RCEP: Asia readies world’s largest trade deal

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• Trade barriers between most countries in the Asia Pacific will be lowered significantly from January 1 as the world’s largest free trading bloc opens for business. It includes China and excludes the U.S. 

About RCEP

• Trade bloc: The Regional Comprehensive Economic Partnership (RCEP) is a trade deal between the 10-member Association of Southeast Asian Nations (ASEAN) and China, Japan, South Korea, Australia and New Zealand.
• GDP: RCEP will cover about 30 percent of global gross domestic product (GDP), worth $26.2 trillion, and nearly a third of the world’s population, some 2.2 billion people.
• China factor: While China already has a number of bilateral trade agreements, this is the first time it has signed up to a regional multilateral trade pact.

What will RCEP do?

• Eliminate a range of tariffs: The RCEP is expected to eliminate a range of tariffs on imports within 20 years.
• Provisions included: It also includes provisions on intellectual property, telecommunications, financial services, e-commerce and professional services.
  • RCEP will also set common rules around trade, intellectual property, e-commerce and competition in a move the United Nations said would raise the Asia Pacific region’s position as a “center of gravity” for global commerce.

Issues/ Challenges

• Not very comprehensive: The RCEP isn’t as comprehensive and doesn’t cut tariffs as deeply as the TPP’s successor.
• Free trade agreements: Already many member states have free trade agreements (FTA) with each other, but there are limitations.
• Multi-country components: Businesses with global supply chains might face tariffs even within an FTA because their products contain components that are made elsewhere.
  • A product made in Indonesia that contains Australian parts, for example, might face tariffs elsewhere in the ASEAN free trade zone.
• Anti-China sentiment: Ratification will likely be tricky in national parliaments, owing to both anti-trade and anti-China sentiment.
• The least developed countries in Asia: Cambodia, Laos, and Myanmar currently benefit from inter-ASEAN trade, which could be “eroded” by RCEP trade.
• Rules of origin impact: It is possible that the new “rules of origin” which officially define where a product comes from will have the biggest impact.
• The smaller ASEAN countries: may also lose some of their benefits from trade preference programs that allow them to export tariff-free products outside of ASEAN, including South Korea and Japan.
• RCEP is China-centric: The RCEP is seen to be China-centric, and is expected to elevate its economic and political influence in the region. India has an unfavorable trade deficit with China.
• Ratification: But it could be some time before any country sees the benefits, because six ASEAN nations and three other nations have to ratify it before it takes effect.

Significance

• Huge market size: RCEP’s sheer size makes it more significant.
• Faster recovery: Leaders hope that the pact will help to spur recovery from the corona virus pandemic.
• Comparison: The new free trade bloc will be bigger than both the US-Mexico-Canada Agreement and the European Union.
  • The United States-Mexico-Canada trade agreement (USTR) covers 28% of world trade, while the European Union’s Single Market is a distant third at nearly 18%.
• Equal treatment: Under RCEP, parts from any member nation would be treated equally, which might give companies in RCEP countries an incentive to look within the trade region for suppliers.

Who is likely to benefit?

• Increase global national income: The deal could increase global national income by $186bn annually by 2030 and add 0.2% to the economy of its member states.
• Pro-china: Some analysts think the deal is likely to benefit China, Japan and South Korea more than other member states.
  • China currently has no bilateral agreement with Japan and only a limited deal with South Korea, its third and fifth largest trading partners.
• South East Asia and North East Asia: The economic benefits of the deal might only be marginal for South East Asia, but there are some interesting trade and tariff dynamics to watch for North East Asia.

What are the differences between RCEP and the CPTPP?

• There is a big gap in quality, in coverage, in depth and breadth.
  • In TPP, you joined voluntarily, you wanted to be subject to high ambition, high quality.
  • In RCEP, you joined it because you had to, because you are a member of ASEAN or you had an existing agreement with ASEAN.
• On any dimension: population size, wealth, landlocked versus archipelago countries, services versus trading goods, imports versus exports, RCEP is really diverse.

Impact on India dropping out of RCEP

• Losing flexibility: Signing the RCEP would have meant India losing flexibility to raise tariffs.
• Trade deficit with China: The increases in India’s trade deficit with China and the dominance of China in many sectors at a global level have made India wary.
• Cheap imports: India’s concern was that participation in RCEP would expose domestic manufacturers to a flood of cheap imports from China.
• Agriculture, dairy and textile sectors: Indian agriculture, dairy and textile sectors which employ millions of workers were projected to be adversely impacted with the signing of the RCEP.
• Economic self-harm: Pulling out of RCEP is an act of economic self-harm, as India will stand isolated and continue to under-perform in terms of exports and growth.

Source: TH