"A slow sort of country!" said the Queen.

"Now, here, you see, it takes all the

running you can do, to keep in the same place. If you want to get somewhere else,
you must run at least twice as fast as that!" -- Lewis Carroll (Through the Looking
Glass)

WITH the signing of RCEP, Pakistan finds itself in a situation reminiscent of Alice
in Wonderland, having to run just to stay still. Interpreted in the RCEP context,
if we are to retain our status quo position with market access, we must renegotiate
or fall behind. How does a trade agreement that Pakistan is not a part of put it in
this predicament?

The ASEAN-centred Regional Compre�hensive Economic Partnership (RCEP) was signed on

Nov 15. Ten of the 15 member countries are already members of ASEAN and the
remaining five are FTA partners of ASEAN (China, Japan, South Korea, Austra�lia,
and New Zealand). Together, they have a population of 2.2 billion and a share of 30
per cent of the world's output, making RCEP one of the biggest free trade
agreements in history. Like other trade agreements, it sets out terms of trade in
goods and services. However, trade between the RCEP members was already fairly
liberalised with respect to tariffs, so while tariffs will decline further, there
was not much room for improvement.

The big new gains to RCEP members are in the ease of movement of goods, services
and investment, which will lead the members to not just trade more with each other,
but to form smoother and lower-cost regional and global value chains and undertake
joint ventures and investments more readily in other member countries. Key to this
is a unified rule of origin which means that products manufactured to RCEP-
originating criteria can move freely within the bloc with a single certificate of
origin, slashing administrative time, complications and costs of sourcing inputs
within the region. Consequently, RCEP countries are likely to become more cost-
effective and competitive.

There are at least two critical areas where this will have spillover implications
for Pakistan: exports and foreign direct investment (FDI).

The RCEP agreement has implications for Pakistan.

A sixth of Pakistan's exports are destined for RCEP countries. As RCEP members find
it easier and cheaper to trade with each other, there is likely to be some trade
diversion away from Pakistan towards fellow RCEP members. The tariff offered to
Pakistan by RCEP countries, while it remains unchanged, is now higher relative to
RCEP competitors. We saw this after the first phase of Pakistan's FTA with China,
signed 2007. Within three years, China had signed an FTA with ASEAN which eroded
Pakistan's preference margins. We will see this again with RCEP.

The larger loss to Pakistan, however, is likely to arise from the greater
competitiveness of RCEP countries in international markets. Many of the RCEP member
countries (in particular China, Vietnam, Indonesia, Cambodia, Myanmar and Thailand)
are Pakistan's direct competitors in our main export markets: the US and Europe,
and for our main export categories: textiles and garments. With RCEP-related
improvements in their competitiveness, they are likely to gain market share over
Pakistan.

The second big potential issue for Pakistan is FDI. As with trade in goods and
services, the RCEP agreement makes capital flows and investments in partner
countries smoother and less expensive. As a destination for outsourcing production
and linking value chains for major global firms, this is likely to make Pakistan
less attractive vis-�-vis RCEP member countries. This is true of investment
originating from within RCEP countries, and for investment outside the bloc as
well, both of which are now likely to see some diversion to RCEP countries.
Paradoxically, the saving grace for Pakistan is that it is not a large trading
nation and receives just 0.1pc of world FDI. Moreover, most of Pakistan's FDI at
the moment is market seeking (ie it comes for the large consumer market) for which
costs of production are relatively less important. Secondly, the large chunk of FDI
that Pakistan has received recently is not from private firms. State-led
investments are unlikely to be impacted by RCEP. Still, attracting efficiency-
seeking investment and global value chain partners must remain a priority for
Pakistan to improve FDI and exports sustainably. Competitiveness relative to other
countries is a prerequisite for this. With RCEP, this is now at the risk of being
eroded further.

It is imperative for Pakistan to position itself to engage more deeply with

regional initiatives and build the capacity to negotiate bilateral and multilateral
agreements more strategically. The terms negotiated in Pakistan's existing FTAs
might seem static, but seen in the context of a region progressing steadily towards
better and better trade deals, Pakistan will need to keep running just to stand
still.

The writer teaches economics at the Lahore University of Management Sciences.

Published in Dawn, December 2nd, 2020