Scratching one’s head is not the way to address RCEP concerns

IN a recent opinion piece, Mr. Cielito Habito complains that we wasted seven months and gained nothing by delaying Philippine membership in the Regional Comprehensive Economic Partnership. RCEP is a free trade agreement (FTA) among the Association of southeast Asian Nations (Asean), China, south korea, Japan, Australia and New Zealand. The Philippines and Indonesia have not ratified the treaty.

Mr. Habito argues that worries about a surge in agricultural imports following RCEP membership are misplaced, because our commitments in RCEP are not much different from those in our current trade pacts with RCEP member-countries, either bilaterally or through Asean. He says that sensitive products like rice will continue to be protected under the agreement. Habito adds that not joining RCEP will deprive us of many trade benefits, particularly for sectors in the economy aside from agriculture.

While many of Mr. Habito’s premises are valid, his conclusions are not.

Indeed, RCEP is primarily a compilation of tariff and other commitments that have been in place under pre-existing trade agreements between Asean and its FTA partners for over 10 years now. The Philippines made few additional concessions, and did not offer tariff reductions on selected sensitive products like rice, meats and vegetables. Other RCEP countries did the same. Hence, Mr. Habito concludes, RCEP membership should not increase threats to our agricultural sector.

This would be true—if our competitiveness and trading position remains the same relative to other RCEP countries. But if we sit still or—worse—retrogress, while our competitors move forward, then things can change dramatically. Even without significant changes in RCEP tariffs, there is the real danger that cheaper and better quality imports will continue to pour into the country. At the same time, we will lose our export markets, if other RCEP members become better producers and suppliers of products that we currently sell abroad.

We cannot just dismiss this possibility, which Mr. Habito calls an “imagined ghost.” Our country was a net agricultural exporter when we joined the World Trade Organization in 1995. In 2021, our agricultural trade deficit ballooned to $9 billion, the biggest within Asean. The excess of imports over exports has grown over the years, even though our tariff commitments under the WTO and subsequent FTAS did not change much. Imports of rice, meats and vegetables continued to rise, despite the relatively high tariff protection that we preserved under the FTAS. If we do not act, this trend will go on and worsen once we join RCEP. And the rosy projections of economists like Mr. Habito about the gains from RCEP and free trade will end up grossly off the mark, as they have characteristically been in the past.

Because other countries did not go much beyond their prior commitments under existing FTAS, new trade opportunities under RCEP are actually very limited. Many of the supposed gains are likely small. For instance, RCEP proponents highlight China’s offer to drop its tariffs on canned pineapples to zero. What they do not say is that China’s current tariff is already a low 5 percent, and that the zero tariff will take effect only on the 20th year. By then, it is highly possible that our competitors like Thailand and Vietnam will have learned how to produce better and cheaper canned pineapples and displace us from the Chinese market.

Then there are warnings that the Philippines will lose out to its competitors that can avail of RCEP’S improved Rules of Origin. These rules would allow them to treat raw materials sourced from RCEP countries as part of “local content” of products that are exported, thus making it easier to qualify for concessional RCEP tariffs. It remains to be proven that this will be of major benefit to our exporters. ROO under existing FTAS already allow us to pass on our exportable products with up to 60 percent foreign content as Philippine-made products. RCEP’S ROO will not benefit us if we export our products outside RCEP, such as our garments to the US or our canned tuna to Europe. Reports further indicate that many of our exporters cannot enjoy lower tariffs under the FTAS because of difficulties in securing Certificates of Origin and complying with the ROO guidelines.

Claims that we will miss getting foreign investments by staying outside RCEP are grossly misleading. The Philippines is among the least attractive investment destinations in Asean. Inside RCEP, we will remain to be so, unless we fix our investment climate and address problems that matter most to investors, such as poor basic infrastructure, high power and utilities costs, graft and corruption, and red tape.

Mr. Habito warns that important sectors other than agriculture will lose out if we remain outside RCEP.

However, on micro, small and medium enterprises, the agreement’s legal text merely mentions information sharing and cooperation among member-countries—and not much else. Meanwhile, our tariff concessions on industrial products have been particularly aggressive—zero tariff on 83 percent of tariff lines upon entry into RCEP, and full or partial tariff elimination for almost all others. Less than half a percent of tariff lines have been exempted, which will benefit only a few traditionally protected sectors like automobiles, air conditioners, plastics, batteries, and guns and ammunition. How will our industries—msmes in particular—thrive under this scenario? Also, RCEP rules do not offer any significant improvement beyond those that are already found in existing FTAS regarding the temporary movement of natural persons, such as overseas Filipino workers (OFWS).

Proponents contend that, despite all its perceived disadvantages, RCEP membership will force our government to install the necessary adjustment measures and programs to enhance our competitiveness. This same argument was used to justify WTO membership in 1995 and the adoption of subsequent FTAS. But the promised remedies never materialized. Our competitive position actually deteriorated over time.

Given this experience, it is both practical and imperative that we first prepare ourselves before, and not after, we jump into new trade agreements like RCEP. We will not lose much, contrary to what Mr. Habito claims, because the existing FTAS will continue to provide us essentially the same trade opportunities that RCEP offers. In fact, our exports during the first three months of 2022 were the highest in the last six years, despite the fact that we missed the deadline for joining RCEP on January 1. We will also be in a much better position to gain not only from RCEP, but also from pre-existing and future FTAS, if we prepare ourselves properly.

Clearly, Mr. Habito strongly believes in free trade and the power of markets. He will thus vigorously endorse any initiative—such as Rcep—that reduces protection and enhances competition. He is, of course, entitled to his opinion. Unfortunately, he may have developed a habit of “scratching his head ” ever y time somebody disagrees with him, and condescendingly treating those who see things differently as “foolish” or out of their minds.

It might be good for Mr. Habito to step down from his pedestal from time to time, so that he can understand better what is actually happening on the ground. Otherwise, he may end up not only hairless, but also deaf and blind to reality.