RCEP: Bangladesh ignoring the centre of gravity

The Regional Comprehensive Economic Partnership (RCEP) will be the world’s largest trading bloc in economic size, and is set to become a new centre of gravity for global trade. It will enter into force on 1 January 2022. RCEP includes 15 Asian and Pacific nations: Australia, Brunei, Darussalam, Cambodia, China, Indonesia, Japan, the Republic of Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand and Vietnam.

Its impact on international trade is expected to be significant. Under the RCEP framework, trade liberalization will be achieved through gradual tariff reductions. Many tariffs will be abolished immediately, while others will be reduced gradually during a 20-year period. The concessions are key in understanding the initial impacts of RCEP on trade, both inside and outside of the bloc. The export losses of countries such as Bangladesh, Pakistan, Sri Lanka are more significant when measured in percentage terms. In the case of Bangladesh, it is expected that about 12 per cent of its export to RCEP would be diverted to favour RCEP members. The United Nations Conference on Trade and Development (UNCTAD) made the estimate in its latest report titled “A new centre of gravity: The regional comprehensive economic partnership and its trade effects” released on December 15, 2021.

This FTA includes 15 East Asian and Pacific Nations of different economic sizes and stages of development, representing around 30 per cent of world GDP. Intra RCEP-trade was already worth about US$ 2.3 trillion (2019) and this analysis shows that RCEP’s tariff concessions would further boost the intraregional exports of the newly formed alliance by nearly 2 per cent, approximately US$42 billion. Most of these gains come from trade diverted away from non-members.

The pact will progressively remove both tariff and non-tariff barriers on trade in both goods and services. Tariff concessions in the manufacturing sectors are expected to add about US$ 30 billion to intra-RCEP trade, or an increase of about 2 per cent. More than 60 per cent of this gain, US$ 18 billion, comes from trade diversion effects. Overall, the tariff concession of RCEP results in gains where trade diversion effects represent 60 per cent, while trade creation represents 40 per cent. As the process of integration goes further these effects could be magnified, a factor that should not be underestimated by non-RCEP members. Agricultural trade is expected to see gains of about US$ 10 billion, equivalent to an increase of 7 per cent. Most of this gain is expected to come from trade diversion effects from non-member countries.

As the process of integration of RCEP members goes further, these diversion effects could be magnified, a factor that should not be underestimated by non-RCEP members. This is the result of two forces: trade creation, as lower tariffs would stimulate trade between members, by nearly US$17 billion; and trade diversion, as lower tariffs within RCEP would redirect trade away from non-members to members, equivalent to nearly US$25 billion.

The agreement goes beyond tariff concessions and encompasses other areas of cooperation to foster regional integration among its members. For example, a single document covering several processing stages and border crossings will suffice to prove the origin of goods. Documentation of data accompanying the trade will be able to occur centrally, in RCEP member countries. The combination of reduced tariffs, facilitated cross-border trade and standardised rules of origin will trigger a re-organisation of supply chains. It will strengthens economic integration and the benefits that may come with it, such as foreign direct investment, technology sharing, structural transformations, among others.

With the signing of the RCEP, the announcement of the EU-China Comprehensive Agreement on Investment (CAI) on 30 December, and the prospects of enlarging the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), trade policy with and within Asia is gathering speed. In the greater East Asia region, consisting of Japan, South Korea, China and the Association of Southeast Asian nations (ASEAN), economic integration via trade, investment, supply chains and digital connectivity will accelerate. In contrast, regions that remain on the outside – i.e. North America, Europe and India – surely fear that trade flows will be diverted. UNCTAD study report fear the possible bad impact on trade of Bangladesh as well.

India opted to stay out of RECP due to their fear of Chinese dominate role in RCEP. RECP will become a new centre of gravity for global trade with China in the centre point of the block. One the China is major supply source of raw materials to Bangladesh. The economic and trade perspective is different for Bangladesh and India. An USA based weekly newspaper THE DIPLOMAT article opined (author was a Bangladeshi) on November 05, 2021 that “Bangladesh expressed interest in joining the mega partnership. But with India pulling out, critics are now questioning whether Dhaka acted prudently by showing interest in the grouping”.

Whatever be the regional politics, Bangladesh is in a global value chain (GVC) with upstream supply from China and the emerging export market is China, Japan Korea and ASEAN countries. By joining RECP, Bangladesh may gain most from regional market. For GVCs, low trade barriers between participating countries are particularly important because products cross country borders multiple times – with high barriers, high costs accumulate, and this type of production becomes unprofitable. Therefore, with the emergence of GVCs in Asia, RCEP members have had great incentives to liberalise trade policy.

Bangladesh authority is still undecided about FTA with major trade partners. Md Abdus Samad Al Azad, Joint Secretary (FTA-2) of Commerce Ministry told a daily newspaper that the ministry was studying the merits and demerits of the RCEP agreement and prospects of Bangladesh’s joining with trade pact. Due to FTAs throughout the world, Bangladesh is alone and in a similar situation like falling in the ocean from a ship but preparing to study feasibility of swimming!

Bangladesh has one best option to join the RCEP that will facilitate to regain the lost opportunities of FTA with many countries like ASEAN, China, Japan, Australia etc. Alternately, it may pursue these countries for bilateral FTA with is time consuming. These countries now may not agree to negotiate bilateral agreement. For instance, Japan was willing for FTA with Bangladesh but now not very keen as in a recent interview; the Japanese Ambassador in Bangladesh observed that Japan might negotiate FTA with Bangladesh if Japanese businesspersons ask for any FTA. Other countries also may not now waste their time to negotiate FTA with Bangladesh as they are in process finalizing trade partnership with multipole bilateral and regional FTAs. Does Bangladesh have any other option except joining a trade block like RCEP?

The writer is a legal economist He can be contacted at mssiddiqui2035@gmail.com