SAARC, RCEP and free trade

* This is my article in Business 360 magazine in Kathmandu, Nepal, December 2015 issue.

Nov2015

SAARC, RCEP and free trade

Free trade is beautiful. A seller decides the price that he/she thinks will optimize the sale of goods and/or services. A buyer comes and if he/she thinks the price is commensurate to the quality, he/she gets it, or walks away to find another seller who will give him/her good value for money. Things happen voluntarily, little or no coercion involved. Trade can happen only if it benefits both parties and hence, public welfare is served.

Elevate the scene at the international or  global level and the same principle happens. Trade can happen only if it benefits both the sellers and consumers overall. Otherwise, there  is temporary “market failure” where supply does not need demand or vice versa, until market solution involving new pricing and product/service quality comes in.

Free trade negotiations at the World Trade Organization (WTO) keep dragging into minor and not-so-significant changes despite years of talks, meetings and what some people say as frequent “junkets”. Thus, bilateral and regional talks and free trade agreements (FTAs) and economic partnership agreements (EPAs) arose.

These FTAs and EPAs are not exactly “free trade” deals because there are still so many preconditions and protectionist measures involved. With human and economic  evolution through time, member-countries of such FTAs are moving towards real free trade in  the future.

One such regional FTA is the South Asian Association for Regional Cooperation (SAARC) composed of eight countries – Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Potential members in the future are China, Myanmar, plus other observers: Iran, Japan, Mauritius, S. Korea, Australia, EU, US.

SAARC was formed to promote peace, stability, progress and economic cooperation in the region. Among the mechanisms to attain this goal is the establishment of the South Asia Free Trade Area (SAFTA) where traded goods among member-countries will have zero customs duties by 2016.

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The 5th column, exports expansion over the past 14 years, is not part of the ADB report and is added only in this paper.

There is a huge disparity in trade performance in the association as two countries have expanded their exports more than six times (6x) while four countries were still unable to  export more than $1 billion in 2014.

Another regional trade agreement is the ASEAN FTA (AFTA) composed of the 10 member-states of the Association of South East Asia Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

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The creation of the ASEAN Economic Community (AEC) by end-December 2015, zero export duties among member-states, will be a huge market market of around 620+ million people, slightly higher than the combined population of the US + EU.

A bigger FTA is the Regional Comprehensive Economic Partnership (RCEP) composed of all ASEAN countries + 6 partner economies: China, Japan, S. Korea, India, Australia and New Zealand.

Table 3. Merchandise exports of the 6 ASEAN partners in RCEP, in $ Billion

2000 2005 2010 2014 Expansion, 2000-2014
China 249.20 761.95 1,577.75 2,342.75 9.4x
Japan 479.32 595.70 767.82 689.92 1.4x
S. Korea 172.27 284.42 466.38 572.66 3.3x
India 45.30 103.50 255.09 317.07 7.0x
Australia 63.98 106.21 212.03 239.74 3.7x
New Zealand 13.29 21.70 31.36 39.43 # 3.0x
* Hong Kong 201.86 289.32 390.13 473.65 2.3x
* Taiwan 151.46 198.17 273.59 312.50 2.1x

# New Zealand, 2013 data

RCEP is looking at a semi-FTA among the 16 countries by 2015.

It may sound ironic that socialist governments in China and Vietnam were able to maximize their integration with global capitalism that they experienced exports expansion of 10x and 9x respectively, in just 14 years.
Some national laws and taxes like gross sales tax (GST) or value added tax (VAT) can distort a free trade policy. For instance in the Philippines, while most imported goods are levied with zero to three percent import duties, they are slapped with 12 percent VAT and that immediately raises the price of previously cheap imports. Lots of oil smuggling in the country for instance, is done not so much to avoid the one or three percent import duties for oil products, but to avoid the 12 percent VAT.

Asian people may consider the policy of unilateral trade liberalization over the long-term. Trade with no political preconditions, no prolonged trade negotiations and disputes. Such policy has been practiced by some dynamic economies like Hong Kong and Singapore.

All goods are allowed at zero tariff, except for a few regulated items like guns, bombs, poisonous substances, fake medicines, disease-tainted meat products, and so on.

We are far from that ideal trade policy, so we have to live with the reality of continued intervention by governments in trade like SAFTA, AFTA  and RCEP. These trade alliances are better than economic nationalism and protectionism.

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