asia’s Regional Comprehensive Economic Partnership became less impressive when the country bailed out