RCEP is the largest free trade agreement in history, involving about 30 per cent of global gross domestic product and about the same proportion of the world’s population.
As it combines the existing bilateral agreements between ASEAN members and its 5 major trading partners, RCEP will be an important stepping stone toward an open, integrated economic system in Asia and the Pacific.
RCEP could further promote trade in the region by strengthening regional production networks through greater harmonisation of regulations and policies across members.
The unified rules of origin will likewise reduce export costs within its membership.
Yet, some analysts remain sceptical about RCEP. While successful in combining heterogeneous economies in terms of economic development into one trade bloc by allowing some flexibility, including provisions for “special and differential treatment” to accommodate the varying levels of development among member economies—compared to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—RCEP’s scope is less ambitious, and does not include high-level labor and environmental standards.
In addition, CPTPP is focused on reducing not only tariff measures but also non-tariff barriers. RCEP, meanwhile, is geared mainly on cutting tariffs, which are currently already very low.
RCEP’s target is to eliminate 90 per cent of tariffs, compared to nearly 100 per cent in CPTPP. Furthermore, new tariff cuts will only be implemented gradually, and it will take time for the agreement to be fully in force. The exclusion of agriculture in RCEP is also notable.
Nevertheless, RCEP is still regarded as a significant leap toward a more open multilateral trading system. It is the first (but major) step toward creating a large part of Asia and the Pacific a consistent and cohesive trading zone.
In the short-term, RCEP’s contribution to the region’s trade and income will be rather modest, especially since the scheduled tariff cuts are not considerably large.
This is because over 70 per cent of trade within ASEAN is already done with zero tariffs. But RCEP will likely shape the future of trade in Asia and in the world.
Notably, RCEP is the first free trade agreement among the PRC, Japan, and the ROK. Albeit relatively shallow, RCEP has made possible an agreement among the three economies, of which the progress has been stalling for quite some time.
Japan does not have free trade agreements with either the PRC or the ROK, which together account for 29 per cent of Japan’s exports. Under RCEP, Japan’s share of tariff-free exports to the PRC will rise from 8 per cent to 86 per cent, and to the ROK from 19 per cent to 92 per cent.
In this vein, RCEP will be a major progress toward a more open international trade system in the region, opening a window for sizeable economic gains particularly for the PRC, Japan, and the ROK through greater trade and investment flows.
In addition, RCEP’s benefits are not limited to members of the trade bloc or to the Asia and Pacific region in particular. The whole world stands to benefit from the agreement, with estimated global income gains of $186 billion in 2030 (Petri and Plummer, 2020).
While it is true that the majority of these gains are expected to accrue to the 15 signatories of the agreement, the rest of the world also stands to benefit from RCEP’s role as an important building block toward a more open global economy.
Benefits from RCEP could also arise from stronger production networks, which have driven trade and growth within the region and across the globe. At present, regional value chain linkages among RCEP members remain below the regional average.
The overall regional value chain participation rate among RCEP economies was 46.8 per cent and their complex regional value chain participation rate was 15.8 per cent in 2018, lower than the regional average of 48.9 per cent and 26.2 per cent, respectively.
This means that 46.8 per cent of trade among RCEP signatories entails production stages in at least 2 member economies, and 15.8 per cent of their trade involves intermediate goods crossing borders at least twice before final goods are exported.
With greater trade liberalisation, RCEP members have the potential to expand their overall and complex regional value chain participation rates to match or even exceed the regional average.
In addition, the impacts of tariff concessions for intermediate goods going through complex value chains will effectively be larger, as it will be multiplied by the number of times the intermediate good crosses borders of RCEP members (Kang, 2020).
Beyond the gains from freer trade in goods and services, hidden benefits from RCEP would be ensuing domestic reforms and economic restructuring, which will transform RCEP members into high performing economies in the coming years.
Multilateral trade agreements often encourage the acceleration of ongoing structural reforms and strengthening domestic policy and institutional frameworks, in turn promoting competition, efficiency, and productivity. Potential gains from domestic structural and policy reforms are often much greater than the gains from trade.
This year, the pandemic disrupted cross-border trade and supply chains due to border closures and travel restrictions.
As RCEP reaffirms the region’s strong commitments to open trade and investment and bolsters the rules-based international trading system, it is imperative for the rest of the world to use the momentum to reinvigorate free, open, transparent, and inclusive trade and investment regimes that would help the regional and global economies cope with the pandemic and recover strongly in the coming years.
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