With the Regional Comprehensive Economic Partnership (RCEP) Agreement set to enter into force on January 1, 2022, securing Senate concurrence to the ratification of the Agreement becomes more urgent for the Philippines.
Many economists and international organizations have already expressed views on the value and importance of the RCEP Agreement to the Philippines and to the region.
According to one economist, Dr. Francis Quimba, of the Philippine Institute for Development Studies (PIDS), non-participation to RCEP will cause the Philippines to miss out on this opportunity to facilitate the much-needed economic growth and recovery.
Quimba stressed that delayed or non-participation to RCEP would lead to a 0.26% decline in real GDP of the Philippines.
“The Philippines and Vietnam are among the countries that have positive export growths once the RCEP is in effect.”
“Economies that fail to ratify the agreement (when the rest of the countries do) will be adversely affected. The Philippines and Vietnam are among the countries that have positive export growth once the RCEP is in effect, and much of the growth is coming from new-product margin where innovations stem,” he said.
Initial estimates by Quimba show that while East Asian countries stand to benefit the most in terms of increase in exports as RCEP will be the first FTA among the three, the Philippines and Viet Nam will gain the most in terms of real GDP due to lower trade costs and higher factory gate prices.
On the same vein, a study conducted by Dr. Caesar Cororaton, a Research Fellow at the Virginia Polytechnic Institute and State University (USA) and a Visiting Scholar at the De La Salle University (DLSU), noted that the RCEP is estimated to improve the country’s trade balance by as much as $128.2M, increase overall welfare by $541.2M, contribute to a 1.93% real GDP growth, and lower poverty incidence by 3.62% in 2031.
In the study released by the Asian Development Bank (ADB), it recognized that RCEP has a strong potential to mold regional trade and investment patterns well into the future and to influence the direction of global economic cooperation at a challenging time.
RCEP effects on the region’s trade will also significantly deepen regional production networks and raise productivity. At the sectoral level, exports and imports of nondurable and durable manufactures will experience the most growth.
Some stakeholders, however, pointed out that the study by the ADB indicates marginal gains for the Philippines, with the country only seeing an incremental increase in real income of $3 Billion by 2030 (or 0.39% growth) compared to other RPCs such as China, Japan, and Korea.
On this point, DTI Secretary Ramon Lopez explained that it is understandable that east Asian countries see the largest increase in incomes as this will be the first time that these three countries will have an FTA among each other.
“Prior to RCEP, there had been no FTA between China, Japan, and Korea which means there is no pre-existing preferential treatment on traded goods among them, and MFN rates are applied. The same can also be said with trade in services and investment where these countries do not accord special treatment to services and investments coming from the other two countries,” Lopez explained.
It must be stressed, however, that an increase in income or percentage of growth rate must always be viewed in proper context taking into account the size of the economy, levels of development, and extent of economic activities.
“While the ADB study cited in the article states that the Philippines will see a small incremental increase in real income valued at only $3B by 2030, again this must be viewed in proper context. Note that Singapore has zero incremental income in the study with a growth rate of 0.05%; Brunei has 0.46% change in income but it has zero incremental income; Indonesia has 0.18% change in income yet it has $4B incremental income; and Vietnam has 0.97% change in income yet it has only $4B incremental income,” the trade chief added.
On the same vein, in the recent study released by UNCTAD, it also recognized that the “large potential of the RCEP agreement in creating trade for the member economies also implies that even for members that may initially negatively affected by trade diversion effects, it is better to be in than out the RCEP agreement. Not only because being part of the deal creates additional trade that may offset the losses, but because it strengthens economic integration and the benefits that may come with it, such as foreign direct investment, technology sharing, structural transformations, among others”.
DTI Assistant Secretary Allan Gepty, the Philippines’ lead negotiator for the RCEP Agreement, also explained that while the assumptions and estimates on the benefits of RCEP to the Philippines vary, studies consistently show that the Philippines will indeed benefit from the RCEP Agreement.
“Figures may be higher or lower depending on the assumptions and models used, but an improvement in real GDP, no matter how small, is always a welcome development.”
“Figures may be higher or lower depending on the assumptions and models used, but an improvement in real GDP, no matter how small, is always a welcome development, especially as we seek to reverse the economic slump we’ve experienced due to the pandemic,” Gepty said.
During the conduct of public hearings by the Senate Committee on Foreign Relations (CRF), questions were raised by stakeholders on the impact of the RCEP Agreement to the Philippine economy, particularly in the context of economic slowdown due to the pandemic, and the worsening trade balance of the Philippines.
Stakeholders also had concerns that the tariff liberalization that came with the RCEP Agreement would cripple the country’s ability to address the COVID-19 pandemic due to lower tariff revenues, and force local industries out of business with cheaper imported goods.
The primary basis for these concerns is the study by Banga et al., published by the Boston University which shows that tariff liberalization under RCEP will negatively impact the balance of trade (BOT) of ASEAN countries.
The balance of trade (BOT) of the region will deteriorate by 6% annually primarily due to increase in imports and trade diversion within the RCEP group towards more efficient exporters.
For the Philippines, the study finds that exports are estimated to decrease by 0.2% while imports will increase by 0.2%, causing a decrease in the country’s trade balance by 1.1%.
While the figures presented by Banga et al. indicate a negative outcome for ASEAN’s trade balance post-RCEP, it should be noted that the model used in the study is limited in scope as the same only takes into consideration changes in tariff rates and excludes other factors that may affect the country’s trade performance.
Economic models often give leeway to create certain assumptions, but the RCEP Agreement goes beyond tariff reduction and includes provisions intended to reduce non-tariff measures and facilitate investments in the region, among others.
As opposed to the model used by Banga et al., other economic studies take into consideration other variables and inter-market linkages which allow them to provide more realistic and sophisticated estimations.
The RCEP Agreement will enter-into-force on 1 January 2022 for six (6) ASEAN Member States, Brunei Darussalam, Cambodia, Lao PDR, Singapore, Thailand, and Vietnam, and the five (5) ASEAN trading partners namely Australia, China, Japan, Korea, and New Zealand.
The Agreement will enter-into-force for the remaining Signatory States 60 days after the deposit of their instrument of ratification or approval.
