The RCEP and the shrinking of public policy space

Jane Kelsey explains how the RCEP services chapter will erode the regulatory capacity of the governments of developing and least developed countries.

THE Regional Comprehensive Economic Partnership (RCEP) is shrouded in secrecy, just like the other mega-regional agreements that people are rejecting as an assault on their right to decide their own future, such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union.

The draft services and investment chapters of the RCEP were leaked some months ago. These texts are now dated, but they remain the best publicly available source of information and provide disturbing insights into what is happening behind closed doors. The likely failure of the TPP has intensified pressure from ministers to conclude the RCEP. That makes it all the more urgent to expose how the governments of developing countries and least developed countries (LDCs) are being pushed into accepting an outcome that could cause severe damage to their economies and societies in the future.

The RCEP services text dated August 2015 embodies the anti-social and anti-democratic essence of these agreements. Services are treated as commercial products that are exchanged for money through markets. That very narrow view takes precedence over the social, employment, development and environmental dimensions of services that governments would usually give priority to, or at least treat as equally important when they make and implement policy and law. The RCEP rules aim to weaken such laws and policies, which foreign firms say make it harder for them to sell their services and compete with locals, even when they are massive transnational companies.

But these new-generation mega-deals are not just more of the same. Their rules and obligations on services are much more potent than the World Trade Organisation (WTO)'s General Agreement on Trade in Services (GATS) and earlier free trade agreements (FTAs). In the past, rich countries were principally concerned about gaining access for their corporations to other countries through foreign investment. Now they want to control the global supply chains and digital platforms through which global capitalism will operate for the 21st century. That means the right to supply services from outside the country and preventing governments from requiring them to have a legal presence inside the country. New technologies should be allowed to deliver services with no new restrictions. Rules that guarantee money flows into and out of the country to pay for those services are equally important. So is the right to store data, including financial data, anywhere in the world.

Making more services available through the Internet from outside the country can facilitate cheaper access to more diverse services for developing countries. But it also consolidates the power of dominant players in services supply chains and value chains. Countries and communities who rely on these services become dependent on offshore suppliers over whom they have very little influence and who can avoid local responsibilities in areas of taxation, training and employment, supporting small businesses, technology transfer, cultural relevance and legal liability.

The power politics of RCEP services

The leaked RCEP services text reveals the very different positions of the 16 negotiating countries. Australia, Japan, New Zealand and South Korea have been aggressive in their demands and are insisting on new ways to bind the hands of governments in the future. These four countries are part of a group that call themselves the 'Really Good Friends of Services' which are negotiating a plurilateral Trade in Services Agreement (TiSA) that is designed for export back into the WTO, where they have not been able to upgrade the GATS because of resistance from the Global South and from civil society.

In the RCEP talks, ASEAN is negotiating with a single voice on behalf of its 10 members. It is difficult to know how much they are resisting individually or collectively. They seem to have agreed to the framework and are arguing about how far it should go and which parts are voluntary. India, on its part, has proposed some novel arrangements and protections, while pursuing its own ambitions to increase the mobility of services professionals and facilitate its back-office operations, but it seems to have few allies. As of a year ago, China had not played a prominent role.

Similar dynamics are evident in the leaked RCEP investment chapter. Japan and South Korea have tabled hardline pro-investor rules and rights of enforcement that are based on the failed TPP. India proposed a different approach based on its new model bilateral investment treaty (BIT) that seeks to preserve more power for the state and the domestic courts. China was midway - wanting protection for its investors offshore while protecting its regulatory authority at home.

Handcuffs on the future

To date, the RCEP's chapter on investment has attracted more attention than the services chapter. That reflects the international backlash against such pro-investor rules and the ability of corporations to enforce them directly against governments through investor-state dispute settlement. But the services chapter of the RCEP would impose at least as severe restrictions on the regulatory sovereignty and policy space of governments, with serious social, environmental, cultural, gender, political and economic consequences.

Both chapters would allow governments to preserve some rights over their future decisions through inter-related schedules of commitments. But that would be limited and subject to agreement by all other parties. The RCEP has not adopted the 'negative list' approach to services commitments that would require countries to state what laws, regulations and activities are not subject to the rules. But the South countries have been pushed into accepting an approach to scheduling commitments that would prevent them from adopting more restrictive rules in the future (standstill) and either a ratchet that locks in future liberalisation or promising all other RCEP parties will benefit from future FTAs that provide better terms for services providers from other countries. The exact terms of these 'value-added' commitments are not publicly known. But it is clear that developing countries and LDCs are being pressured to take on significant new commitments which will require changes to their domestic policies and regulation. Far from promoting development, these new obligations will have a disproportionate impact on them. The e-commerce chapter imposes a further layer of obligations designed to protect cross-border digital commerce from future regulation.

This approach is really dangerous. Policy space is critical for developing countries, especially for LDCs, which require flexible rules and the ability to respond to unanticipated problems without facing the threat of a legal dispute or economic sanctions. It is too easy to make mistakes in such complicated negotiations. What appears to be low-risk at the time it is agreed can become a major liability, especially when domestic and global economic circumstances change and new technologies alter the impact of rules and commitments. The international context can also change, as challenges like climate change and energy scarcity require fundamentally different approaches to production, distribution and regulation.

Above all, all the RCEP negotiating parties have obligations to address the asymmetry of development, where the legacy of colonialism and imperialism continues through a model of capitalism and global rules that are designed to maintain the dominance of powerful states and their corporations, and seek to constrain competition from newly ascendant countries like China and India. The negotiating parties have all committed to achieving the 2030 Agenda for Sustainable Development. That will require a rebalancing of developmental over commercial outcomes, yet the RCEP is silent on those goals and the services and investment chapters will make it harder to achieve them.

The RCEP's framework for services

There is room here just to summarise some ways in which the RCEP services chapter would restrict governments' policy space and regulatory sovereignty. It is important, however, to stress the limitations: the draft text is over a year old and accompanied by only a few explanatory documents and it is unclear how far the negotiations have progressed since then.

The RCEP has some standard rules drawn directly from the WTO's GATS that operate across national, regional and local government levels.

The 'market access' rule requires governments to open and keep open their services markets so that foreign firms can expand their operations with few restrictions. This means removing restraints on the growth of the services market and access to it by providers of services, even when they are not just targeted at foreign firms. These commitments put handcuffs on the ability of governments to shape the provision of services to meet local needs. The rules would, for example, prohibit a transport monopoly, a requirement to show an unmet need before opening a new big supermarket or port, restrictions on the number and size of hotels in a region, or a ban on certain kinds of advertising.

Likewise, under the 'national treatment' rule, governments cannot give preferences to local services and service suppliers, and foreign suppliers of services must be treated at least as well as their national counterparts. An obvious breach would be to deny foreign firms the same subsidies, grants or loans that the government gives to local firms. However, recent agreements, including the RCEP, have an exception that allows subsidies to be limited to locals.

Even with this exception, the national treatment rule would prevent, for example, the exclusion of foreign investors from broadcasting or telecommunications, banning foreign ownership or leasing of land, a rule that only local communities can run ecotourism operations, levying remediation insurance only on foreign mining or forestry operators, restrictions on using offshore banks, requiring foreign firms to hire local personnel, only allowing domestic firms to run schools or hospitals, or saying only nationals can be registered as lawyers or midwives.

Other rules make it hard to regulate in ways which governments think are best for their communities but which services firms consider too burdensome. This applies to qualifications (teachers, lawyers, accountants, nurses etc), technical standards (such as land zoning, water quality, construction standards, advertising rules, mining discharges, location of hypermarkets) and licensing requirements (for fishery vessels, transport operators, schools, telecommunications, television, financial advisers).

Countries draw up their own schedules of commitments to these rules. As noted earlier, they have some choices about what they seek to include but that will be negotiated hard. Each country's final schedule will limit the right of the current and future governments to adopt new restrictions in the services sectors they have promised to keep open. They face legal challenges and trade penalties if they breach those obligations.

These restraints would apply to all levels of government - central, regional and local - as well as bodies that exercise powers delegated to them by those authorities. The leaked RCEP services chapter shows China has joined the rich countries in opposing the standard GATS flexibility that requires governments to take steps reasonably available to them to ensure the other levels of government comply. They now appear to expect strict compliance at all levels of government, possibly subject to reservations that countries are allowed to put in their schedules.

Empowering the digital domain

The 'TiSA-4' (Australia, Japan, New Zealand and South Korea) have proposed an architecture and level of commitments in the RCEP that strengthens their position in globalised markets and integrated supply and value chains. Although there is no public list of all the chapters and annexes, proposals on telecommunications and financial services appear to follow developed-country templates in the WTO, which very few developing countries have adopted. If agreed to in the RCEP, this would strengthen the dominance of the TiSA-4, and other, non-RCEP countries that would also benefit from them, while adding to the burden on developing countries and LDCs.

This is bolstered by a concept of 'technological neutrality' that was never formalised in the WTO but is being treated by those promoting these agreements as if it is accepted trade law. If a government commits a service to the RCEP's rules now, it must accept the delivery of that service through any technology in the future, even if the technology was not foreseeable when the commitment was made and it has significant negative impacts that would have deterred the government from making the original commitment. In an era where drones, robots and driverless trucks are no longer science fiction, the idea that governments would promise now to accept whatever new technologies emerge in the next 20 to 30 years is truly frightening. 

The services chapter needs to be read in tandem with the e-commerce chapter. The RCEP version of the latter has not been leaked but it is expected to follow the approach in the TPP and TiSA. The underlying presumption is that barriers to cross-border supply of services need to be reduced or removed and prevented from being adopted in the future. One rule would prohibit governments from requiring an offshore service supplier to have a local presence in the country, allowing the supplier to avoid legal liability, accountability and taxation.

A second controversial rule would prevent governments from requiring that data a company holds from doing business in the country be held within the territory and subject to its laws on privacy, consumer protection and security. Prohibiting what Google, IBM and others call 'forced localisation' means they could hold that data anywhere in the world. The servers that operate the so-called 'cloud' are mainly in the US, whose privacy and consumer protections are minimal and security laws intrusive. In TiSA the US is demanding that this rule applies to financial data as well. That is unlikely to be included in the RCEP. But the TiSA-4 will be pushing to include most of the other rules from TiSA and the TPP.

Risks of policy and regulatory failure

Central, regional and local governments are principally responsible for meeting the needs of their local communities, local businesses, workers and families, and are held politically accountable for doing so. The foreign services firms that will dominate through the RCEP chapter are motivated by expansion of their market share and maximising the profitability and value of their business, not the needs of local communities or the responsibilities of governments to their people.

This is a time of chronic instability of the global economy, rapid technological change and commitments by all the RCEP countries to the 2030 Agenda for Sustainable Development. Governments need the maximum freedom to adopt policies and regulations they think are necessary for the national interest, and the freedom to amend, withdraw or expand them as they consider appropriate to their needs at the time.

There are five kinds of failures that governments negotiating RCEP rules and commitments need to anticipate.

Policy failure: This is where a policy, such as privatisation, liberalisation or deregulation of services, turns out to be inappropriate, unworkable or damaging to important interests and needs to be changed. The policy may have been designed by consultants who are unfamiliar with the local context, required as a condition of debt financing without full consideration of the implications, copied from another country that has different circumstances, driven by ideological preferences of officials or politicians, or patterned after a popular fashion without adequate critical review and/or a proper cost-benefit analysis.

Regulatory failure: Here, it is the regulatory techniques and institutions adopted to deliver a policy which are inappropriate, unworkable or damaging to important interests and need to be changed. The causes can be similar to those behind policy failure, but are also likely to arise when the elements considered in a regulatory impact assessment or cost-benefit analysis are biased towards quantitative factors and give preference to light-handed regulation and market mechanisms (which is implicit in the RCEP domestic regulation disciplines).

Market failure: The market may not be sufficiently big to accommodate competition, or parts of it may prove unattractive to service suppliers because of remoteness, poverty of consumers, uneconomic niche markets or difficult consumer requirements. Dominant players may fail or foreign firms may decide to exit the country, leaving a void in provision because there is no longer any local capacity and no foreign interest wants to take up on similar terms.

Social failure: Firms who come to dominate the market are often not interested in providing important social services or servicing locations or communities whose need is greatest. The firm may refuse to provide the specific service altogether, charge far more than what consumers can afford, or demand excessive subsidies from local or central governments which have become captive to them because they no longer have the capacity to provide the service themselves.

 Political failure: Policies or regulatory approaches can become politically unsustainable, often as a consequence of other forms of failure.

All these forms of failure are heightened for developing countries and LDCs, whose regulatory regimes are still evolving, whose markets are limited in size and sophistication, and whose government agencies often lack strong institutional capacity and have competing priorities. Yet the leaked services chapter shows that the RCEP will systematically foreclose these countries' ability to address those failures.

The TiSA-4 want to take the RCEP far beyond the GATS and ASEAN's existing FTAs. The rules and schedules in the services chapter are being negotiated now. If ASEAN does not stick together to resist their demands, there is a serious risk that its developing-country and LDC members will be pressured to make concessions on services - possibly as a trade-off for outcomes of commercial importance to them in other chapters, such as market access for goods, or just from old-fashioned bullying. When problems emerge, the RCEP will make it almost impossible to change or withdraw these services commitments.

The timeline for these negotiations is uncertain, but the pressure to conclude them has become more intense as other mega-deals fall by the wayside. It is important to mobilise now to educate people, especially central and local governments, about the risks from the services and related e-commerce aspects of the RCEP, and to join forces with others who oppose the other parts of the deal (e.g., on intellectual property, investment, goods, state-owned enterprises) as being bad for our people, our nations and our futures.                       

Jane Kelsey is Professor of Law at the University of Auckland in New Zealand. For several decades her work has centred on the interface between globalisation and domestic neoliberalism, with particular reference to free trade and investment agreements. She is the author of Hidden Agendas: What We Need to Know About the TPP (Bridget Williams Books, 2013).

*Third World Resurgence No. 314/315, October/November 2016, pp 32-35