Trade and investment implications of the RCEP for Pakistan
On November 15, 2020, 15 countries in the Asia Pacific region signed the Regional Comprehensive Economic Partnership (RCEP). The RCEP is the world’s largest free trade agreement (FTA), representing one-third of the global population and around 30 percent of the global GDP. The RCEP countries collectively account for over 27 per cent of global merchandise trade, 18 percent of services trade and 19 percent of foreign direct investment (FDI) outflows. The trade deal could help revive post-pandemic economic growth, boost global FDI and provide a framework for further regional cooperation at a time of trade tensions worldwide. It looks like that the “workshop Asia” that sprang up after the voyages of Ibn Batuta, Christopher Columbus and Vasco da Gama but temporarily shifted to Europe and America, is returning to its previous glory.
Pakistan, along with several other countries in the region, has not yet become part of the RCEP. Standing alone may not be a feasible option as the trade deal could have significant repercussions for the national economy. On the other hand, joining the RCEP would increase the competitiveness of Pakistan’s firms in these markets and open numerous opportunities for diversification of trade and investment flows.
RCEP countries are important export markets as well as a key source of essential imports for Pakistan. In 2019, Pakistan exported goods worth $4billion to RCEP countries. Among these, major export items were textiles and clothing (40 percent) followed by agricultural produce (28 percent) comprising fruit and vegetables and animal products. In the same period, the value of Pakistan’s imports from the RCEP signatories totaled $21bn, among which the major import items were machinery and electronics (35 percent), followed by chemicals (14 percent), metals 11 (percent) and transport equipment 9 (percent) in that order. Overall, 16 percent of Pakistan’s exports are absorbed by RCEP members while the country sources around 41 percent of its imports from these countries. Pakistan’s exports to and imports from RCEP countries were on a rising trajectory until 2015 but have stagnated in recent years. Joining RCEP would help revive Pakistan’s trade with its members. At present around 50 percent of Pakistan’s trade (both exports and imports) with this regional bloc is oriented toward China, reflecting a sizeable untapped potential in other RCEP markets, particularly Australia, Japan, Indonesia and Thailand.
Pakistan has historically relied on the United States and European Union markets for its exports. However, these regions are still struggling to bring the Covid-19 pandemic under control and thus experience a deep recession in the medium term. By contrast, the RCEP countries were relatively more effective in controlling the spread of coronavirus and, as a result, could experience a sharp economic rebound next year. This could boost demand for Pakistan’s exports in the near future, especially when demand for textiles and clothing has slumped in Europe and America.
To revive its economy from the ravages of Covid-19 and sustain economic growth, Pakistan needs to strengthen its economic linkages with the fast-growing economies of the Asia-Pacific region.
The new mega Asia-Pacific trade bloc has the potential to help fuel investment in the wake of the Covid-19 crisis. The RCEP countries are large investors in greenfield FDI projects in Pakistan. Between 2010 and 2019 they invested $21 billion in 96 projects creating more than 28,000 jobs, largely in the communication, automotive and renewable energy sectors. Around 95 percent of this investment originated from China, Japan and South Korea, suggesting that there might be significant potential to attract untapped investment from other RCEP countries.
As a developing country, this kind of agreement is easy to enforce by Pakistan. It does not require immediate steps to completely liberalise the economy and protect labour rights, environmental standards and intellectual property. Tariffs in RCEP countries are already very low, and the remaining tariff reductions have a long transition period, up to two decades in some cases. The second main strength of RECP is the harmonisation of Rules of Origin (ROO) in existing FTAs between member economies, which effectively creates a single market for intermediate goods. This single set of ROO, as well as simple regional content rules, should boost trade in intermediate products, leading to further integration and diversification of regional supply chains. Participation in this mega-regional deal would enable Pakistan to diversify and integrate its global value chains (GVCs). As China is moving up the GVC ladder, it leaves the space for countries like Pakistan and Vietnam to operate at the assembly/manufacturing stage.
Moreover, joining RCEP would increase Pakistan’s access to Western markets due to several FTAs between RCEP countries and those economies. Seven of the 11 CPTPP members are signatories of RCEP: Australia, Brunei Darussalam, Japan, Malaysia, New Zealand, Singapore and Vietnam. The US has not been deliberately excluded from the RCEP, and incoming President Biden has hinted that he is open to joining the CPTPP. Hence, Pakistan’s entry into the RCEP could act as a channel to expand market access to several developed countries that currently do not have a direct FTA with Pakistan.
India was part of the RCEP negotiations until 2019 but dropped out at the last moment due to fears of a widening bilateral trade deficit with China, disagreement over the selection of the base year for tariff reductions, and a lack of progress on services trade. The agreement, however, allows for new members to join within 18 months of its coming into effect (it is expected to come into force by the end of 2021). Pakistan needs to consider its position with respect to RCEP owing to its robust trade and investment linkages with RCEP countries, its massive potential for trade creation, and scope it offers to more effectively exploit the capacity of the China-Pakistan Economic Corridor (CPEC). Moreover, to revive its economy from the ravages of Covid- -19 and sustain economic growth, Pakistan needs to strengthen its economic linkages with the fast-growing economies of the Asia-Pacific region. The RCEP could provide a pathway to doing so by dismantling barriers to trade and investment while facilitating the sourcing of inputs, services and investment from the fastest growing economies and putting Pakistan’s economy on a high-growth trajectory.
The author is a professional trade economist. Detailed data on Pakistan’s trade with RCEP members can be seen in the online version