Investment Institute
Macroeconomic Research

RCEP: Integrating Asia beyond trade

  • 12 January 2021 (5 min read)

Key points

  • The creation of the world’s largest free-trade-zone under the Regional Comprehensive Economic Partnership represents Asia’s defiance against protectionism for a continued pursuit of economic integration
  • Despite wrapped as a trade deal, the key source of gains from RCEP may not actually come from increased trade activity – mainly because most RCEP members already had bilateral free-trade agreements amongst them
  • China, Japan and Korea should be the main beneficiaries of reduced trade barriers as RCEP fills the void of free-trade agreements for them. These gains will accrue over time as existing tariffs are phased out
  • More important than trade could be the accelerated formation of regional supply-chains. By unifying trade standards – particularly in relation to the Rules of Origin – RCEP could reduce transaction costs and encourage production networks to spread across Asia
  • RCEP could also bring geopolitical ramifications to both insiders and outsiders of the pact. Closer economic connections could reduce friction and foster regional stability. The US could see its geopolitical influence weaken in Asia along with reduced economic ties. India may face economic and political marginalisation for not being on the RCEP train, although it could join later

Creation of the world’s largest trading bloc

The recent signing of the Regional Comprehensive Economic Partnership, or RCEP, has created the world’s largest trading bloc, accounting for roughly a third of the global economy and population (Exhibit 1). Initiated by the Association of Southeast Asian Nations (ASEAN) in 2011, RCEP has brought together 15 nations – including the 10 ASEAN members, China, Japan, South Korea, Australia and New Zealand – creating a large and diverse economic zone with members of different size, culture, custom and economic development.

Compared to the other regional trade deal – the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, RCEP is larger and broader in its coverage (Exhibit 1). However, for the gains in economic breadth, it compromises the quality of standards in order to 2 draw consensus from countries of different economic status. For example, RCEP aims to eliminate trade tariffs on 90% of exports over the next 20 years, compared to CPTPP that removes 99% of tariffs over 15 years. More importantly, CPTPP imposes higher standards on market accessibility, intellectual property protection, state-owned enterprises as well as on labour and environmental rules. These non-tariff criteria are the true differentiators of the two agreements. For now, RCEP’s more flexible and inclusive approach has won support from a larger group of nations. CPTPP, on the other hand, represents the highest trade standard today and will create its own gravitational pull for those vying for top economic rewards. These two spheres are not mutually exclusive, and given the existing overlaps (Exhibit 2), there is a potential for them to merge further1 . The emergence of these large regional trade deals – at a time when protectionism is on the rise and multilateral institutions, like the World Trade Organization, have been marginalized – offers hope that globalisation can still function as a source of economic prosperity for a large swath of the world.

Don’t hold your breath for immediate gains

Notwithstanding its structural significance, RCEP – as predominantly a trade agreement – may not bring many immediate benefits from increased trade flows. This is because bilateral free-trade agreements (FTAs) have already proliferated between RCEP members that have either already, or are expected to, drive down tariffs in the coming years. The incremental gains from the regional pact is therefore less than meets the eye.

That said, the ‘holes’ that RCEP can be expected to fill are non-trivial. Neither China and Japan, nor Japan and Korea, have existing bilateral FTAs2 , which saw China’s exports to Japan, for example, levied by a weighted average tariff rate of 2.5% in 2018. These barriers are expected to decline under RCEP over time. After the transition is completed, most of China’s exports of electronic products, machineries, car parts and textile goods to Japan will be tariff-free. Similarly, 86% of Japan’s industrial exports to China will be exempted of duties, while 92% of its exports to Korea will be levy-free, up from the current 19%. These make China, Japan and Korea the biggest beneficiaries of the trade pact in dollar terms (Exhibit 3), while India and Taiwan – which are not part of the agreement – look set to be the biggest losers. One study3  estimates that RCEP will add $165bn to Asian economies in 2030, boosting the region’s GDP by 0.3%.

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