New free trade agreement to elevate regional cooperation

Tiếng Việt

New free trade agreement to elevate regional cooperation

Vietnam can look forward to the new Regional Comprehensive Economic Partnership (RCEP), which will act as a bridge between the Southeast Asian region and its most powerful neighbours, according to Dr John Walsh from RMIT University.

Signed on 15 November 2020, the RCEP will unite more than 2.2 billion people and nearly 30% of the world’s GDP. The scale of the agreement would have been even bigger if India had not withdrawn from negotiations at a late stage, leaving 10 ASEAN nations, including China, Japan, South Korea, Australia and New Zealand as the signatories.

Notably, this is the first such agreement to include the often-discordant nations of South Korea, Japan and China. In terms of geopolitics, the RCEP's expected contribution to maintaining peaceful relations in Vietnam’s East Sea is much to be welcomed.

However, the agreement will offer more than that. It will join the Southeast Asian region with its most powerful and influential neighbours. It will provide a free trade agreement (FTA) that includes not just agricultural products, manufactured and assembled items, but also services and the thorny issue of e-commerce. Negotiating such an agreement is complex and it is not surprising that it took eight years to complete.

The RCEP will continue the work of the ASEAN FTAs already in existence and extend the most favoured nation (MFN) concept across the 15 states. The MFN concept will be the basis of negotiation championed by the World Trade Organization, and it means that no country can offer another country a deal that is in any way worse than what it has already agreed upon with another country.

Trade effects will be predictable; those goods and services which can compete internationally will be able to bring more prosperity and employment. However, those which cannot compete will be forced either to improve or to move out of the market. There will be winners and losers and the role of governments will be to care for the losers.

China's involvement

Many people are concerned that this agreement is simply another means by which China is seeking to dominate the region. Although it is true that China will probably benefit more than the other countries in absolute terms, in relative terms countries such as Vietnam will in fact benefit more.

Agreements like the RCEP are win-win in nature but that does not mean that all partners will benefit to the same extent. Countries will benefit in areas in which they are strong, but may lose out in other areas. Making exceptions and exemptions to protect countries in the latter cases helps explain why negotiating agreements takes so long in the first place.

Is China masterminding the whole process? This is not the case – the RCEP builds upon the existing agreements that ASEAN has already made and extends them geographically. If anything, China is acceding to the ways in which its southern neighbours have already structured their trading and investment patterns.

More Chinese investment can certainly be expected in Vietnam because of the RCEP, but the same is true of investment from the other signatories. Concurrently, Vietnamese corporations can follow in the wake of pathfinders such as Viettel and Vinamilk in carrying the Vietnamese flag in foreign markets.

Further, reduction of internal barriers and tariffs within the RCEP will boost cross-border movements of complex goods and enhance the viability of regional value chains that might see different stages of production of a single item take place in Vietnam, Thailand and Cambodia.

India's reluctance

If the agreement is so good, then why has India backed out from it? The Indian government claimed that a number of items remained so problematic that it had no choice but to withdraw from negotiations. These included concerns about protection for Indian agriculture, the possibility of some goods being rerouted or given a false badge of origin, and intensification of tensions with China in the mountainous border area between the two countries.

There may be some substance to these concerns, and all countries involved in the RCEP have shared similar concerns at some point. However, they managed to find a way to resolve the issues and come to an agreement.

What is different in India is that its Prime Minister Narendra Modi has been taking a leaf out of US President Donald Trump’s playbook and promoting economic nationalism while denigrating international agreements and alliances. Once President Trump steps off the world stage, it is likely that Prime Minister Modi and his advisors will think again and find a way to rejoin talks.

The same is likely to be true of the United States under the next administration, which is likely to make it a policy priority to rebuild confidence in the US reputation and competence in Asia as well as around the world. New talks are to be expected to increase the scope and coverage of trade and investment agreements in the next year or two.

The future ahead

The RCEP will strengthen existing arrangements but does not signal a revolutionary change in itself. Existing trends will be strengthened, and incremental improvements in imports and exports are expected. Arrangements to promote e-commerce and investment will help to improve the digitalisation of Vietnam’s economy and the movement to the cashless society will be accelerated.

It is hoped that Vietnam’s private sector will also respond to the changes by intensifying institutions’ own movement towards digitalisation, so that benefits can be enjoyed by both citizens and organisations.

For local companies looking to do business abroad, it is important to conduct research to understand what opportunities are available and how they can be approached. At home, small firms should consider how they can better cooperate with inward investing firms and provide goods and services at the level of quality and consistency required. Forming partnerships and networks with other forward-looking firms might help in this regard.

Story: Dr John Walsh

About the author

Dr John Walsh is International Business Senior Program Manager from RMIT’s School of Business & Management in Vietnam. In addition to the UK, Dr Walsh has lived and worked in Sudan, Greece, Korea, Australia, United Arab Emirates and Thailand, before moving to Vietnam in October 2018. He has conducted research and is widely published on a range of international business subjects, particularly those that relate to the Greater Mekong Subregion. He received his doctorate from Oxford University for a thesis on international management in Northeast Asia.

Business and management

02 December 2020