Published on: Dec 16, 2020

The largest Trading Bloc was formed in the Asia-Pacific. What is the RCEP?

Industry Blogs

On the 15th of November, fifteen Asia-Pacific countries signed a free trade agreement, forming the world’s largest free trade bloc. The Diplomat writes that the Regional Comprehensive Economic Partnership (RCEP) will come into force within two years. “The deal brings together 10 ASEAN members states: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam – with major trading partners Australia, China, Japan, New Zealand, and South Korea.” The trade bloc will account for 30 per cent of the world’s population and GDP.

The regional Asian trade pact has been in the making since 2012.

The Diplomat writes that although China is a major beneficiary of the trade agreement, it should be stated that the RCEP is not a China-led initiative. Many analysts have overlooked the role played by ASEAN and portrayed the idea that China has constructed the agreement. The RCEP is an ASEAN-led initiative and dubbed “a triumph of ASEAN’s middle-power diplomacy” according to academics Peter A. Petri and Michael Plummer.

It should be noted that the deal excludes the US. The Obama administration was still negotiating the Trans-Pacific Partnership (TPP), a rival Asia-Pacific trade pact. However, the Trump administration withdrew from the TPP in 2017. After the departure of the US, the remaining 11 countries, including Australia and Canada, finalized and signed a new version of the TPP in 2018.

In the aftermath of the TTP, Asian countries continued negotiating trade deals excluding the US, weakening their political power in the region.

India was also excluded from the agreement. Initially, the country participated in the negotiations, but, a fear of an influx of cheap imports due to lower tariffs resulted in a withdrawal in late 2019.

What is the RCEP?

The RCEP is a trade agreement that will lower or eliminate tariffs on various goods and services. In essence, it is an extension of free trade that currently exists under frameworks between its member countries. Experts note that the biggest advantage relates to the rules of origin, making it easier for companies to create supply chains in multiple countries. Building and selling goods across the region will be possible with just a single certificate or origin paper.

As a consequence, companies from outside the region will have a weakened competitive position. Companies located inside the region will trade with lower tariffs, better access at customs, improved market access for services as well as better investment opportunities.

The agreement is supposed to eliminate a number of tariffs on imported products for its member countries in the coming 20 years. The agreement also includes rules on intellectual property, telecommunications, financial and professionals services and e-commerce.

It will take some time for the RCEP to take effect and countries start seeing the benefits. The agreement first has to be ratified by six ASEAN nations and three other nations. It could be a slow process.

Significance of the RCEP

The BBC writes that the RCEP is not as comprehensive and does not cut tariffs as deeply as the CPTPP. However, analysts suggest that the sheer size of the RCEP makes it more significant. “Its membership includes a larger group of nations, notably reflecting the membership of China, which considerably boosts the total GDP of RCEP members,” according to Rajiv Biswas, Asia Pacific chief economist for analyst firm IHS Markit.

The CPTPP is another ASEAN-focussed free trade agreement which includes Canada and 10 other countries. It forms a trading bloc representing 495 million consumers and 13.5 per cent of global GDP. The agreement provides Canada with preferential access to key markets in Asia.

The fact that China is a member of the RCEP is especially remarkable. China has participated in a number of bilateral trade agreements but the RCEP is the first multilateral trade pact signed by the country.

With the participation of China, the long-term strategic and geopolitical implications of the free trade agreement are considerable. Peter A. Petri and Michael G. Plummer estimate that the agreement will add almost 200$ billion to the global economy and 0.2% to the GDP of its members each year.

Investment in the Bloc

Between 2003 and September 2020 Intra-RCEP cross-border investment already generated 14,000 greenfield projects. This number is higher than any other trade and investment bloc, except for the EU. After the RCEP is ratified, investment value estimates exceed the EU as the largest investment area in the world.

The new bloc brings together 15 countries at very diverse stages of economic development, from Japan and South Korea as well as Laos and Cambodia. Specific provisions are made available to support the least developed countries in the agreement. Furthermore, the diversity of the development stages of the countries generates opportunities.

Source: Malaysia’s Free Trade Agreements

Although most countries in the Asia-Pacific region have been able to keep the COVID-19 outbreak under control, they will seek to recover from the economic consequences. The trade agreement will take years to come to full effect but the opportunities it provides may be an important factor that can help bounce back Asian economies.

Critique on the agreement

The laudatory comments regarding the RCEP are not universal. Several critics have come forward and dubbed the agreement platitudinous and ineffective. The main criticism derives from the fact that the RCEP is mostly concerned with tariff reduction at a time when base tariffs are already low. It does nothing to combat sensitive topics such as government subsidies, theft of intellectual property or labour standards.

Salvatore Babones, associate professor at the University of Sydney, writes in an article for the Foreign Policy that when you get down to the details of the agreement, there is not much to get excited about. “For example, Japan’s single largest category of exports to China is machinery, at over $10 billion a year. China’s highest tariffs on Japanese goods in this category are currently just 10 per cent, scheduled to reduce to zero by 2030 or 2035. But in the most important categories of machinery—industrial robots and machines used to print integrated circuit boards—the tariffs are already zero.”

It comes down to the fact that there is a focus on tariffs, which there shouldn’t be since the impact will be minimal. Other issues that actually need addressing, such as China’s handling of human rights issues, the trade war and their interference in Hong Kong are not present in the agreement.

And while there are plenty of issues that need addressing in the Asia-pacific region, the trade agreement should be assessed based on the effect it will have on its member’s economies. Within two years the agreement will be ratified by its member countries, and the effects can be accurately measured.