By Faisal Ahmed
With the United Kingdom reaching an agreement to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), mega-regionalism is back in the discourse. Interestingly, the U.K. is neither an Asia-Pacific Economic Cooperation (APEC) country, nor a founding negotiating member of the agreement, nor one that shares the Pacific. This solicits at least three critical observations: (a) mega-regional trade agreements (MRTAs) are blurring regional geographical boundaries; (b) MRTAs are flexible in seeking commitments and are potentially trade-creating; and, (c) MRTAs bring together those willing to embrace multilateral rule-making, albeit considering few exceptions to their domestic compulsions.
The geopolitical competition between MRTAs began to receive much attention in policy and academic discourse in 2012 with the beginning of China-led negotiations to form a 16-member Regional Comprehensive Economic Partnership (RCEP). RCEP was apparently positioned in response to President Barack Obama’s Trans-Pacific Partnership (TPP), an Asia-Pacific congregation that excluded China — a geographically-eligible APEC country. TPP was signed in 2016, but not ratified. In 2017, however, President Donald Trump pulled out of the TPP, and the middle-income member economies saw their dreams of improved market access being compromised. Japan then took the lead to move this congregation without the United States, albeit with the hope that America would be back to the CPTPP soon. The CPTPP was signed in March 2018, but since his inauguration, President Joe Biden has not shown any possibility of re-joining it. Also, RCEP was signed in November 2020 as a 15-member congregation as India pulled out of the negotiations in 2019.
In fact, CPTPP constitutes 12 percent of global gross domestic product (GDP), whereas RCEP — being larger — constitutes around 30 percent of global output. Considering the overlapping membership between the two MRTAs e.g., countries like Australia, Japan and Vietnam, etc., which are part of both, the combined GDP of CPTPP and RCEP accounts for approximately $36 trillion, which is close to 38 percent of the world GDP. With such huge potential for trade and investments, MRTAs offer sufficient scope for global competitiveness, region-building and economic resilience. Low and middle-income economies must strive to negotiate an entry into any of the two MRTAs depending upon their economic needs and the geo-economic possibilities that an MRTA might offer. This will enhance their preparedness to embrace and adapt to a rule-based multilateral trading system. Here’s how MRTAs would benefit them.
First, both CPTPP and RCEP offer enhanced market access for member economies. Once fully implemented, almost 99 percent of the tariff lines will be duty-free within CPTPP (12 economies including the UK), while for RCEP (15 economies) it would be close to 90 percent. With more and more economies seeking to create trade for themselves, MRTAs will potentially prove to be a good bet.
Second, the MRTAs have the potential to ensure maximum commitment, build common positions and consequently set the rules of the game. Definitely, such rule-making efforts emanate from a cohesive understanding of multilateralism. It is acceptable to the many participating countries, albeit without compromising their own geo-economic interests. Low and middle-income economies in Asia and Africa who may express their intent to join any of the MRTA and complete the accession formalities will immensely benefit in terms of market access and trade creation. This will especially be a win-win situation for landlocked countries like Kazakhstan, or the small island countries of the Indian Ocean or the South Pacific.
Third, whether it is rule-making for trade in goods or services, or intellectual property (IP) protection and investment liberalization, MRTAs are comprehensive in nature and geographically inclusive in approach, while also allowing flexibility to accommodate non-conforming measures e.g., those related to investments. For instance, as per the CPTPP text, the clauses of National Treatment, and Most-Favored-Nation Treatment envisaged under Article 9 shall not be applicable to any existing non-conforming measure maintained by a member country. Thus, low and middle-income economies will get immense flexibility if they prefer to join an MRTA.
Fourth, MRTAs are structurally and legally sound in connecting the dots for supply chain resilience within the region and beyond. For instance, many Southeast Asian economies have been able to keep their supply chains working and maintain resilience despite the Western narrative of China plus one that sought to shift their supply chains out of China. Neither China plus one could fulfill its core mandate of reducing dependence on China, nor did countries like Japan and Australia abstain from entering into the RCEP alongside China, when it was signed in November 2020. Finally, it is China that mended the supply chains, and helped countries to traverse a path of economic recovery. And with China already in the RCEP, and an applicant to the CPTPP, the member countries are likely to experience a robust supply chain.
Fifth, MRTAs will help develop multiple production centers that can contribute to the domestic output of the respective countries and help reduce supply-side constraints. They are destined to contribute to trade facilitation, reduce trade costs and support trade creation within the congregation. Countries can enrich their manufacturing capabilities and enhance their participation in global value chains. Being in an MRTA would strengthen their small and medium enterprises and channel their production linkages in the region and beyond.
Faisal Ahmed is a professor of international business at FORE School of Management, New Delhi, India.