Report Contents

November 16, 2020

Asia

ASIA: RCEP heavy on symbolism, but its economic effects will be limited

BY Gabriel Wildau, Bob Herrera-Lim, Tobias Harris

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( 6 mins)
  • After eight years of negotiations, the fifteen participants in the Regional Comprehensive Economic Partnership (RCEP) signed a final agreement in a virtual summit on Sunday, 16 November.
  • The economic benefits may be relatively modest in the near term but simplifying rules of origin will promote greater integration along supply chains.
  • The agreement illustrates that Asian countries are not interested in decoupling from China and shows that Asia is at the center of global rule making, although regional integration is proceeding at multiple speeds.

The Regional Comprehensive Economic Partnership (RCEP), which covers roughly 30% of global GDP, is notable not only as the first multilateral regional trade agreement that includes China but also as the first trade agreement involving Japan, China, and South Korea outside the World Trade Organization. As arguedpreviously, the conclusion of RCEP is not an unqualified victory for China in a bid for regional hegemony. Rather, coming less than two years after an updated Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) came into force among 11 countries (including seven RCEP members), it highlights the extent to which Asia, due to its increasingly central role in global trade and growth, is becoming the primary rule-setter for economic integration. The willingness of CPTPP members and US security partners to conclude RCEP shows that they do not support “decoupling” from China but instead still want to engage constructively with China even as they may be mindful of its growing military might and political reach.

However, the complexity of RCEP and the concessions granted to build consensus, when considered alongside the CPTPP, suggests the existence of a “multi-speed” Asia. The region as a whole is pursuing deeper integration, but different countries will be moving towards integration at different speeds and with greater or lesser commitments to liberalization. The CPTPP remains the highest-standard set of rules in the region, with its “behind-the-border” provisions regarding regulatory harmonization, non-tariff barriers, state-owned enterprises, and labor and environmental standards going beyond RCEP. RCEP deepens integration between the region’s developed and developing economies, allowing the latter to take more time to adjust to a more modest set of rules. Not surprisingly, it is the bloc’s largest economies – China and Japan – that are estimated to benefit most from the creation of a new baseline set of rules. China’s trade with countries that receive roughly 25% of China’s total exports and from which China takes roughly a third of its total imports will now be governed by a single agreement, while Japanese producers will be able to include more developing economies into their supply chains. ASEAN countries will benefit from their ability to import more from their RCEP counterparts, but some of the group’s member countries will have to compete with exports from Japan and South Korea to China, and vice versa. The pact could eventually make Asia a more coherent platform for manufacturing along increasingly sophisticated supply chains, but as long as the region’s economies continue to run trade surpluses, the impact on growth outside the bloc will be limited. It is estimated that RCEP will increase real income by around USD 187bn per year by 2030 for the signatories, and only USD 22bn for countries outside the bloc.

Final text

There are relatively few surprises in the final text itself. Reflecting the diversity of RCEP’s membership – the mix of wealthy, developed economies and poorer economies like Cambodia and Laos – the final agreement makes substantial allowances for members to phase out tariffs and implement the new rules in the pact. Members were also able to negotiate substantial exemptions to investment and trade-in-services rules. In some cases, it could take more than twenty years for tariff elimination to take effect. Trade liberalization will focus more heavily on industrial goods – 91% of tariffs on industrial goods will eventually be eliminated – than agriculture, although there was slightly more liberalization of relatively less politically sensitive agricultural products than anticipated. The digital chapter, while more modest than the CPTPP’s and making room for exceptions in the name of “essential security interests,” still lays out basic rules against data localization requirements and the imposition of duties on data flows.

The rules of origin chapter remains the most significant, replacing the competing rules found in the Association of Southeast Asian Nations (ASEAN)’s trade agreements with the “Plus Five” countries (China, Japan, South Korea, Australia, and New Zealand) with a common standard for the entire bloc. This will enable more exporters to benefit from preferential tariffs and could enable even lower-income members of the bloc to receive more investment. One surprise in the final agreement is that the RCEP-15 accepted a relatively modest regional value content (RVC) requirement for a good to qualify as originating in bloc: 40%, roughly equivalent to the RVC requirement in the CPTPP.

What happens next

It could take as long as two years before the agreement comes into force. It will require nine members – at least six ASEAN members and at least three of the five “Dialogue partners” – to notify the ASEAN secretariat that the agreement is ratified before it enters into force. Coincidentally, nine of the 15 signatories will need to go through formal domestic ratification procedures. The agreement will be open to new members starting 18 months after it enters into force, although India will be able to join any time after RCEP enters into force. The agreement also calls for the creation of a secretariat to oversee the implementation and interpretation of the pact, but how this will be organized and where it will be located has not yet been determined.

India is unlikely rejoin despite the opening granted to it. In the year since Prime Minister Narendra Modi’s government opted to leave the negotiations, Modi and his cabinet ministers have amplified their warnings about the threat RCEP would have posed to Indian manufacturers. Japan and Australia, both of which would have preferred India to stay in, will seek alternative ways to strengthen ties with India. The Resilient Supply Chain Initiative (RSCI) launched by the three countries in September could enable India to be more deeply integrated into regional production networks without being an RCEP member.

Finally, the conclusion of RCEP could mean a renewed focus by Japan and other CPTPP members to admit new members. The pending end of the UK’s transitional agreement with the EU is lending urgency to its interest in CPTPP membership. Japan has voiced its eagerness for both the UK and Thailand to join in the near future.