12 January 2021

His Excellency Sim Sokheng, Secretary of State, Ministry of Commerce,

Distinguished Professor Su Hao, Director of Center Strategic and Peace Studies of China Foreign Affairs University,

Dr Leng Thearith, Director of the Mekong Center for Strategic Studies of AVI,

Dear Webinar Participants, Ladies and Gentlemen,

Good morning,

1.                  At the outset, I would like to express my sincere appreciation to the Mekong Center for Strategic Studies of the Asian Vision Institute (AVI) for organising this timely webinar on the “Regional Comprehensive Economic Partnership (RCEP) and Its Impacts on Cambodia”. I am pleased to have the opportunity to share my views on the important topic at a time when Cambodia and the East Asian region need to unlock fresh businesses opportunities, in light of the current global slowdown evidently exacerbated by the COVID-19 pandemic.

Professors, Ladies and Gentlemen,

2.         After eight years of intense negotiations, a historic event was achieved by ASEAN with their development partners from China, Japan, South Korea, Australia and New Zealand with the signing of the RCEP last November 15, 2020. Unlike the normal fanfares that typify major ASEAN or WTO events, or for that matter as spectacular as the accession of China in the WTO in 2001, an unusual virtual signing ceremony was held due the COVID-19 pandemic. It was an interesting sight to see head of state or head of government of RCEP countries standing behind their trade ministers taking turns signing copies of the agreement, and smiling to the cameras.

3.         Perhaps a short background on the origin of the RCEP is needed to set its proper historical context. In fact, it started a decade ago on August 2011 when the East Asia Summit Economic Ministers welcomed a Chinese and Japanese joint “Initiative on Speeding up the Establishment of EAFTA[1] and CEPEA[2]”. Subsequently, during the 19th ASEAN Summit held in November 2011, the concept of the RCEP was introduced. One year later further discussions were advanced in Siem Reap, Cambodia, at the 44th ASEAN Economic Ministers (AEM) culminating in the endorsement of the RCEP framework at the 21st ASEAN Summit in November 2012 in Phnom Penh. The ceremony to launch the RCEP negotiations was attended by Leaders of ASEAN countries and the six FTA Partners countries, namely China, Japan, the Republic of Korea, Australia, New Zealand and India. In May 2013, the first negotiation round was held in Brunei Darussalam.

Ladies and Gentlemen,

4.         The formation of any FTA is a lengthy process, and the RCEP is no exception. It has taken eight years, 46 negotiating meetings and 19 ministerial meetings to complete it. In November 2019, at the third RCEP summit held in Bangkok Prime Minister Modi announced the withdrawal of India from the trade pact, thus reducing the number of RCEP negotiating countries from 16 to 15 countries. By that time, the grouping had already concluded the text-based negotiations for all 20 chapters and essentially the bulk of their market access issues. Despite the uncertainties behind the prolonged pandemic, the legal text scrubbing was initiated to ensure that the agreement could be signed at the next ASEAN summit in 2020,.

5.         Once ratified and implemented by member nations, the RCEP, by virtue of its size and the diversity of its membership, will become a solid building block for advancing further trade liberalization in the Asia-Pacific. More importantly, it will mark a major step forward for the world, at a time when multilateralism is losing ground and global growth is slowing down. 

6.         There is no doubt that the RCEP carries considerable symbolic heft. As the largest plurilateral FTA in the world, the most-important trade agreement after only the World Trade Organization, this mega FTA joins another important regional accord, the CPTPP[3] that went into effect in 2018. It covers more of humanity, with over 2.3 billion people or nearly a third of the world’s population as well as a third of the world’s GDP.   Measured in terms of GDP, it is larger than the CPTPP, the European Union, the US-Mexico-Canada Free Trade Agreement and MERCOSUR[4].

7.         RCEP is such a large agreement and its systemic impact on regional and global trading systems can’t be ignored. As such I believe it is quite important that we place its existence in the context of the geo-economic and the geo-political context.

8.         Let me start with the Asia-Pacific region. Over the past five decades, this region has been the main beneficiary of global trade and investment liberalization. Many countries had experienced a steady long-term growth in their exports to key global markets, a trend that, in my view, was driven by two determinant factors: the multilateral trade liberalization through the GATT and WTO trade rounds, and the growing network of regional and bilateral free trade agreements within the Asia-Pacific region.

9.         Unfortunately, this export growth success has suffered some setbacks in the past three years, starting with its first shock due to the escalating US-China trade war in 2018, which resulted in some trade disruptions and trade diversion effects due to rising bilateral tariff barriers between China and the US. These disruptions were escalated further during the first half of 2020, due to the shockwaves from the global COVID-19 pandemic that triggered widespread lockdowns and travel bans across the world, once again disrupting industrial production, dampening consumer spending and declining exports of goods and services from many Asia-Pacific economies.

10.       On a parallel front, trusted multilateral institutions, such as the World Trade Organization, were weakened under protectionist attacks, compounding further the global slowdown.

Excellencies, Ladies and Gentlemen

11.       In terms of geopolitics, the RCEP has emerging as a mega FTA centered on the “ASEAN centrality”. Although ASEAN is the obvious driving force behind RCEP, the negotiations were also influenced by Japan, China, and other major players, and to the last moment, India. Despite some scepticism by some paranoid Western analysts, I am of the view that RCEP is neither a Sino-centric nor a Japan-centric trade order, by no means.

12.       Why I am saying that? RCEP was built on ASEAN templates and no one country was driving the talks alone.  Of course, it was not an easy negotiation because the 16 parties had widely different levels of economic development and did not share similar development agenda.  This complex structure added to the delay in concluding the negotiations but it was certainly an inclusive process. No one can deny that. The negotiations are led by ASEAN, with individual chapters broken into lead officials from both ASEAN and ASEAN Development Partners. Its structure was truly meant to benefit all participating countries subjecting them all to the same trade rules.

13.       For China, no doubt the RCEP solidified its broader geopolitical ambitions in the region for several reasons: China has played an active role in realizing the RCEP as it was not part of the U.S.-led TTP initiative. We have to bear in mind that when the RCEP negotiations started the talks, the TPP were underway, in which China was not part of. The TPP was seen as a counterweight to RCEP, and when negotiations for RCEP began in 2013, the presence of India was seen by some members as another counterweight to China. Of course, the TPP never went into effect as the U.S. left the agreement on its own under President Donald Trump and India withdrew unilaterally just before the RCEP’s conclusion. In both the US and India cases, protectionism played a part. In both cases, the show went on without them and China was handed on a golden platter a powerful leverage, that of being the largest economy in a now regionally focused East Asian system.

14.       That being said, I would agree that the Belt and Road Initiative (BRI) is more representative of China’s bid for economic dominance in the Asia Pacific region than through the RCEP. Of course, the RCEP and the BRI do reinforce each other relationships as much as it does with Japan’s Free and Open Indo Pacific (FOIP).

15.       As far as RCEP fitting in with Japan’s trade vision, it was clear that Japan took on a leadership role in the conclusion of the CPTPP after the U.S. withdrawal. In similar vein, Japan has been active in promoting the formation of highly liberal and advanced economic and trade frameworks around the world, for instance with the conclusion of the Japan–EU Economic Partnership Agreement.

16.       As for India, it withdrew over concerns about cheap Chinese goods entering the country. India has also been facing stiff opposition from its industries and the farming community over the $60 billion trade deficit it has with China. Another likely reason was that many countries opposed liberalization in IT human resources and service areas, where India is dominant. India’s Act East policy reverted back to India’s Look East policy.

17.       But as a whole, the RCEP is a clear “historical breakthrough” because for the first time, the deal marked the coming together of the rival East Asian powers, China, Japan and South Korea, into a single free trade agreement, further deepening the linkages among these three giants, which are already among each other’s largest trade partners. Aside from the reduction in the cost of doing business in East Asia, these three economies will connect their respective strengths in technology, manufacturing, agriculture, and natural resources. Their businesses will also be able to enjoy more flexibility through effective orchestration of their supply chains in the region. The RCEP’s unified rules of origin and regional cumulation provisions will make it significantly easier for products made in these three member countries to qualify for preferential access to each other markets and beyond.

Excellencies, Ladies and Gentlemen

18.       The RCEP is a comprehensive agreement, covering 20 chapters, including market access for trade of goods and service, investment liberalization as well as a large number of trade related aspects, such as trade facilitation, e-commerce, intellectual property rights, competition policy, and government procurement.  

19.       The most obvious element of RCEP is its ambitious reduction in tariff barriers. The total number of zero-tariff products in trade in goods exceeds 92 percent, while the opening up at least 65% of services sectors, will certainly have the effect of stimulating more cross-border trade, investment and flows of people, thus expediting economic and trade integration in the Asia-Pacific region.

20.       The second most sought after element is the harmonization of different rules of origin of RCEP countries, and the setting of generous regional-content requirements for a lot of products. Take for example the case of a company which manufactures travel goods. Once it can prove that its bags contain a 40% regional value content that come from any of the 15 RCEP members, it can export them to any of the 15 RCEP countries and enjoy preferential access.

21.       It is interesting to highlight that the RCEP does not supersede the multiple pre-existing FTAs like the ASEAN ‘plus-one’ trade agreements per se. Here I refer specifically to the ASEAN FTAs that were signed separately with major economies such as China, Japan, the ROK, and Australia-New Zealand. In fact, it solves the ‘spaghetti bowl’ problem of ASEAN by improving and facilitating an orderly and negotiated convergence of these agreements, in terms of trading rules and customs procedures, into a unified set of trade rules for the Asia-Pacific region. In another words, this goes to the heart of the RCEP: the creation of a truly “Asian products” by way of managing the most controversial issue of the Rules of Origin (ROO).

22.       The Rules of Origin (ROO) is a sensitive subject matter in the RCEP trade negotiation and negotiators tried their best to help their companies which struggled in the past to manage their production across multiple FTAs. The problem is owing to the fact that market access, once granted, can only be controlled in by way of the rules of origin contained in the agreement. It requires a fine balance between allowing permissive rules for goods which a country is an exporter of and setting restrictive rules for goods which that country is an importer of.

23.       The difficulties lies in a so-called “diversity challenge”. Complexities are expected by default from the mere fact that the RCEP is comprised of 15 incredibly diverse countries at different stages of development, including developed countries, developing countries, and even least developed countries. Each one of them had to deal with completely domestic priorities and must manage their respective developmental challenges in a number of sensitive sectors, such as agriculture and services. With fifteen members, seven pre-existing agreements that do not handle ROOs in the same manner, and thousands of products to cover, the number of individual ROO issues to consider is mind-boggling. This metaphor “We share the same bed but we dream of different things” is perhaps a good illustration of this dilemma.

24.       There is also the challenges of “shadow protectionism” lurking behind the use of ROO with the RCEP covering tens of thousands of products, there are plenty of loopholes where ROOs could be manipulated to dilute the commitments made by a government. A government could agree to lowering tariffs for a product, but then insist on an ROO method that will make it difficult for a few or no product to qualify.

25.       Another ROO issue to tackle is the so-called “circumvention problems”, which are an obvious form of cheating that defeat the whole purpose of the tariff commitment. For example, in the case of a product substitution, a different product (say, pomelo) are fraudulently packaged and labelled to pass them off as oranges. Another example is a third country shipping their products to Country A, and repacking and export onto another Country B, in order to pass them off as products from Country A.

Excellencies, Ladies and Gentlemen

26.       Let me now turn to the specificities of the RCEP with regards to its impact on Cambodia. Let me put more simply the question as to how does the RCEP benefit Cambodia?

27.       Amidst the partial 20% withdrawal of tariff preferences under the Everything But Arms (EBA) initiative of the European Union, the Cambodian government has made it a priority to complete trade deals with other countries to diversify its exports. Outside the ASEAN FTA framework, up to recently, Cambodia has managed to sign only an FTA with China. This year another FTA with the Republic of Korea is in sight.  A large majority of Cambodia’s trade is not yet with RCEP members. As such the RCEP will provide Cambodian companies and consumers with increased commercial opportunities and partnerships. There will be more opportunities for local enterprises to boost exports, participate in new value chains in the region, and increase foreign investment.

28.       At the macro level, with this deep integration of regional economies under RCEP, global companies and investors will find it more compelling to invest not just in China but also in the Mekong Subregion, which is recognized as a growth center as well as a very strategic regional hub.

29.       The five ASEAN partners are technically advanced nations that have moved to high-end factories, where labour and production costs are relatively high. Their companies are keen to minimize costs by outsourcing finishing work to the less well-off ASEAN nations. For labour-intensive processes, such as finishing garments, the unified rules of origin regulations under RCEP will stimulate an increase of manufacturing investment interest in countries with lower-cost and lesser-skilled workers such as Cambodia and Myanmar. For Cambodian companies, they will benefit from enhanced flexibility in navigating between the two economic powerhouses, China and Japan, and to a lesser extent, the ROK.

30.       It will also open up reverse opportunities for investment inflows, with Cambodia becoming one of the attractive destination for international investors, due to its pivotal geographical location in the Mekong Subregion trade supply chains.

31.       Aside from enhanced market access for key sectors like processed food industries,  textile and footwear sectors, I can foresee also vigorous cooperation in the services sectors, like telecommunications, banking and finance, and consultancy. They will be able to provide their services in RCEP countries as foreign suppliers, through increase in foreign shareholding so many sub-sectors including professional services and financial services.

32.       Cambodian skilled construction workers and service workers, such as young IT programmers and software developers, could benefit from higher demand from countries like Japan and South Korea which are in need of these service workers. I expect as well the growth of the business process outsourcing industry. More professional cooperation is also envisaged as RCEP countries have agreed to mutually recognize each other’s professional qualifications, potentially opening doors for RCEP market opportunities for dentists, doctors, engineers, architects and other professions.

33.       Another area of sustained focus in RCEP is e-commerce and digital trade, which looks promising for Cambodian SMEs. Given Cambodia’s very high level of digital connectivity and its very open economy, compared to other countries in the subregion, e-commerce and digital trade can present new growth opportunities for smaller firms to connect to suppliers, consumers and big players in major industries.  I would expect to see  more service providers, including those engaged in e-commerce, to establish commercial presence in Cambodia and enjoy greater market access in terms of cross-border supply and the larger RCEP markets.

34.       Moreover, the RCEP is a major breakthrough for Cambodian companies to exploit the immense market potentials open to them. In the past, these opportunities have been hard to come by for SMEs, partly because they find the various ASEAN plus one FTA rules too bothersome. For example, if the tariff preferences are small compared to MFN rates, or if their products simply don’t qualify under the ROO, these SMEs just avoid going the FTA route.

Excellencies, Ladies and Gentlemen

35.       All these are potential opportunities in waiting. I would like to caution that it will take some time before Cambodia could enjoy the full benefits of the RCEP, foremost, for the obvious reason that the agreement has yet to come into effect, and secondly it takes time to prepare the ground for the private sector to get up to speed with this new trade paradigm. For that I do have a few thoughts in mind in terms of areas of support the government, the development partners and the private sector itself could undertake to ensure a speedy take-off, once the RCEP enters into effect.

36.       On the role of the Cambodian Government, it is quite clear that it has made all the difficult works to advance the negotiations. The remaining outstanding tasks are to go on a massive promotional campaign to explain and assist our businesses to fully exploit the benefits as offered under the RCEP. On their own, it would be an uphill struggle for Cambodian companies to understand all the specifics of the agreement and its schedules. There are about 14,000 pages in total. Most of the Cambodian companies are small and would not have the resources nor the expertise to grasp the intricacies of the trade rules. 

37.       On the role of the donors and development Partners, I would stress on the provision of technical cooperation to address Cambodia’s productive capacity challenges. Advanced industrialized countries like Japan, China, the ROK, Australia and New Zealand could assist Cambodian SMEs in developing better, more competitive products. New product innovations that increase the value-added contents of local products, which are still very modest, to be quite frank about it, could boost its quality and attractiveness in the regional market. The Cambodian government, in its dealing with its development partners, should advocate more advanced technical cooperation through digitalisation and smart manufacturing, which will go a long way to support SMEs in developing more innovative and competitive products capable to sustain competitive pressure and fit for inclusion in global and regional supply chains.

38.       On the role of the Cambodian chambers and foreign business organisations, there is the obvious merit that they could actively promote partnerships and collaborations with their counterparts in advanced RCEP countries.

39.       Lastly, on the role of commercial banks, the local SMEs need to be supported to grow their market and business overseas. SMEs face the biggest challenge in accessing trade finance. Without adequate trade financing the prospect of doing international trade will be dim, to say the least.  

Excellencies, Ladies and Gentlemen

40.       In conclusion, let me state in the most unequivocal way that multilateralism and rules-based economic order are back with the advent of the RCEP. Last year many countries have turned inwards under protectionist pressures and when confronted with the Covid-19 pandemic, the signing of the RCEP signalled the Asia Pacific region’s collective commitment to promoting freer trade and closer interdependence so as to stimulate the recovery of the global economy in the post-pandemic era. The business opportunities are up for grab for those countries who are ready, willing and capable. I truly believe that my country, Cambodia, is definitely one of them. Thank You.