All you need to know about the RCEP, the world’s largest economic trade agreement

Map representing the signatory countries of the agreement. © https://roskill.com/news/macroeconomics-rcep-agreement-creates-trade-tensions-and-partnerships/

by marco Scarangella

What does the RCEP provide for?

The agreement includes 20 chapters of rules covering several fields. In the immediate term, the pact aims to eliminate duties on 65% of goods imported and exported within the region. In the long term, the agreement aims to reduce tariffs between member countries by 90% over 20 years, expanding the services sector and establishing common trade rules.

It also includes provisions on intellectual property, telecommunications, financial services, e-commerce and professional services. In addition, it overcomes the limits imposed on existing bilateral free trade agreements between countries in the region, first and foremost, the ‘rules of origin’ that determine where goods come from. Before the pact was signed, a product made in Indonesia containing Australian parts, for example, could be subject to duties in some Asean countries. With the RCEP, components from any member country would be treated equally, giving companies in the region an incentive to look for suppliers within the trade region.

However, agriculture remains absent from the understanding, and there is limited inclusion of the service sector and sectors deemed strategic. Little progress has been made in defining common standards for products, and no progress has been made on labour and environmental protection or on the regulation of State-Owned Enterprises (SOEs). The reason for this is mainly to be found in the great diversification of the economies of the countries party to the agreement, which are currently at different stages of their development. However, the RCEP will create common rules of origin for products in the area, so that certificates of origin issued in one member country will be valid throughout the region, thus reducing internal shipping and transaction costs.

The moment of the signing of the RCEP by teleconference on 15th November 2021

© https://www.globaltimes.cn

Who has decided to enter the agreement and who has not

Among the fifteen participants in the RCEP there are very different countries. Firstly, the Far East’s three often competing major economic powers - China, Japan and South Korea – that signed for the first time a joint free trade agreement. This is why the Chinese Premier, Li Keqiang, called it a ‘victory for the free market and multilateralism’.

Apart from being certainly due to the need to boost their national economies, the signatures of Australia and Japan can be considered the product of the last four years of Donald Trump’s Asia policy. The ‘vacuum’ left by the United States at a regional level has favoured a rapprochement of regional economies with China.

Also benefiting from this agreement will be the ASEAN countries - the countries of South East Asia - which will increasingly become the recipients of South Korean and Japanese investment in producing components for their industry. The

consequence will be to increase their industrial capacity and, in the medium term, lead to a reduction in income gaps in the region. In recent months, South-East Asia has recorded better economic figures than the rest of the world, partly due to the pandemic’s successful containment. In particular, Vietnam is driving the region’s recovery, with GDP up 2.6% in the third quarter of 2020 compared to the same quarter last year. This is in addition to positive figures for the region as a whole: countries such as Indonesia (GDP 2021 +6.1%), Cambodia (+6.8%), the Philippines (+7.4%) and Malaysia (+7.8%) will drive growth for the entire region.

The significant absentee from the RCEP is India, which had withdrawn from the negotiations as early as 2019, citing the need to protect its manufacturing from the competition and for fear of seeing its trade deficit with Beijing increase.

This move further divides the two Asian giants, which are reeling from a summer of tensions in the Himalayas. New Delhi had decided to self-exclude itself from the agreement. It feared that with the removal of most tariffs, the Indian market would be flooded with cheap foreign products, effectively hitting small and medium entrepreneurs who numbered over 63 million in rural and urban activities in 2019 alone. Delhi’s decision will make medium and long-term economic growth targets more complex and the acquisition of the technology needed to support the country’s economic development more difficult, probably making it necessary to strengthen relations with Washington and Brussels.

Is the RCEP a victory for China?

One of the most critical issues within the RCEP is the Chinese economy’s disproportionate size compared to others, especially after India withdrew from the negotiations. Indeed, there are many advantages of the agreement for Beijing. This pact will allow China to strengthen its sphere of influence in the face of growing USA pressure, mitigate the risks of losing relevance in international value chains and finally do away with the idea that China can be isolated in a global economy. The RCEP is the cornerstone for the creation of an ‘Asian bloc’ which - although less ambitious than other free trade areas such as the EU and NAFTA, which do not offer the same level of integration - represents a turning point in the future of international economic relations.

Comparison of GDPs of the world’s three largest trade agreements

© marco Scarangella

This is why the agreement is considered a geopolitical victory for China, which gets to formalise and strengthen ties with other Asian countries, presenting itself as an alternative to the economic vacuum and loss of credibility bequeathed to the United States by Donald Trump.

Is the RCEP a wake-up call for the West?

The signing of this historic agreement has alarmed the American political and business world. After the news of the signing of the RCEP, President-elect Joe Biden immediately stated that it will be the United States and its allies who will have to write the rules of free trade, not China. He has already announced a plan on international trade that will be made public in his office’s first weeks. A statement that seems to deviate from the Trump administration’s policies in the name of ‘America First’.

It was precisely the US withdrawal from the Trans-Pacific Partnership in 2017 that was one of the factors that facilitated the conclusion of the RCEP and enhanced Chinese centrality in the Asian trade games. Three key US allies (South Korea, Japan and Australia) have become part of a Chinese-dominated arrangement, so a new ‘pivot to Asia’ is increasingly necessary for Washington if the US is not to lose economic, political and trade ties in an increasingly strategic region.

Regarding the European Union, the situation is somewhat different. Europe has always been closely linked to the United States, but relations between the two old allies have cooled down during the four years of the Trump government. Something will probably change with Biden’s election, but it is clear that Europe is looking to Asian countries (and China in particular) as a possible trading partner. The EU is now in the middle of the dangerously strained relations between China and the USA and has no interest in a generations-long conflict between the two superpowers. Europe intends to maintain and strengthen its economic relationship with China but under stringent conditions. If the EU were to adopt this kind of policy towards China, it would prompt Biden to adopt a more constructive approach towards the Asian Dragon. This is a stance that – judging by his long involvement in foreign relations and with China – the President-elect would be inclined towards anyway, despite the election rhetoric.

The signing of the RCEP mega-trade deal is inevitably pushing European countries to make clear and decisive political and economic choices. Paradoxically, this pact may prove to be a wake-up call for Europe from the slumber of recent years.

In the middle of the pandemic, East Asia is the only area of the world that has already restarted. In fact, it never completely stopped, which means that it will have a time advantage in redefining the geography of regional and global production.