RCEP – significant for recovery of the global economy

After eight years in the making the RCEP (Regional Comprehensive Economic Partnership) is now the latest and most significant deal in a long list of trade agreements for Asia. While the ink on Vietnam’s recently signed free-trade agreement with the European Union (the EVFTA) is still wet, the signing of the RCEP last Sunday 15 November 2020 has created the biggest-ever trade bloc and is important from a global perspective for various reasons.

Unmatched in size

The RCEP is the world’s biggest free-trade deal ever signed. Its 15 Asia-Pacific member nations together represent around a third of the total global population and almost 30% of global GDP.

Ten of the RCEP member countries are of the Association of Southeast Asian Nations (Asean): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The other five partners are Australia, China, Japan, New Zealand and South Korea.

RCEP and CPTPP, what is the difference?

The RCEP is seen as a rival of the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). The CPTPP, originally a US-backed agreement named TPP (Trans-Pacific Partnership), was an ambitious trade agreement between 12 member countries (Japan, Vietnam, Brunei, Malaysia, Singapore, Australia, New Zealand, Canada, the US, Mexico, Peru and Chile). The deal was signed in 2016 under Obama’s administration with the aim to strengthen alliances with and show commitment to Asia. The agreement however was never ratified by the US congress. President Donald Trump withdrew from the agreement on his first day in office in January 2017 after his ‘putting America first’ presidency campaign.

The TPP was revised by the remaining signatories and given new life under the name CPTPP.

Both RCEP and CPTPP stimulate intra-East Asian integration around China and Japan. The main difference between the two trade agreements is that compared to the CPTPP, the RCEP is relatively unambitious. It does not cover labour and environmental standards, agriculture is largely absent and the RCEP does relatively little to set common standards for products. Because of these lower standards and criteria it is expected that the economic growth caused by the trade policies of the RCEP will be evident much faster than that of the CPTPP.

What is in the RCEP deal?

The RCEP trade agreement aims for the same as most other free trade deals. Liberalizing trade and investment across the Asia-Pacific region by diminishing tariffs and red tape and introducing new rules on government procurement, competition policy and e-commerce.

In the RCEP agreement however, there are two elements that stand out. The first is rules of origin. These are the criteria that determine where a product was made. All of Asean’s existing trade agreements have different rules of origin. This means that for example if a company in Thailand makes a vacuum cleaner it might be eligible under a free trade deal with Vietnam but would need to meet different criteria to be eligible under a deal with Cambodia. Under this new RCEP trade agreement you can freely trade your product with every member nation using only one set of criteria, one piece of paper.

The other element that stands out in this trade agreement is the fact that this is the very first free trade deal between China, Japan and South Korea. Although the trade agreement is quite shallow, politically this is a big step and something that would have been very hard to accomplish if they had tried to do it only among themselves.

Significance for China

The ongoing trade war with the US has caused China to diversify its trade options and reduce reliance on the US market. The complete stand still of global supply chains during the global Covid-19 pandemic further underlined the importance of securing reliable regional supply chains.

The China-backed RCEP is expected to be a positive driving force in the recovery of the pandemic-hit world economy. This would pull the economic centre of gravity towards Asia even more, giving China an important voice in writing trade rules for the region.

Significance for the world economy

According to computer simulations recently published by Brookings, RCEP could add $209 billion annually to world incomes and $500 billion to world trade by 2030.

The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources. Although the RCEP is not as rigorous as the CPTPP, it incentivizes supply chains across the region and also caters to political sensitivities. RCEP’s favourable rule of origin is expected to attract foreign investment. The RCEP takes Asia a step closer to becoming a coherent trading zone like the EU or North America.

Before the RCEP takes effects and we can start seeing the effects of this biggest-to-date trade deal on the South East Asian and world economy, six Asean nations and three other member countries first need to ratify the deal in their national parliaments.