RESTORING CONFIDENCE IN TRADE

After some delays due to the outbreak of Covid-19, the WTO’s 12th Ministerial Conference (MC12) was held from 12 to 17 June 2022 at WTO headquarters in Geneva. Ministers of member states across the world attended the MC12 to review the functioning of the multilateral trading system, make general statements and take action on the future work of the WTO.

The outcome of the MC12—dubbed as “Geneva package”— includes a set of WTO responses to emergency situations concerning food supply, Covid-19 and future pandemics, and a decision on the Agreement on Trade-Related Aspects of IPRs. In addition, Ministers adopted an Agreement on Fisheries Subsidies. Perhaps this Agreement can be considered as the most significant outcome of the MC12, albeit there are no market access commitments made under the Agreement but, rather, some disciplines to prohibit support for illegal, unreported and unregulated fishing.

Such an outcome does not amount to the magnitude of challenges facing global trade in the last three to four years. We witnessed how a combination of prolonged impacts of a trade war between China and the US, China’s “zero Covid” policy and later Russia’s invasion of Ukraine wreak havoc on global supply chains. Some believe that this situation may pave the way for a redistribution of global manufacturing production as the business sees the need to be sovereign and independent from an industrial point of view. But a recent development in the global economy may not allow it to happen anytime soon. How, then, could businesses regain confidence in trade while the trust deficit continues to linger even amongst close trading partners?

Regional Value Chains

While multilateral trading platforms continue to experience contractions due to multiple issues, and bilateral engagements offer limited potential, perhaps regional economic platforms could provide some rooms for like-minded countries to rebuild confidence in trade on a larger scale. For the short term, it is likely that businesses will need continued support from the government to recover from unprecedented impacts brought about by major disruptions in national, regional and global value chains. However, depending heavily on government support for a longer period will only run the risk of reinvigorating mercantilism: greater role of SOEs, more contribution of government procurement to GDP, more rigid approach to the policy-making process resulting in more restrictions and control at home, and stiffer views toward international cooperation on trade and investment.

It is believed that in longer terms, businesses should better capitalize on trade agreements to which Indonesia is a party. One of such trade agreements which offer significant benefits compared to bilateral trade agreements or existing regional trade agreements is the Regional Comprehensive Economic Partnership or RCEP. Conceptualized by Indonesia in 2011 before the negotiation was launched in November 2012, RCEP is a regional FTA between 10 ASEAN member states and five ASEAN trading partners in the region. Figure-1 suggests that RCEP is the largest regional economic integration platform built upon the existing ASEAN+1 FTAs. Even if we exclude India, which decided to leave the negotiating table in November 2019, RCEP’s shares of world GDP, trade, FDI inflow and market are something that businesses should not miss to observe.

Source: ASEAN Secretariat based on IMF, UNCTAD and WB data, late 2019

Concern was raised at the time of negotiation and as the Agreement went through the ratification process that Indonesia’s tariff commitments under the RCEP Agreement pose a greater threat than those agreed upon under the existing ASEAN+1 FTAs. This may hold only limited truth: if we include the ASEAN-India FTA in the calculation, the average percentage of Indonesia’s elimination commitments across all five ASEAN+1 FTAs is 83% (HS 6-digit). But if we exclude India from the equation, Indonesia’s average tariff commitment across four ASEAN+1 FTAs is 91.7%, while under the RCEP Agreement Indonesia’s commitments cover 91% of total tariff lines.

Further, Indonesia’s tariff elimination commitments in RCEP are put into four different timeframes: Entry into Force (EIF), EIF+10 years, EIF+15, and EIF+20. This suggests that Indonesia—like all other ASEAN developing countries and LDCs—have sometimes to prepare for the eventual elimination of tariffs on products deemed to be sensitive. On the other hand, RCEP offers more facilitative Rules of Origin: businesses would be required to have just one RCEP Certificate of Origin to export the same products to all other RCEP participating countries, thus overcoming the issue of “spaghetti-bowl effects.”

China as Partner

Regional value chains in East Asia have gone deeper and more extensive in recent years, and ASEAN and China are very much at the centre of this. China’s economy has witnessed steady growth, and its total gross fixed capital formation is now larger than the United States, Japan, and Germany combined. ASEAN, on the other hand, represents a market of 660 million with a combined GDP of about US$3 trillion. Most ASEAN countries have long been entwined with the global trading system and have trade-to-GDP ratios above global averages. With a per capita GDP of US$4,500, ASEAN could offer a much cheaper source of labor than China.

Interestingly, ASEAN’s export growth matched that of China. ASEAN’s exports grew by 21% between 2016 and 2020, from US$1.15 trillion to US$1.39 trillion, while China’s grew by 23% from US$2.1 trillion to US$2.59 trillion. Two observations can be observed. Firstly, ASEAN’s exports to China represent only 15% of total ASEAN’s exports to the world, but it grew 51% between 2016 and 2020 while exports to the rest of the world grew 16%. One may argue that ASEAN’s economic future will intertwine stronger with China’s.

Secondly, ASEAN’s imports from China grew 33% compared to imports from the rest of the world which grew by 13.8%, indicating that ASEAN is increasingly dependent on China for imports that feed into its exports. Therefore, any interruption on this would quickly feed through into trade with ASEAN if producers could not source key components from China.

Hence, RCEP Agreement offers some cushions with a higher degree of certainty, discipline and transparency among its participating countries so that interruption and disruption to trade with China— and with all other RCEP parties for that matter—can be minimized.

There are a couple of things that Indonesia may consider taking to fully benefit from RCEP. First, raising awareness of RCEP to as wide stakeholders as possible, including small-and-medium-sized enterprises, startups, women and young entrepreneurs, academicians, and others. This will help expand stakeholders’ focus from domestic to RCEP regional market. Second, facilitating business expansion to RCEP while intensifying the existing ones. This may include providing insightful information on market and investment opportunities, and industry/sector mapping of the RCEP market for businesses to consider entering or expanding. As the initiator of the RCEP and chair of an eight-year-long RCEP negotiation, Indonesia should ensure that RCEP benefits Indonesian businesses, domestically and regionally.

Author:

Iman Pambagyo

Iman Pambagyo is a Consultant for Trade Advisory in Bahar. He is an experienced lead trade negotiator for the Government of Indonesia with excellent understanding of ever-changing geopolitics and geo-economy at the bilateral, regional and global levels. He played a key role in raising Indonesia’s profile in bilateral, regional and multilateral/international fora. He is highly acknowledged by Leaders and Trade Ministers of 16 RCEP countries for leadership and perseverance in chairing the RCEP negotiation between 2013 and 2020.