On 15 November 2020, 15 countries of the Asia Pacific region entered into the largest free trade agreement in history, known as the Regional Comprehensive Economic Partnership (RCEP). Envisioned to be the framework for facilitating trade and services, the RCEP aspires to transform the future global trading system by introducing a new common Asian model of economic integration that will reorient the global connectivity towards the Asia Pacific. Once in force, the agreement will reduce trade and service barriers for nearly 30% of the world’s population and production, and will bring $186 billion annually to the global economy and 0.2% to its members’ GDP on a permanent basis [Petri and Plummer, 2020]. Thus, the major features that make the agreement critical for global geopolitics and geo-economics are outlined further.
The RCEP brings together 10 members of the Association of Southeast Asian Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, along with Australia, China, Japan, New Zealand and South Korea. The free trade agreement (FTA) that was signed after 31 rounds of negotiations over eight years, needs to be ratified by at least six ASEAN countries and three non-ASEAN countries to formally enter into force, which is expected to happen not earlier than the second half of 2021 [Wong, 2020]. Although the full text of the RCEP is not available to the public, the announced topics of 20 chapters enable us to delineate its differences.
The primary importance of the agreement lies in its uniform rules of origin for all 15 member states, that is to say, requires one certificate of origin allowing to bypass individual procedures for each country. The harmonized rules and procedures, besides the minimization of costs, affect numerous processes, including digitalization, relocation of manufacturing and regionalization at a regional level, as well as the standardization of national procedures, as a result of changing customs and tariffs, taxation, government subsidies and access to the labor market at the national level [KPMG, 2020]. It also pushes to reorganize the supply chain along the major routes due to the optimization of processes. Given the complexity of trade operations in the Asia Pacific, the agreement, therefore, impacts not only trade processes but also enables to advance the manufacturing sector and strengthen the regional supply chains.
In addition, according to the estimates of the Peterson Institute, the RCEP is likely to remove tariffs on about 80-90% of products [Petri and Plummer, 2020]. However, the member states are trying to find a consensus for economically and politically diverse member countries. In particular, the removal of tariffs on food, for instance, might lead to a surplus of cheaper export products that might destabilize the domestic market. This is why the RCEP is not removing tariffs on 39% of ASEAN exports, and similarly, Japan’s agricultural tariffs will remain intact [KPMG, 2020]. In fact, the issue of an overflow of cheap Chinese manufactured goods and dairy products from New Zealand in the Indian market were among India’s major concerns in joining the RCEP, which subsequently lead to termination of negotiations last year. Therefore, when dealing with both small and large economies, protection of the domestic market must be essential, especially with countries like the manufacturing giant, China.
In addition to trade in goods, the RCEP covers trade in services, which will include approximately 65% of the services sector, in order to promote areas such as competition policy, intellectual property rights (IPRs), investment, economic and technical cooperation and government procurement [IISD, 2020]. Some have criticized the RCEP for a weak promotion of e-commerce and omitting provisions on environmental protection, government subsidies and the role of labor unions and financial services in comparison to other FTAs.
In terms of geopolitics, some consider the RCEP as a geopolitical victory of China, while others see it as a triumphalism of the ASEAN. In fact, both assumptions are legitimate, since China is the largest beneficiary of the pact and the ASEAN, as the initiator of the negotiation process, has taken the central position over the course of negotiations. Although the RCEP is often labeled as a China-driven agreement, during the discussions, the ASEAN served as a main coordinator of negotiations, and the ASEAN Secretariat provided full assistance in maintaining the negotiations process and expects to continue its role after the ratification of the RCEP. The ASEAN member states believe that the ASEAN successfully mediated between regional powers using its middle power diplomacy [Xijun, 2020]. If the ASEAN can sustain its centrality within the further implementation of the RCEP, the RCEP will contribute to strengthening the ASEAN’s position in the Asia Pacific. The ASEAN’s centrality indeed played an important role in uniting the regional powers, since if other major players were in charge of the process, it would have been less likely to be signed. On the other hand, the ASEAN has already signed FTA’s with all non-ASEAN members of the RCEP, hence, economically it will not gain much.
Meanwhile, the new FTA will probably benefit China, Japan and South Korea, major trading partners that do not have a common free trade zone. The China-Korea FTA is the only FTA working within the triangle, since Japan lacks an agreement with both China and South Korea. Negotiations on a trilateral FTA with China, Japan and South Korea were launched in the same year as the RCEP, in 2012, yet far from being completed. It is worth mentioning that China is the largest trading partner of Japan and Korea, and Japan is the third, Korea is the fourth largest partner of China [Petri and Plummer, 2020]. Accordingly, the RCEP will be the first trade agreement to unite China, Japan and South Korea.
As for China, which does not have multilateral trade agreements, but rather bilateral arrangements with regional partners, the signing of the RCEP means expanding its influence in the Asia Pacific. Considering the assertive strategy of Beijing, in addition to the ongoing U.S.-China trade wars, the signing of the RCEP has given China a geopolitical advantage along with expanding its trade capacity within the region. This particularly true in the light of the withdrawal of the U.S. from the Trans-Pacific Partnership (TPP) that later became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), when the RCEP left overboard the U.S and India. Moreover, in 2019, the latter withdrew from negotiations due to the protests in the country, though the member countries agreed to keep the opportunity to join the RCEP later. The Trump administration’s decision to leave the TPP was explained by its shift towards the new Free and Open Indo-Pacific (FOIP) vision. Nevertheless, the absence of the U.S. from the largest multilateral Asia-Pacific trade platform does not favor U.S’s strategy, since the RCEP is projected to become a central mechanism of cooperation in East Asia. If the potential of the RCEP and the CPTPP is combined, the Asia-Pacific is moving towards shifting the global trade networks further to the East.
Given the size of the region, strengthening of interdependence of East Asia through the RCEP is expected to bring positive changes for the whole region, especially during the post-COVID-19 crisis time and the trade war between the U.S. and China. The signing of the RCEP itself was triggered by the abovementioned issues, which the member states are trying to solve through their economic integration. If successfully implemented, the RCEP might bring new changes to the economic architecture of the world by institutionalizing its structures and sustaining its center in Asia.
References:
IISD (2020). With RCEP Agreement Signed, Eyes Turn to Interactions Among Trade Deals in the Asia-Pacific Region. Retrieved from https://sdg.iisd.org/commentary/policy-briefs/with-rcep-agreement-signed-eyes-turn-to-interactions-among-trade-deals-in-the-asia-pacific-region/. Accessed on 17.12.2020
KPMG (2020). Signing of Regional Comprehensive Economic Partnership. Impact for the Asia Pacific region. Retrieved from https://home.kpmg/cn/en/home/insights/2020/11/signing-of-regional-comprehensive-economic-partnership.html. Accessed on 17.12.2020
Petri, Peter A. and Plummer, Michael G. (2020). 20-9 East Asia Decouples from the United States: Trade War, COVID-19, and East Asia’s New Trade Blocs. Peterson Institute for International Economics Working Paper 20-9, JUNE 2020. Retrieved from https://www.piie.com/system/files/documents/wp20-9.pdf. Accessed on 17.12.2020
Wong, Dorcas (2020). RCEP FTA Signed: What Can Foreign Investors in China Expect? Retrieved from https://www.china-briefing.com/news/rcep-fta-signed-what-can-foreign-investors-in-china-expect/. Accessed on 17.12.2020
Xijun, Deng (2020). RCEP: Historic milestone for ASEAN centrality. Retrieved from https://www.thejakartapost.com/academia/2020/11/20/rcep-historic-milestone-for-asean-centrality.html. Accessed on 17.12.2020
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.