Sri Lanka seeks to join the RCEP, the world’s largest trade bloc, as a step towards economic recovery
Joining RCEP requires overcoming internal challenges:
Socio-political factors that pose potential barriers
Sri Lanka will take a bold step towards deeper economic integration, aiming to join the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade area. President Ranil Wickremesinghe’s intention to apply for the RCEP trade bloc membership will be an important milestone in Sri Lanka’s roadmap to rebuild the country’s crisis-hit economy. RCEP, known as the world’s largest free trade pact, encompasses 15 Asia-Pacific 
countries covering about 30% of the world’s gross domestic product and population. It includes China and Japan but not the US.
RCEP entered into force on January 1, 2022 for ten original parties: Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand, and Vietnam. RCEP then entered into force for the Republic of Korea on February 1, 2022, Malaysia on March 18, 2022, Indonesia on January 2, 2023, and the Philippines on June 2, 2023. RCEP is the world’s largest free trade agreement by members’ GDP.
RCEP negotiations were launched in November 2012 between the Association of Southeast Asian Nations (ASEAN includes 
Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and ASEAN’s free trade agreement partners (Australia, China, India, Japan, New Zealand and the Republic of Korea).
India’s withdrawal
India withdrew from RCEP negotiations in November 2019, and on November 15,2020, Leaders endorsed the Ministerial Declaration on India’s participation in RCEP, stating that India may commence RCEP accession negotiations at any time following the Agreement’s entry into force. Before India decided to pull out of the China-dominant 15-member RCEP process in the latter stages of an eight-year negotiating process, Sri Lanka’s ambitions to tie up with RCEP seemed straightforward.
RCEP promises more profound integration compared to previous regional trade agreements Sri Lanka has signed, such as SAFTA, BIMSTEC, and APTA. The scope of import tariff cuts is extensive, with reductions on about 80-90% of existing tariff lines, except for politically sensitive agriculture industries. The Agreement excludes controversial topics, including labour rights, environmental concerns, government contracts, and subsidies. However, it includes intellectual property, telecommunications, financial services, online commerce, and professional services.
The world’s largest regional trade bloc on Sri Lanka’s doorstep – the Regional Comprehensive Economic Partnership (RCEP), established in November 2020 – raises fresh questions about how the country will navigate its most recent economic turmoil.
Internal conclusion
Chief Negotiator of the Office for International Trade, K. J. Weerasinghe, explaining the latest developments of Sri Lanka’s RCEP application, said that as soon as the RCEP reaches an internal conclusion, Sri Lanka will reap the rewards of regional integration.
“President Ranil Wickremesinghe wanted to write to the RCP Secretariat, which is also the RCEP secretariat signalling Sri Lanka’s intention to join RCEP. So, we have sent a letter of intent to the RCEP secretariat, which has been circulated around the RCEP member states. Then, they will set up a working committee to discuss further matters. Sri Lanka is the first to make an RCEP application, and the RCEP is still working on procedures for accepting new members. Last July, RCEP opened up for new members, but they are still finalising how they will go about it.
For example, the WTO has established a working group to accept new members. So what they do is they make a report including all the policies of the relevant country, and thereafter, they make a decision whether to be included or not.
So, Sri Lanka’s application has been circulated, and it is still being looked at because the interim response says that they are still working on the internal procedures. They are not yet ready with a process to accommodate new members. Once that is ready, we will be starting negotiations. First, we will work with the RCEP secretariat to accept the RCEP agreement, and then we will have bilateral negotiations with individual members. We already have the Singapore agreement with us, which has already been concluded, as well as the Thailand agreement. With China, we are still negotiating; the next round of talks is in April. The Malaysian president has also indicated the need to initiate discussions, and we will begin it soon. All in all, we are working with some RCEP members because, by the time our application to join is accepted, we will have completed agreements with some countries in the region.
A team of senior officials of the Government of Sri Lanka concluded a successful Fact Finding Mission to Jakarta, Indonesia to explore avenues for early entry into Regional Comprehensive Economic Partnership (RCEP) from June 12 to 14, 2023.
Also, it is essential to mention that many studies are taking place regarding this, and reports are being made. RCEP membership is 10 ASEAN and five other countries, a vast market. RCEP is a long-term plan of President Ranil Wickremasinghe to achieve his target, which is to achieve the status of a developed nation by 2048,” Weerasinghe added.
RCEP integration
Daily News also contacted a Professor in Economics at the University of Colombo, Prof. Sirimal Abeyratne, to gain a broader picture regarding the benefits and challenges while Sri Lanka is pursuing RCEP integration.
“It’s an organisation of two kinds of partnerships. One is ASEAN, which is the original one made up of ten countries in the Southeast Asian region. Then, the neighbouring countries around them entered into free trade agreements with ASEAN.
So, it includes China, India, Japan, South Korea, Australia, and New Zealand. So, when you take it as a whole, it is the largest free trade area in the world in terms of population and GDP. So, it would be an enormous benefit if a country like Sri Lanka could join RCEP. But there are challenges, too.
First, regarding the benefits, most notably, Sri Lanka can open up its international trade to the largest free trade area in the world. As far as our export market in the world is concerned, we are still dependent on our traditional export markets: the US, EU, and the UK. And we haven’t diversified enough into these fast-growing Asian markets when considering the export destinations. So, this is one area where Sri Lanka can benefit. We can expand our exports to this region.
Also, if we have the gateway to connect to the Asian region, it can also be the gateway to Asian investments. It can also be blended with the specific advantages available only to Sri Lanka.
These two aspects are important for investors to invest substantially in Sri Lanka. So Sri Lanka would benefit from that as well.
The third point is it will also provide us with the free trade opportunity to import whatever we need. Our consumer goods, as well as producer goods from this region, which is very important. It will also lower costs like consumer costs as well as production costs. So these are the three kinds of benefits that we can anticipate.
Anyhow, the challenges are also bigger. Challenge number one is if we enter into free trade agreements with RCEP or any other bilateral or multilateral agreements, we should also be prepared to adopt policy reforms at home.
“When domestic policies are in disarray, entering into complex bilateral or multilateral agreements does not generate anticipated benefits. That’s precisely what has happened with the Indian Free Trade Agreement.
India offers us a big market, but we could not benefit. We did not generate enough investment, nor did we generate enough exports, mainly because of internal issues. So we were not able to benefit from that Agreement. The same could also materialise with the RCEP agreement unless and until we improve our domestic, unilateral policy environment.
Secondly, we need to change our attitude.
I remember what happened with the Singapore bilateral trade agreement, which, by the way, is still in limbo. The main argument is that Sri Lanka is still a developing country, and as such, these agreements fundamentally disadvantage us as we cannot stand on par with Singapore.
However, if you look at ASEAN or RCEP, we see big countries like China and India or rich countries like Japan and Australia all being a part of ASEAN.
Also, there are poor countries like Laos and Myanmar. They don’t make an outcry, saying they cannot trade or enter into agreements with all these big or rich countries. So, we need to change that attitude and look at the bigger picture; otherwise, it will not be easy for Sri Lanka to join ASEAN and reap substantial benefits.
The third challenge is our cost of production. We need to make a serious attempt to assess our cost of production.
Because in a free trade environment, we must be competitive in the region. Being strategically located in the region and being closer to a global shipping lane is not enough to be competitive. Nor is having natural resources and scenic landscape and beauty. Because we also need to offer a better competitive investment environment to attract substantial investments.
Without these factors aligned, investments will not come to Sri Lanka. In this case, one of the significant aspects we should consider is our cost of production. Because our energy costs, our labour costs, and our transport costs will determine our cost of production and increase attractiveness to foreign and domestic investors.
Due to the recent changes, we are unsure where we stand in the region. We cannot determine where we are because no studies have been done correctly recently. Thus, it is another aspect that we need to be cautious about,” Prof Abeyratne said.
When queried regarding whether there could be any other reasons that would be a barrier for us to enter RCEP, Prof Abeyratne said that socio-political reasons, such as the country’s political and domestic responses, might hinder this partnership. “Our political response to an open economy and trade agreements with the rest of the world has been complicated. And even our business community is divided in this regard.
One faction of the business community is looking for access to the global market and is happy about these agreements. But another faction of the business community fears open markets and is only looking at exploiting the domestic market, just targeting 22 million. They are not happy about entering into such agreements. So, these attitudes must also be considered when it comes to socio-political aspects. After all, the potential market is not the Sri Lankan market, which is only 22 million. The market is global, and we should be able to derive benefits from the worldwide market,” Prof. Abeyratne added.
Sri Lanka’s Bid to Join RCEP
* The Regional Comprehensive Economic Partnership (RCEP) is the world’s largest free trade agreement.
* Formed in 2020, it encompasses 15 Asia-Pacific nations with 30% of global GDP and population.
* Excludes India but includes China, Japan, ASEAN countries, Australia, New Zealand, and South Korea.
Why does Sri Lanka want to join?
*Open up export markets to a vast region with significant growth potential.
* Attract foreign investments and diversify Sri Lanka’s economy.
* Gain access to cheaper imports, potentially lowering consumer and production costs.
Challenges to Entry:
*Policy reforms: Domestic policies must align with RCEP standards for full benefits.
* Competitive disadvantages: Sri Lanka must address higher production costs than regional players.
*Attitude shift: Moving away from domestic market focus to embrace regional competition.
* Divided business community: Differing opinions on the impact of open markets.
*Uncertain political climate: Complexities in Sri Lanka’s political response to trade agreements.
Current Status:
* Sri Lanka officially expressed its intention to join in November 2023.
* RCEP members are still finalising procedures for accepting new members.
* Bilateral negotiations with individual members like China and Malaysia are ongoing.
Potential Impact:
* Increased trade and investment could boost Sri Lanka’s economic recovery.
*Challenges must be addressed to ensure equitable benefits and avoid worsening existing issues.
