By Saheli Wickramanayake
In May 2023, Wickremesinghe stressed the importance of Sri Lanka’s integration into international trade during the ‘Nikkei Forum: Future of Asia’ event in Tokyo and emphasized that the centrality of the global economy is shifting to Asia. In this respect, he noted that “Sri Lanka would look to join RCEP”. Consequently, in July 2023, Foreign Minister Ali Sabry said that Sri Lanka had sent a letter of intent to join the Regional Comprehensive Economic Partnership (RCEP). Accession to RCEP would be a strong step forward for Sri Lanka as it seeks to recover and rebuild from the economic crisis. In this blog post, I will explain what RCEP is and how Sri Lanka can benefit from its accession.
What is RCEP?
RCEP is the biggest Free Trade Agreement (FTA) in the world, given that the total GDP of its 15 signatories is around $38,813 billion, which is 30% of the global GDP. In the words of UNCTAD, it “is set to become a new centre of gravity for global trade.” Among the signatories of RCEP is a mix of developing and developed countries. This includes 10 members of ASEAN (including Malaysia, Singapore, and Thailand) and 5 countries in the Asia-Pacific region – Australia, China, Japan, South Korea, and New Zealand.
Figure 1: Signatories of RCEP
The establishment of RCEP was long awaited. Although the FTA was conceptualized in 2012, it took 8 years for the member states to negotiate, until finally, on the 15th of November 2020, it was signed. Part of the reason for this was that since the members included both developing and developed countries, the members had to account for the differing levels of development. India, who was an original negotiating member, opted out of RCEP in 2019. Should India decide to join, it would enjoy a fast-track procedure of accession. However, this does not seem likely, given the country’s ongoing dispute with China.
An important point to note is that RCEP overlaps with another major trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in terms of subject matter and members. CPTPP is larger in scope and is considered to push for deeper liberalisation. Still, RCEP covers several areas of trade and investment, with chapters on trade in goods, trade in services, trade facilitation, trade remedies, e-commerce, competition, and more. Notably, it does not cover state-owned enterprises, labour, or the environment (which the CPTPP does). This is likely due to China’s central role in negotiations.
Central to RCEP is the reduction in tariffs. RCEP aims to reduce 90% of tariffs between members over a period of 20 years. It, however, does contain some exceptions for sensitive sectors. The reduction in tariffs is set to boost trade within the bloc and is central to why this agreement can benefit Sri Lanka – as the next section will examine.
How can Sri Lanka benefit from RCEP?
Lowered tariffs will make it easier for Sri Lankan exports to compete internationally. For example, Sri Lanka’s garment industry stands to gain from RCEP. The following table shows the current rate of tariffs imposed by RCEP member countries on Sri Lankan exports of brassieres, which is Sri Lanka’s largest textile export. Sri Lanka is the third largest exporter of brassieres, China and Vietnam are first and second respectively. China and Vietnam are both parties to RCEP.
|Tariff for Sri Lanka
|Trade Value with SL*
|Tariff under RCEP**
|Trade Value with Vietnam*
|Trade Value with China*
*values in 1000USD
**as per their individual Schedules of Commitment, the phasing out of the tariff will occur either immediately or gradually.
(All data taken from the World Integrated Trade Solution by the World Bank)
It should be noted that as per the World Bank, Sri Lanka has a revealed comparative advantage (RCA) of 12.29 in textiles, while the RCA of Vietnam is 2.81 and China is 2.28. A higher RCA means a higher export strength. These indices do not account for national policies such as tariffs. Simply put, Sri Lankan textile exports could be more competitive internationally, and RCEP will help do so by giving our exporters access to markets at lower/zero tariffs.
One notable aspect of RCEP, that sets it apart from other trading schemes which Sri Lanka enjoys, is the laxer rules of origin. Rules of Origin determine what country a good was made. This is important when claiming preferential treatment, especially as Sri Lanka imports most raw materials for the textile industry. For instance, if a Sri Lankan producer imports cloth from China and makes a t-shirt, the Rules of Origin determine whether the good can be considered ‘Sri Lankan’ when exported to a third country.
Many textile producers cannot claim GSP+ because their products do not meet the sufficient level of ‘transformation stages’ to be claimed as originating from Sri Lanka. Too much of the final product is made outside of Sri Lanka to be claimed as Sri Lankan. Under RCEP, however, these rules are far more relaxed. This means that it is easier for Sri Lankan products, including textiles, to claim preferential treatment, even if the raw materials are imported from a non-RCEP country.
China plus one policy
Linked to the benefits of the relaxed Rules of Origin is the potential for Sri Lanka to benefit from the so-called China plus one policy. Because of the US-China trade war, the Covid-19 pandemic, and the labour demographics of China, many multinational firms are looking to reduce their dependency on the country by pursuing supply chain diversification. While maintaining some level of operations in China, they also set up secondary production bases elsewhere. Countries like Vietnam and Thailand have already benefited from this. RCEP is set to intensify this, by simplifying the process and allowing a producer to use a single certificate of origin when selling in the region. Value chain cooperation is something China and Sri Lanka already discussed in 2020. Accession to RCEP could act as further incentive for manufacturers to shift outside of China and towards Sri Lanka. Moreover, Sri Lanka’s competitors being part of RCEP (or indicating their intention to join) means that we could lose out by not joining ourselves.
Conclusion and way forward
Sri Lanka cannot simply state their intentions of acceding to RCEP and benefit from it. Based on past experiences, political backlash is likely. It is important that decisions on joining and the commitments we make are based on sound policy, and not political rhetoric. The process of accession will take time. Moreover, implementation will require Sri Lanka to make (much needed) changes. For instance, RCEP includes strong trade-facilitation measures, such as releasing perishable goods within six hours, and enhanced transparency in import licensing. Sri Lanka has so far been unable to even meet its (reduced) commitments under the WTO Trade Facilitation Agreement. To meet the requirements of RCEP will be even more challenging.
Yet, Sri Lanka cannot afford to fall further behind in international trade. Many countries in the region (including Hong Kong and Bangladesh) have taken steps to join RCEP. As the WTO remains in a crisis, some argue that the future of international trade lies in plurilateral agreements like RCEP and CPTPP. Accession to RCEP could be an important step for Sri Lanka in being part of that future, and using trade to bring about development that is enjoyed by all.
The views and opinions expressed in articles submitted to the Comparative Advantage Blog are those of the author and do not necessarily reflect the views of The Moot Court Bench.