RCEP impact on the Philippines

by Rey Gamboa (The Philippine Star), 17 Nov 2020

The big news on the sidelines of the closing session of the annual meeting of the 10-nation Association of Southeast Asian Nations (ASEAN) last Sunday was the virtual signing of the Regional Comprehensive Economic Partnership (RCEP), resulting in the creation of the largest free trade bloc in the world.

It’s considered a powerful trade alliance since the RCEF binds together the 10 member countries of ASEAN – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – with some of the biggest economies in the Austral-Asian region – China, Japan, Australia, South Korea, and New Zealand – in a single multilateral pact.

This trade agreement, however, has divided the world further. Conspicuously absent in this “feat” is the participation of the United States, which withdrew from many trade pacts when Donald Trump became president, and India, which feels that China’s growing dominance will not be in its best interest.

Even with a new US president in Joe Biden, the world’s largest economy is not expected to immediately open discussion on trade pacts with Asian countries, especially with China, which it still thinks has coerced US companies to forego intellectual property rights on many crucial technologies.

Still, RCEP will be good for the US, and even Europe. It is expected to initially generate close to $190 billion for the global economy by 2030, and would benefit close to 30 percent of the world’s population and reach 2.2 billion people. International trade economists project it would add 0.2 percent to the gross domestic product of participating members.

Re-examining trade agreements

RCEP comes at a time when many governments across the world are re-examining their strategies and approaches to free trade agreements. There is now a growing preference for agreements that involve a smaller number of countries, or even just bilateral agreements between two countries.

It also comes at a time in the global stage when the Trump government, during the last four years, had successfully brandished a return to protectionism with its America First sloganeering, which had been responsible for the review and withdrawals from many trade agreements where it felt disadvantaged.

The same is true for India, which has been realigning its free trade agreements according to the needs of specific countries and matching these with its own economic plans. For example, it favors trade with the US, which needs many products that it can supply in abundance, like mineral fuels, pharmaceuticals, organic chemicals, gems, and jewelry.

Sweeping multilateral trade agreements, like the RCEP, often gloss over the long-term impact on poorer developing countries. Especially vulnerable are its agriculture sector and the growth of its small and medium enterprises (SMEs).

Agriculture and SME concerns

For many ASEAN countries, RCEP means rising importations and declining exportations; these would exacerbate trade deficits, weaken fiscal positions, and extend poverty alleviation measures over a longer period. The pandemic certainly aggravates the situation.

Indonesian activists, for example, are concerned about land and water capture by large-scale investments, deforestation, and ecosystem degradation. They cite the potential for more land transfers from rural communities to foreign corporations.

Even some sectors in Malaysia are concerned that importations will severely affect its SMEs, which are already handicapped by the pandemic. The influx of cheaper consumer goods from other RCEP countries will ultimately destroy more SMEs.

Similar concerns are applicable for the Philippines. With drastic reductions in tariff on food products from other stronger ASEAN countries and China, our agriculture and SME sectors face the possibility of even more cheap imports.

Left behind

While the RCEP has yet to be ratified by the Philippine Senate, the government is already moving ahead in preparing for the eventual changes in tariffs, mostly for imported goods. The country has apparently become immune to the recurring warnings of increased threats to the agriculture and SME sectors.

In the last three decades, the Philippines through ASEAN has been party to trade agreements with Japan, some European countries, India, Australia, New Zealand, China, and South Korea. In most instances, this has just pushed the Philippines into increasingly becoming a net importer of goods and agricultural produce rather than a net exporter.

We have been left too far behind in building our own manufacturing facilities and thus being able to become a competitive exporter of manufactured products. This equally applies to agricultural products, where decades of neglect have reduced our capability to compete in world markets.

The Philippines’ biggest exports continue to be in electronics. However, these bring little additional value for the economy since most of the components are brought in from other countries, and assembled in export-only processing zones.

Focus on services

Our service sector remains the country’s competitive edge, not just with regards the export of human labor, but even in the locally-based business process outsourcing (BPO) sector.

Filipinos are amenable to receiving lower wages from jobs abroad, even if they are generally better qualified. This explains why we continue to remain competitive as a labor source in the US and Europe, especially for specialist positions.

Remittances of Filipinos from overseas jobs continue to bail out the negative effects of a country that is increasingly a net importer of goods and agricultural products. Such seems to be the working model for the Philippines, and hopefully, one that could serve as a transition program to that dream of becoming a developed economy.