TIMELAB PRO UNSPLASH
When the Senate failed to ratify the Regional Comprehensive Economic Partnership (RCEP) due to what some senators called a “lack of farm sector safeguards,” it signaled the country’s missed opportunity to join the world’s largest trade deal early. This June 2022 Senate deliberation has lasted a full five months since RCEP was pushed through on January 1 of this year. At that time, both Indonesia and Myanmar also had to ratify the regional trade pact.
RCEP includes 15 countries that generate a third of the world’s gross domestic product (GDP) and almost half of the world’s population. Some estimate RCEP’s share of the global economy could grow to $0.5 trillion by 2050. The Trade Pact aims to create an integrated market to facilitate cross-border transactions in trade in goods and services, investment, intellectual property, dispute resolution, e-commerce, small and medium-sized enterprises and economic cooperation.
The benefits are definitely not trivial. If world trade weakens, this regional deal is a good throwback, if not a powerful antidote.
But prospects for swift Senate action worsened when then-President-elect Bongbong Marcos called for a review of the RCEP to “determine whether the agricultural sector is adequately protected”.
For all its economic policy flaws, then-President Rodrigo Duterte actually approved the RCEP agreement back in September 2021. He recognized and accepted that RCEP was trade and investment positive for us. These issues of orderly transition to free trade and proper safeguards for some industries have been widely debated over nearly a decade of RCEP negotiations.
They call them safety nets and they are well articulated in the RCEP agreement. Foreign competition has existed primarily since our accession to the World Trade Organization (WTO) in the 1990s and the establishment of further free trade relationships with ASEAN and other groupings of countries. The scope has just been extended to the extent of RCEP’s larger membership. It must be the rules and disciplines that some circles complain about. Agricultural products are exempt from tariff liberalization but would still be entitled to some other benefits from trade defense measures, including those provided by the WTO’s global safeguard measures.
For example, if burgeoning imports threaten a local industry, WTO safeguards remain available to the Philippines. The RCEP also provides a temporary safeguard measure to address this potential situation by suspending or increasing further tariff reductions should imports under the RCEP increase. Anti-dumping and countervailing measures that reinforce the rights and obligations of different parties under relevant WTO agreements remain available.
The Ministry of Trade and Industry therefore assured that our local industry, including agriculture, should look to RCEP “as a platform for more and greater opportunities, ranging from improved market access in the RCEP region, cheaper access to raw materials, wider cumulation area, trade facilitation measures , and even investing in smart farming and research and development.”
It helped that business executives in the Philippines supported RCEP. For example, both the then NEDA boss Karl Chua and the then Trade Minister Ramon Lopez testified in the Senate in May 2021 and held talks with members of Samahang Industriya ng Agrikultura (SINAG). As Chua pointed out, “The best farmers who can mechanize improve their productivity and consolidate farms, win and become more productive. However, the trade deficit is a real problem, it means we are not competitive. The solution there is not to stop RCEP, but to address the root causes of inefficiency in the agricultural sector.”
With broad inclusion of free trade partners in RCEP, the Philippines could find ways to increase the partners’ share of over 50% of the country’s exports while securing its imports from them, which now stand at more than 67%.
Therefore, if the Philippines does not join the RCEP soon enough, the country is likely to miss many other opportunities on the region’s path to economic recovery. RCEP is a contemporary tool to promote regional integration and economic growth.
Despite being relatively late in the game, Indonesia more deeply realized that while its exports would benefit directly from RCEP, its own downstream industries are also poised to reap greater investment. With its rich natural endowment, Indonesia aspires to move up the global value chain, from exporter of raw materials to global supplier of processed high-value raw materials. Some members of Indonesia’s parliament also feared that removing around 92% of tariffs on goods traded with the other 14 RCEP members could lead to an excessive flow of imports. But its key ministers have been smart enough to point out that there are indeed near-term costs, such as a higher trade deficit. In due course, Indonesia expects some turnaround in its real output and a trade surplus of almost $1 billion. The challenge is to diversify the manufacturing sector and incubate new and emerging value chains especially in the digital space. Infrastructure projects are also crucial and Indonesia is taking them very seriously.
Why is RCEP mandatory and should have been ratified yesterday?
In its regional economic outlook for Asia and the Pacific, the International Monetary Fund (IMF) sees some damaging scenarios of fragmentation recently. These scenarios derive from possible global trade disruptions following geopolitical tensions in recent years. The Fund refers to this as trade fragmentation, which occurs in the form of increased trading restrictions and uncertainty.
Asia is key in this scenario, as its value added in global manufacturing provides half of external demand in North America and 35% in Europe in 2018, up from 41% and 28% respectively in 2000. Asia is no less than one global manufacturing hub that accounts for about half of global demand for key commodities. Asia’s well-developed regional value chains fuel two-thirds of intra-Asian trade.
And dark clouds are gathering on the horizon.
There are rising geopolitical tensions that could affect global trade and multilateralism. The fund notes that these tensions are being driven by strategic competition and national security issues at the expense of economic efficiency. Greater trade integration has led to higher productivity and living standards around the world over the past two decades, with Asia contributing to this trend. But Asia could be eyeing a possible turning point.
The fund now sees increased trade restrictions being actually imposed by countries based on its Global Trade Alert since 2018, “reflecting the rise in trade-related uncertainty”. The sectoral composition of trade restraints shows that high-tech and energy sectors are booming, predicting what might happen to them in terms of economic competition and national security.
Keeping trade-related uncertainty at current levels would be enough to affect economic activity. Uncertainty about trade relations encourages a “wait and see” attitude among companies, discouraging them from investing and exporting. Uncertainty could also fuel inflation by pushing up import prices or importers’ premiums.
In general, the fund says, trade uncertainty is reducing investment and GDP but increasing unemployment. It could also cause exchange rate depreciation via a higher risk premium. If higher trade policy uncertainty has negative economic implications in the short term, the Fund is equally concerned about the long-term impact. Past trade hostilities between the US and China, and more recently the Russia-Ukraine conflict, have triggered waves of trade uncertainty.
An illustrative scenario of high fragmentation was assumed, in which the world splits into separate trading blocs, generating large, permanent losses in output. Given its large role in global manufacturing and trade, Asia is expected to be hit the hardest and most severely. The resulting reduction in productivity is enough to save 3.3 percentage points of regional production. Admittedly, if exporters lose their markets, overall losses could be higher due to the impact on investment.
As expected, the Fund’s advice is to promote greater international cooperation to reduce trade barriers, avoid political uncertainty and always promote open and stable global and regional trade.
But the story doesn’t end here.
The fragmentation of trade can be exacerbated by the fragmentation of finance. There are early signs, including capital flow measures imposed by several countries in the wake of the pandemic. In particular, some restrictions on foreign direct investment inflows are most evident. It would definitely hurt Asia and the Philippines if we see foreign companies doing more reshoring, nearshoring and onshoring.
Therefore, early accession of the Philippines to the RCEP can be a good countermeasure against these observed signs of both trade and financial fragmentation. Given the country’s high foreign trade ratio of over 60% as a percentage of GDP, RCEP can keep our growth engine running at full speed.
There’s no time to lose.
Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economic Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. From 2001 to 2003 he was Deputy Executive Director of the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.