Will RCEP provide the right deal for business?

Spend any time at all talking with negotiators on the Regional Comprehensive Economic Partnership (RCEP) and you are sure to hear about “finding the right Landing Zones”. In consensus driven ASEAN this is polite code for: “We are trying to meet the expectations of countries like Australia and Japan, while keeping India in the room”. Just how deep or wide these zones might be is what concerns business.

The basis for RCEP membership is an existing free trade agreement with ASEAN however, as is often the case in international relations, while we all use the same words, we rarely mean the same things. The chart shows the various levels of tariff elimination free trade agreement (FTA) members have committed to in ASEAN +1 FTAs. It is also a clear indication of the varying levels of ambition that respective negotiators will bring to the table, and a key reason for the limited progress made in five years. Based on past performance, a tariff Landing Zone might be 25 percentage points wide, an impossible situation for Australian exporters and our negotiators.

Tariff elimination under ASEAN+1 FTAs. ASEAN Member State figures are average levels across all ASEAN+1 FTAs

The Australian Industry Group (Ai Group) has been representing the interests of Australian manufacturers for more than 140 years. While tariff reductions are important and get all the attention in trade deals, they aren’t as significant for our sector as they are for the agriculture sector. What really makes a difference to the trade prospects of manufacturers today are the border red tape and processes and behind the border regulations and barriers. What will make a difference in the future? Protecting data and data flows.

Let’s tackle the former first.

Global value chains have become more important in the 21st century. Global trade is no longer characterised by the import/export from one country to another of raw materials and finished manufactured products, but rather vast webs of trade in intermediate products, across different sectors, and often involving numerous countries, business trips and data exchanges. Recent estimates show that 60 per cent of global commerce involves intermediate products, and 30 per cent of the total is conducted between affiliates of the same multinational corporation. This raises the importance of trade transaction costs including burdensome border administration which increase the costs of trade, particularly where products must travel through numerous countries before the final good can be sold.

Tariff reductions in RCEP are less important for manufacturers

The Trade Facilitation chapter in RCEP has the opportunity to enhance trade facilitation and custom procedures in a manner that is predictable, consistent and transparent. Broadly defined, trade facilitation is any measure that contributes to lowering trade transaction costs and creating standard efficiencies. There are numerous costs to inaction on trade facilitation including:

• Direct and administrative costs to traders;
• Direct administrative cost to governments;
• Time lost, which results in higher working capital needs;
• And uncertainty.

Among the many ways to enable trade, reforming border administration requires relatively little money and can be done quickly. Unlike tariffs, which do provide revenue for governments, all the resources spent on overcoming administrative barriers are lost. According to Zaki’s estimates halving trade facilitation costs could deliver nearly ten times the benefit of halving tariffs.

Governments negotiate FTAs, but it is left to businesses to implement them. Our experience with some FTAs has been that non-tariff barriers have increased after ratification, negating the benefits of tariff reductions and market access. We encourage negotiators to take pragmatic steps to include mechanisms to address non-tariff barriers within RCEP, ensuring that it is a dynamic and practical tool for ongoing trade access.

This is why the Government’s work does not end at the conclusion of negotiations, nor does it end when the agreement is signed or ratified. In order to ensure that businesses gain full advantage of FTAs and the broader community understands and supports free trade, it is essential that the whole of government works together to support Australian businesses to take advantage of new opportunities and remain competitive in the face of new threats.

Non-tariff barriers sometimes actually rise after trade deals

However, often the issue is not the creation of new barriers, rather it is pre-existing rules and regulations that cause problems. We have a member that manufactures chocolate-coated honeycomb who was unable to take advantage of a new opportunity in an ASEAN market due to a preexisting rule that honeycomb is unable to be sold unless connected to a biscuit. This is just an accident of insufficient regulation development.

While other countries take a transactional view of foreign aid – building infrastructure that requires the purchase of materials and expertise from the donor country – Australia focuses on capacity building that will make a material difference to transforming the recipient’s economy. Ai Group supports this strategy. However, we would like to see priority given to industries and agencies that match Australia’s economic interests. This will assist in removing the behind the border barriers that limit the success of Australian exporters and prevent developing economies from reaching their potential.

Digital technology has revolutionised modern trade and the products and services that we are able to export. Block chain technology, Industrial Internet of Things (IOT) and electronic communication are all essential elements of a globally competitive industry. A common characteristic of all successful businesses is their ability to harness the benefits of digital technology to support their strategic goals. The democratising nature of the internet has reduced the barriers that previously excluded small to medium businesses to global markets, exposing them to greater opportunities and risks.

We are signing FTAs today that are setting trade rules for technology that hasn’t been invented yet. The multilateral infrastructure that supports global trade rules was created in an age when most trade was between two businesses, shipping a box of items between two countries using a global payment system that was first used on the Silk Route. Digital technologies have created a new world where businesses can sell directly to consumers using a trading platform developed in one country and housed on a server in a third country.

IOT refers to a digital ecosystem where everything connects and communicates from inanimate objects to living organisms, including people and animals. With all these types of things connecting, they can form an entire network of things, resulting in a smart home, factory or business – or an entire smart city or global community. A UK Government study estimates there were about 14 billion devices connected in 2013, and predicts that there will be between 20 and 100 billion connected devices by 2020 across the globe.

The manufacturing sector is one of the top users of IoT, with 25 per cent of global manufacturers estimated to currently use it. This is predicted to grow to more than 80 per cent by 2025. According to Deloitte’s Tech Trends report, ambient computing (where real business value is extracted from the use of IoT) is one of the “exponential” technologies whose performance (relative to cost and size) will experience rapid growth, and create new competition and opportunities. In a recent World Economic Forum survey, 72 per cent of businesses said the development of IoT will be disruptive to their businesses and industries – and 79 per cent said those disruptions will occur within the next five years.

Unfortunately, our multilateral rules bodies have not kept up with the changes to the digital landscape, particularly when faced with protectionist barriers.

Global rules are not keeping up with the rise of ecommerce

Recent action taken by China to pass cyber security laws is a good example of the way governments are introducing restrictions to trade and the free flow of data. While the stated motivation might be security, these new laws are a significant protectionist measure that inhibits innovation and disadvantages small to medium sized businesses. Businesses most at risk will be those with special hardware and systems for network management. The rules state that companies operating in China must provide the government with their anti-hacking proprietary security hardware and software, which could then be passed on to relevant Chinese firms. And having access to the hardware and software means firms would have access to the data as well. The law also requires business information and data on Chinese citizens gathered within the country to be kept on domestic servers and not transferred abroad without permission. This means that Australian businesses who sell network-enabled machines to China will need to share their intellectual property and establish their own servers in China. In fact, all Australian companies with a physical presence in China will be affected, particularly if they want to send intra-company communications back to the Australian head office. Members with operations in China have complained that they struggle to get clarity on domestic data security regulations in China.

Digital technology also has the power to improve the efficiency of international transactions, reducing costs and paperwork for all international traders. In 2016 the Commonwealth Bank of Australia was involved in an international transaction that used Blockchain, Internet of Things, GPS, smart contracts and a secure electronic distribution system to support the first completely paperless international shipment and financial transaction. Any changes or discrepancies were communicated to all parties in real time and the movement of goods and money were completely traceable. Traditional trade finance and international shipping is paper and labour intensive, contributing to a process where errors and delays are rampant.

These examples demonstrate that data is both a product and an enabler to improve international trade transactions. In all examples, companies are relying on the free movement of data across international borders using interoperable systems.

The Internet gives small and medium enterprises (SMEs) and firms enhanced scalability and better access to markets, financing, labour, skills, as well as new services and products, increasing their productivity and reach. However, the internet has not changed the fundamental rules of international trade nor removed the need to support SMES to develop sustainable business models.

These businesses require support from trade facilitation services such as Ai Group’s TradeStart to understand the mechanics of international markets and to harness the potential of online sales.

E-commerce and the emergence of online platforms have made pricing strategies even more crucial as smaller exporters start to understand the value of cutting out middle men and selling direct to the consumer. A wine maker in regional Victoria used TradeStart advice to shift from using a consolidator into China to going direct via an online platform such as Alibaba. Its revenue went from $55 free on board (FOB) Melbourne per case to $186 per case, after taking out freight and commissions. The Chinese consumer was still paying a competitive price, however, the Australian company was able to capture a greater share of the value.

Online platforms, particularly those targeting the Chinese consumer, have also created a new business model around Daigou traders. This is essentially a grey market of 40,000 to 60,000 “shoppers for hire”, buying to order on behalf of Chinese consumers. As informal as this salesforce might be, it still requires a strategy from exporters who need to protect their brand, market positioning and sales volume. This strategic development relies on advisors who possess current and innovative export expertise.

Recommendations

1.  Use RCEP as an opportunity to improve the quality of trade facilitation rules across the region, protect data flows and reduce behind the border barriers.

2.  Ensure DFAT has sufficient funds to become more proactive in promoting compliance with WTO and FTA rules amongst our competitors and trading partners.

3.  DFAT should ensure exporters and investors understand their rights under international agreements and provide a contact point for companies facing non-tariff barriers.

4.  Implement a development agenda that improves the governance and administration capabilities of regional economies.

5.  Government agencies should build more capability to address issues that may inhibit exports of digital technology and restrict digital communications for global companies.

6.  Austrade should improve the capabilities of its advisor network and website to include information on new forms of export, new risks and international digital compliance advice.

7.  Australia should be a global advocate for the creation of a multilateral framework for addressing restrictive digital trade barriers.