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The free trade agreement RCEP – A historic milestone

The free trade agreement RCEP – A historic milestone

At a time when Covid-19 is ravaging the global economy, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP) at a virtual Summit on November 15. The RCEP is a meaningful achievement for regional cooperation and a historic milestone in the globalization process. The RCEP is expected to come into force in the second half of 2021.

Who is involved?

The RCEP is made up of 10 Southeast Asian countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), as well as China, Japan, South Korea, Australia and New Zealand.
India was involved in early negotiations but chose to withdraw last year. There was a fear in India that its industries would be unable to compete with China and lower tariffs could hurt local producers. As one of the original negotiation partners, India can join the RCEP at any time once the deal comes into effect.

The Regional Comprehensive Economic Partnership (RCEP)

Source: World Bank

Why is the RCEP important?

The RCEP marks the world’s largest Free Trade Agreement (FTA), covering a market of 2,3 billion people with a combined size of US$25,8 trillion or 30% of the world’s GDP. It will form a single goods and services trading market in the Asia-Pacific region with tariff elimination of at least 92% of goods traded amongst participating countries. More than 65% of services sectors will be fully open with increased foreign shareholding limits including in Professional Services, Telecommunications, Financial Services, Computer, Distribution and Logistics Services. The pact’s rules of origin set common standards for how much of a product must be produced within the region for the final product to qualify for duty-free treatment. It will make business more predictable for companies to set up supply chains that span several countries and encourage companies to invest more in the region.

Beyond its economic value, the RECP is an indication of Asian region’s political mindset toward closer regional relationships and less dependent on outside assistance. The RCEP brings together countries that have sensitive diplomatic relationships. China, South Korea and Japan, for example, are for the first time under one trade agreement.

Who is likely to benefit, who not?

The RCEP will significantly boost trade and economy in the Asia-Pacific region. According to a research of the Peterson Institute for International Economics, a think-tank in Washington, the RCEP will add $186 billion to the world economy and 0.2% to its members’ GDP on a permanent basis. These benefits will go largely to China, Japan, and Korea, with gains of $85 billion, $48 billion, and $23 billion, respectively. Other significant RCEP winners will include Indonesia, Malaysia, Thailand, and Vietnam.

RCEP – World’s largest trade bloc

The RCEP also offers a win for China politically, because it enabled China successfully positions itself at the center of the Asia-Pacific region’s trade and investment networks.
The United States bailed on the Trans-Pacific Partnership (TPP), a major trade deal that would have enhanced relationships with several countries in the Asia-Pacific region, including Japan, Australia, Malaysia, Singapore and Vietnam, when Trump took office. The withdrawal significantly diminished US influence in Asia-Pacific economic diplomacy. It is likely that the Biden administration will change Trump’s policies in dealing with Asia, but it is still not clear if the US will join any trade agreement again in the region.

The pact does not include Taiwan, another important economic player in the region. Trade represents 62% of GDP in Taiwan. And RCEP member nations’ trade with Taiwan accounts for 58% of Taiwan’s total trade. Taiwan will face increasing competition in its important export markets such as China and South Korea. More Taiwanese companies may have to relocate their production facilities from Taiwan to Southeast Asian countries.

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