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Notes on the RCEP Trade Agreement

By March 31, 2021 No Comments

By Yuri Freitas 

On November 15, 2020, after eight years of negotiations, the Regional Comprehensive Economic Partnership (RCEP) was signed, forming the currently most comprehensive free trade agreement worldwide, though not fully implemented yet. The fifteen signatory countries belong to the Association of Southeast Asian Nations (ASEAN) – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam to Australia, China, Japan, New Zealand, and South Korea. Together, these economies make about 30% of the world’s population and GDP of US$ 26.2 trillion. Moreover, the RCEP members account for 28% of the world’s global trade and 26% of foreign direct investment (FDI) flows. 

The most notorious impact of the RCEP agreement is reducing trade tariffs among the signatory countries – a zero-tariff rate for 91% of the tradable goods until 2040.  Moreover, arguably the most impactful international trade policy change was on the rules of origin. Even though there is a general criterium to classify the country of origin (called substantial transformation), it varies according to the countries involved and whether parallel bilateral FTAs exist. This lack of rules of origin convergence causes inefficient allocations and increases exporting costs. 

After the RCEP is fully implemented, all the signatory countries will share the same standards regarding rules of origin. The current “spaghetti bowl”, characterized by overlapping different rules for each country, will be replaced by a unifying pattern that will reduce exporting costs. Therefore, it is expected annual savings of US$ 90 billion in intra-zone trade due to these effects alone, which represent 4% of the intra-zone deals in 2019.  

Despite its considerable economic outcomes, the RCEP is limited in scope compared to other free trade agreements’ core and implementation rules. It does not address topics like e-commerce and intellectual property in greater depth, for exampleThe RCEP agreement also barely tackles environmental policies, labor unions, transportation across countries, and government subsidies.  

How the RCEP agreement came about? 

Although some claim that China conceived the RCEP agreement to buttress its geopolitical power in the Southeast Asia and Oceania regions, ASEAN was the most prominent and proactive organization to make it happen. The discussions started in 2012 to unify trade in the Asia-Pacific region and include more Asian countries, like China and India. 

Before the negotiations about the RCEP had started, another economic bloc was being formed – the Trans-Pacific Partnership (TPP), with the United States on the lead. The agreement was signed in February 2016 and included countries like the USA, Canada, Mexico, New Zealand, Chile, and Singapore – but neither China nor India.  

In January 2017, the USA withdrew from the TPP agreement, and the remaining countries formed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), or TPP-11. This geopolitical change fostered the RCEP agreement, whose negotiations continued over the years. 

In 2019, India decided not to join the RCEP agreement due to concerns before import inflows. However, even without India’s participation, the RCEP bloc was established one year later, reinforcing China’s economic influence in Asia and Oceania. 

Global and Regional Economic Impact 

Although regional, the RCEP will have a massive impact on the global economy because of the enormous scale all its members’ economies coverage when put together. The RCEP is expected to add $209 billion to the world income annually and $500 billion to trade in 2030, assuming the US-China trade war remains – one crucial factor that could affect the RCEP’s global and regional economic impact. 

Regionally, the reduction in trade and investment barriers would increase the economic integration among the RCEP member countries, allowing for significant trade gains. Recent modelling work suggests that, by 2030, the agreement would increase the trading bloc’s GDP by 0.4(equivalent to US$170 billion), with a 0.3increase for China and 0.2% for the ASEAN members. Additionally, the new agreements will make North and Southeast Asia economies more efficient, summing up their technology, manufacturing, agriculture, and natural resources strengths. For example, technical cooperation with advanced industrialized countries like Japan, South Korea, New Zealand, and Australia will help ASEAN small and medium-sized enterprises (SMEs) develop better, more competitive productsAs a consequence, the telecommunication services and agriculture industry are likely to boom with businesses competing regionally.  

However, the northern economies will be gaining more than the ASEAN economies, even though ASEAN economies are expected to benefit significantly ($19 billion annually by 2030). This is primarily because northern economies already have free trade agreements with the RCEP partners, which means that existing barriers are already minimal.  

Impact on LATAM’s Economy 

Whereas Latin America exceeded expectations at being the primary products’ manufacturer, there is a requirement for the region to compose part of the value and processing of products to advance as goods and services producers.  Therefore, agreements such as the RCEP could negatively affect trade flows since Latin America is still not a significant part of the global-value-chain phenomenon. 

As for Brazil, even though the expanded integration between China and its neighbors has not affected Brazil’s traditional commodity exports1 in recent years, the RCEP might be a concern. Since this FTA tends to develop the territorial supply chain in Asia, China might start importing some products from signatory countries rather than from Brazil, depleting the Brazilian trade balance. But a political change might benefit the South American country: on March 30, 2021, the formerForeign Affairs Minister Ernesto Araújo, known for his polemic opinions against Chinaresigned and was replaced by Ambassador Carlos França, who has a more conciliatory stance. This replacement might reduce the risks of trade with Brazil, which, as a consequence, may benefit Brazilian exports, especially for China. 

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Yuri is currently majoring in Economics at Insper, São Paulo, and is interested in consulting and data science.

 

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