Report Contents

December 14, 2020

Macro Series

Comment – How to look at the RCEP

BY Jonathan Fried

Share on twitter
Share on whatsapp
Share on facebook
Share on linkedin
Share on email
Share on reddit

Listen to our reports with a personalized podcasts through your Amazon Alexa or Apple devices audio translated into several languages

en flag
zh flag
de flag
pt flag
Press play to listen
( 8 mins)
  • The Regional Comprehensive Economic Partnership (RCEP) is a large trade agreement.
  • While it falls short of the US-inspired CPTTP, it will bring a range of benefits.
  • Particularly important will be whether the US and India choose to become associated.

Formation and coverage

On 15 November last, all members of the Association of South East Asian Nations (ASEAN), 1 along with China, Japan, South Korea, Australia, and New Zealand, signed the Regional Comprehensive Economic Partnership (RCEP).

Covering about 30% of global GDP and population, and 28% of global trade, the agreement has been portrayed as the world’s largest free trade agreement ever, and as cementing China’s domination of an emerging Asian economic bloc, thereby countering the US-inspired Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) to reorient trade and investment growth away from global to regionally-focused ties.

On closer examination, the impact is likely to be more complex.

What’s in the RCEP

The RCEP is a long document, covering many trade areas …

Comprising over 500 pages, and accompanied by 5,000 pages of tariff lines, 2 RCEP addresses trade in goods and services, investment, and intellectual property, alongside a dispute settlement regime and the creation of a multinational secretariat. In each of these areas, however, the agreement falls short of the kinds of disciplines found in CPTPP and other modern regional and plurilateral agreements:

  1. Tariffs are to be liberalized on 90% of the goods traded in the region, but already many goods are traded freely among ASEAN members under an existing patchwork of bilateral FTAs and ASEAN’s own integration agenda. 3 For the remainder, given the differing levels of development of the members, phase-ins are to take up to 20 years; some commitments vary between ASEAN countries inter se, and others by product; 4 and countries reserve rights to reimpose tariffs to protect domestic industry from injury.
  2. Rules of Origin and Customs-related Procedures. A positive aspect is that goods will qualify for preferential treatment if componentry of at least 40% of the value of a good originates in any member territory. This stands to foster integrated regional supply and production chains, while preserving firms’ ability to use non-member inputs, as does the RCEP commitment to expedite customs clearance and increase harmonization of quarantine and technical standards.
Comment - How to look at the RCEP 1
  1. Trade in Services and Investment. The extent of liberalization varies by member, based on individual-country schedules of commitments, although there is a commitment by all to eliminate domestic performance requirements.
  2. Intellectual Property, Competition, and Digital Rights. Provisions on intellectual property, anticompetitive practices and e-commerce are less rigorous than those of the CPTPP.
  3. Temporary Entry. RCEP includes provisions to facilitate the temporary entry of business people.
  4. Procurement. Principles of transparency are enshrined, but there is no commitment to nondiscriminatory access to government contracting opportunities.
  5. Secretariat. Unlike most other FTAs, RCEP envisages a permanent secretariat to provide technical assistance, monitor implementation, and maintain a work program in areas calling for further discussion, such as e-commerce.
  6. Rules. Unlike CPTPP, there are no rules on labour, environment, or state-owned enterprises.

Some Implications

RCEP is not a China-led agreement

RCEP will bring significant voices to the table …

Originally proposed by ASEAN, RCEP’s signatories include 7 of the 11 CPTPP members. Equally importantly, among them Japan, Australia and New Zealand, and non-CPTPP member Korea, all with open approaches to free trade, will bring a significant and responsible voice to the table. The agreement represents the first free trade agreement among China, Japan, and Korea, whose trilateral discussions have long been stalled. 5

Further, shortly after RCEP’s signing, Chinese President Xi Jinping stated that China will “actively consider” joining the CPTPP. 6 ASEAN countries have skilfully avoided taking sides amidst growing US-China tensions, and the intersection of the two mega-regional agreements preserves ASEAN engagement with both East and West. Thus, far from representing significant decoupling, RCEP may be understood as a step towards a broader free trade area of the Asia-Pacific (FTAAP), long advocated by all 22 APEC Leaders. 7

Increasing harmonization will lower costs and increase efficiencies

… integrate the larger Asian economies better in the region …

RCEP will facilitate the off-shoring of production by Japanese and Korean, as well as Chinese, firms, better positioning them to be more fully integrated into regional production, and accelerating industrialization, growth and employment.

Comment - How to look at the RCEP 2

… aid the postCOVID-19 recovery …

Most immediately, RCEP can boost the region’s already-leading rebound from the impact of COVID19. 8 Although economic models suggest only a modest addition to economic growth, 9 with a significant proportion of intra-ASEAN trade being in intermediate goods ultimately making their way into exports from the region, lower-cost end-products will be competitively priced into global markets. 10 In turn a more efficient, more competitive, region will likely generate increased investment in expanded capacity, from both within and beyond the region. 11

…and boost countries’ domestic consumption

A growing middle class and increased domestic consumption can be expected to follow. And the RCEP includes a commitment by the members to agree on additional rules that would deepen integration, in particular on services, investment, procurement, and e-commerce. Although without a firm timetable, the increased market access and integration of supply chains stands to provide a natural impetus to progress, as does the model of the already-operational, more comprehensive CPTPP. At a more granular level, however, trading firms would be well advised to look in detail at the specific product and services schedules, to verify what qualifies for preferential treatment in each member country.

The US will be looked to for early signal on engagement

Other countries have indicated willingness to consider engaging

With President Biden about to take office, and the new US Administration committed to renewed cooperation with allies, early signals on engagement with the Indo-Pacific region will be looked for. Among foreign policy analysts, a “free and open Indo-Pacific”, a phrase first coined by former Japanese Prime Minster Abe, has been seen as a vehicle for like-minded cooperation on security, including in the South and East China seas, alongside trade. Most recently, both the Biden transition team and new Japanese Prime Minister Suga have referred to a “peaceful and prosperous” region, a change of tone less adversarial to engagement with China. 12

However this is unlikely to happen quickly

Europe, France, Germany, and most recently the Netherlands have issued policy papers on engagement with the region and, 13 in the UK, leading public policy institutes have urged a similar focus. 14 The US President-elect on the other hand has said that he will concentrate on increasing American competitiveness and innovation at home, and does not view CPTPP accession as an early priority, particularly given opposition from within the Democratic party. Further, more progressive environmental policies in the US, alongside the EU’s green agenda that may well encompass border carbon adjustment taxes, could, in the absence of any environment-related commitments in RCEP, lead to increased trade frictions.

There could be major implications for India’s prospects

Committed to “Looking” then “Acting East”, India considers both its security and export and investment growth increasingly intertwined with southeast Asia. A participant in RCEP negotiations until the end, India ultimately feared negative impacts on its economy, both from opening up to Chinese imports and from its inability to compete effectively in the rest of the region, as it has negative trade balances with several RCEP members.

India in particular seems unlikely to hasten to join

While RCEP members have confirmed that the door remains open to India joining, prospects for early accession remain unlikely. 15

What’s Next

To enter into force, RCEP must be ratified by at least six ASEAN countries and three non-ASEAN signatories. Given current tensions with China, Australia may be slow to ratify, and Malaysia’s domestic political situation has prevented it from yet ratifying CPTPP, let alone RCEP.

Legislative procedures in other countries will likely mean that it will take the better part of 2020 for enough countries to complete the process, but prospects remain good for the agreement to become effective by the beginning of 2021. As noted above, however, the phase-in of many provisions means that the full benefits will take some time to be felt. 16

Watch fors

  • Ratification of the agreement around the end of the year.
  • Any signs of a wish to deepen and widen the scope of the initial agreement.
  • The strength of expressions of intent from the US and major European countries. 

More by Jonathan Fried