rcep signatories

Impact of RCEP on ASEAN

On November 15, 2020, 10 members of the Association of Southeast Asian Nations (Asean), which comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam plus China, Japan, South Korea, Australia and New Zealand signed on the deal.

RCEP’s guiding principle state, “The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high quality and mutually beneficial economic partnership agreement among the ASEAN member states and ASEAN’s FTA (free trade agreement) partners.” Meanwhile, it is expected that member states will ratify it by middle 2021.

The RCEP is expected to eliminate a series of tariffs on imported products for the member nations in the coming 20 years. The agreement also includes rules on intellectual property, telecommunications, financial and professional services, and e-commerce but not environmental, labour standards and the contentious state own enterprises. The intent is that it will lead to trade creation because the countries that are part of the RCEP will progressively lower tariff rates, so that will lead to an increase in trade among them.

However, many signatories of the RCEP already have FTAs with each other but it is known that the existing FTAs can be very complicated to use compared to RCEP. However, under RCEP, member nations would be treated equally. It would also incentivise companies in member nations to look at the trade region for suppliers. As it is, China being one of the largest of economies and a big supplier to the supply chain will benefit the most. So what does it mean for the smaller countries of ASEAN or even Korea, Japan, Australia and New Zealand? Japan and Korea might also benefit with lower duties as they have a supply chain in China and do also export to China. As for the ASEAN countries it goes without saying that they will be able to export their raw materials to China and import with less duties of spare parts and finished products.

But that being said, is there any other thing that ASEAN countries can do to help balance the trade equation with China? Unfortunately not on a long shot. AEASN will have to come up with indigenous products that China does not make. Or perhaps products with lesser technologies but with marketable indigenous inputs like locally designs that suit certain purposes. Yes, there is a lot of work for ASEAN after having signed RCEP. At the end of the day, China in kick starting RCEP is because China wants to sell more of its products to the other members. And for the other members, the aim is to get access to the bigger market in China, period.

What is there for ASEAN?

As Industrial Revolution 4.0 is getting a hold of production processes, it goes for ASEAN to make changes so as to keep up with the Joneses. Chief among the many facets is education where there is an urgent need to restructure the system to suit a manufacturing economy. Artificial Intelligence and TVET should be embraced as part of the change towards a manufacturing based mindset. And a second but no less important is to change how a government goes around dishing money for research and development. It is sad to know that most of ASEAN countries does not give priority to technology developments as they are more comfortable with importing technology. Buying machines from advance countries seemed to be the mantra as it is less of a hassle. If something were to go wrong with the machine, they will just call rectification crew, some of them have to be flown in as an emergency crew.

For Vietnam, and as a member of RCEP its major export categories that are expected to benefit include IT, footwear, agriculture, automobiles, and telecommunications. As Vietnam moves to become a high-tech manufacturer, the RCEP can help local firms increase exports and attract high-quality goods but lower prices for its consumers. In addition, with demand for Vietnam’s exports like agriculture and fisheries products, Vietnam is set to benefit as there is a bigger market in China but not forgetting that you can get almost anything through the internet from China. So, indeed Vietnam will have to drive up its R & D in order to make better products just to rebalance its trade equation with China. As for ASEAN, what you can make in Vietnam you will be able to make in the other countries. Vietnam will have to look into making unique products that is not available in the other member countries.

As for Indonesia, a free trade agreement like RCEP has positive sides for Indonesia as it can challenge a country to be more efficient, productive, and innovative in increasing an industry’s competitiveness level. Indonesia’s manufacturing sectors will be under great pressure as its manufacturing industry is not as strong as that of China, Korea or Japan. Indonesia is after all an agricultural country and it can produce food at a lower cost because of low labour cost.

As for Thailand, its Ministry of Commerce is of the view that it will begin to train farmers and entrepreneurs on how to tap into the benefits of RCEP this year by way of reducing cost but increasing quality. Thailand exports fruit, vegetable oil, cereal, tapioca starch, seafood, processed food and fruit juice to other RCEP members. Again, increase market access is the aim. As for technology, there is very little to shout about as it is still an agricultural society. The Department of Trade Negotiations released latest data, indicating that in 2019 Thailand exported agricultural products worth 25.2 billion U.S. dollars to 16 RCEP member countries. Products that have seen greater demand in 2020 include fresh and frozen fruit, fresh and frozen chicken, canned and processed fruit and fruit juice.

As for the Philippines, the RCEP will further broaden the Philippines' economic engagements with its trading partners through improved trade and investment, enhanced transparency, integrated regional supply chains, and strengthened economic cooperation but nothing much on technology.

As for Malaysia, almost 60% of her trade involve RCEP members, so Malaysia’s tends to gain with easier access and reduced duties; it bode well to benefit from joining RCEP. However, there is still much work to be done if Malaysia will to be able to export to these similar technology countries besides China, Korea and Japan. For one thing, Malaysia will need to step up its own indigenous technology to be on a different supplier basis. Whatever you can make in Malaysia, you can make in ASEAN with very little price difference.

As for Singapore, it will most probably open a bigger market for its electrical, pharmaceuticals and medical equipment. And for Myanmar, Cambodia, Laos and Brunei, cheaper products from China and also a greater access to the Chinese market.

There then is the dilemma for ASEAN: to either up the technology or to just sell more of its agricultural produce. But upping the technology (may be imported) may not be of a help because China spends 2.5 % of GDP on R & D and thus is leaps ahead of ASEAN. We are beginning to see an uptick of indigenous technology such as artificial intelligence and industry 4.0 elements in its production.

What should ASEAN do?

The members of ASEAN being of a smaller economy can indeed better compete if they were to put their funds into indigenous technologies to shore up unique products that China is not going to make. A case in point is Singapore where they have found it fit to put their money in biotechnological and medical equipment that has found market in China. Thailand will do well if they put their money on developing biotechnology enhance fruit. Thailand will also go along way if it were to pioneer into hydrogen fuel cars for the ASEAN market instead of focussing its energy in also producing electric vehicles for the simple reason that China is on the way to flood the ASEAN market with its EV. It goes to figure that if you only have a little amount of money, go and put them in developing indigenous products that might find access in the ASEAN market. Don’t think grabbing of China market as they are now focussing on supplying to their domestic market as a form of diversification brought on due to the trade war w ith the US. For ASEAN, there is always a tendency for the government and the private sector to spend on importing technology.

There is a shortage of support for developing indigenous technology which is a sad truth. The simple reason is it is easier to just import and transplant them into products than to put hard work and money to do research and development. Another aspect of the equation is that due to China’s prowess in the manufacturing technology, it has however caused the disappearance of a supply chain for parts as most of them had to close shop due to the flooding of cheap imports from China. As a way to remedy the problem, governments of ASEAN should roll up their sleeves and pay attention in rebuilding of local supply chains. It is a fact that ASEAN manufacturers can’t source their parts from local enterprises as there are none to go to and we have to really solve this problem or we will forever face the problem of sourcing our parts from China.

We as a part of ASEAN would like to help to solve this supply chain problem. And how do we do it? Well, for one thing, we will help our entrepreneurs to design new products with indigenous technology. Indigenous technology may not be high technology but it will have a local content that will come from people who knows what the problems to solve are. Putting in some local flavour and you get a new recipe! We will help. Give us a thinker then.