RCEP: The benefits, the regret and the limitations

EAI academic Yu Hong notes that the RCEP will bring greater regional economic integration by increasing trade in Asia-Pacific and generating new business opportunities for companies in the 15 member countries of ASEAN, China, Japan, South Korea, New Zealand and Australia. China and ASEAN in particular, are well-placed to reap many of the benefits.
People wearing face masks are seen at a shopping area in Wuhan, Hubei province, China, 7 December 2020. (Aly Song/Reuters)
People wearing face masks are seen at a shopping area in Wuhan, Hubei province, China, 7 December 2020. (Aly Song/Reuters)

Amidst global intensification of trade protectionism and increasing doubts about free trade, the recent signing of the Regional Comprehensive Economic Partnership (RCEP) agreement by 15 Asia-Pacific nations, including China and Japan, has important significance. This concrete measure by the RCEP member nations is a signal of their support of rule-based free trade, multilateralism and regional economic integration.

Despite India’s withdrawal from the RCEP negotiations last year, the RCEP is still the regional free trade agreement (FTA) with the widest geographical coverage, the largest population (about 30% of the global population) and the largest economic contribution (with the member nations accounting for about 30% of global GDP).

RCEP — not an easy accomplishment 

It has not been easy for the 15 member nations to finally arrive at the RCEP agreement, in a marathon of 31 rounds of negotiations in eight years. One major matter of contention was the threshold for market access, to which some nations suggested a gradual opening up with conditions and specific scope. The RCEP member nations have diverse systems and are in greatly varying states of economic development. They include developed nations such as Japan and Australia, emerging economies such as China, Thailand and Vietnam, and low-income nations such as Myanmar, Lao PDR and Cambodia. Consequently, the negotiations were arduous and protracted.

The RCEP respects the actual state of development of each member nation, and provides for special and differential treatment for the lowest-income nations such as Myanmar and Cambodia for additional flexibility in implementing the agreement.

An aerial view shows the container port in Lianyungang, Jiangsu province, China, on 13 October 2020. (STR/AFP)
An aerial view shows the container port in Lianyungang, Jiangsu province, China, on 13 October 2020. (STR/AFP)

The official text of the RCEP agreement includes 20 chapters, covering areas such as tariff and non-tariff barrier elimination, customs procedures and trade facilitation, trade in services, investment safeguards, market access, facilitation of the movement of natural persons, SMEs, economic and technical cooperation, competition policies, intellectual property rights protection, financial services, telecommunications services, e-commerce, government procurement, law and dispute settlement.

The finalised text of the RCEP agreement is pragmatic, inclusive and mutually beneficial, and satisfies the interests of all member nations to the greatest extent possible. According to the agreement, more than 90% of the tariffs on trade imports will be eliminated. The RCEP respects the actual state of development of each member nation, and provides for special and differential treatment for the lowest-income nations such as Myanmar and Cambodia for additional flexibility in implementing the agreement.

One of the highlights of the RCEP is the implementation of unified rules of origin regulations, where tariff exemptions would apply as long as a sufficient proportion of the good being exported is made of inputs sourced from any of the 15 members of the bloc. This will reduce production costs in the supply chains of MNCs in these nations, while helping to strengthen and deepen the resilience of regional industrial supply chains.

By leading the RCEP negotiation process, ASEAN has consolidated its pivotal position in formulating regional trade rules and promoting regional economic integration.

Pedestrians walk on the Sugamo Jizo-dori shopping street in the Toshima district of Tokyo, Japan, on 11 December 2020. (Soichiro Koriyama/Bloomberg)
Pedestrians walk on the Sugamo Jizo-dori shopping street in the Toshima district of Tokyo, Japan, on 11 December 2020. (Soichiro Koriyama/Bloomberg)

The huge consumer market of the RCEP member nations will result in an increase in trade in Asia-Pacific and create new business opportunities for enterprises of member nations to increase their investments and overseas market share. For example, ASEAN nations can take in more processing and manufacturing industries by attracting more industrial investments from Japan, South Korea and China, in order to more deeply engage in the global industrial supply chains. Japanese, South Korean and Australian enterprises can secure more opportunities to access the ASEAN and Chinese markets. China and the ASEAN nations can also freely and conveniently access the markets of Japan, South Korea and Australia through the agreement.

ASEAN and the RCEP

ASEAN has always played an important role in the RCEP, from the start of the negotiations which were initiated in 2012 in Phnom Penh, Cambodia, to the final agreement that was formally signed by the 15 RCEP member nations when the negotiations were completed during Vietnam’s chairmanship of ASEAN. By leading the RCEP negotiation process, ASEAN has consolidated its pivotal position in formulating regional trade rules and promoting regional economic integration. The RCEP has helped to strengthen ASEAN’s influence in Asia-Pacific.

Overall, through joining the RCEP, the ASEAN nations will benefit from an increase in exports, investment growth and more opportunities to engage in regional supply chains due to greater market access. The agreement can help more ASEAN SMEs to integrate with regional and global value chains and expand their businesses in the RCEP member nations and the global market. Nevertheless, due to the different states of economic development and industrial structures of the ASEAN nations, they enjoy different degrees of benefits from the RCEP.

The implementation of the RCEP agreement will help ASEAN nations to better participate in regional industrial supply chains and strengthen the economic integration of ASEAN with the world and especially in Asia-Pacific. Among the ASEAN nations, Vietnam’s growth and ability to participate in global value chains are noteworthy, in the way that it is establishing itself in regional supply chains and becoming a destination to set up production plants for an increasing number of MNCs.

With the signing of the RCEP agreement, China is the biggest winner in terms of economic development and geopolitics.

People wearing protective face masks ride bikes on a street in Yangon, Myanmar, 7 December 2020. (Shwe Paw Mya Tin/Reuters)
People wearing protective face masks ride bikes on a street in Yangon, Myanmar, 7 December 2020. (Shwe Paw Mya Tin/Reuters)

The agreement is advantageous to the less developed ASEAN nations such as Myanmar, Lao PDR and Cambodia to speed up industrialisation and enhance their ability to participate in regional industrial chains. Through these efforts, they can propel their economic growth and bridge the economic and development gaps with the developed ASEAN nations, thereby helping to pursue ASEAN economic integration.

The integration of ASEAN and the establishment of the ASEAN Community are crucial to the RCEP implementation. ASEAN nations need to accelerate domestic economic reforms and remove the barriers to integration in the services sectors such as finance, law, tourism and telecommunications.

China and the RCEP

With the signing of the RCEP agreement, China is the biggest winner in terms of economic development and geopolitics. Being part of the RCEP is advantageous to China in the face of the triple threat of the China-US trade war, geopolitical changes and global recession due to Covid-19. It also offers China more room to manoeuvre in the China-US trade war and as China’s diplomatic relations with the world deteriorate. Its implementation will help China’s export enterprises expand their overseas market share and bring about expectations of stability. China will also have closer economic and trade ties with Asia-Pacific, including ASEAN.

The RCEP agreement reflects China’s rising economic and political influence in Asia-Pacific. The efforts to promote free trade and regional economic integration in Asia-Pacific are indicative of the rivalry between China and the US. Although the US is not an RCEP member nation, there are several close US allies, such as Japan, Australia, New Zealand and South Korea which have surprisingly chosen to sign the RCEP agreement as scheduled, thus paving the way for smooth implementation.

Shoppers walk past a Happy New Year decoration outside a mall in Shanghai, China on 19 December 2020. (Qilai Shen/Bloomberg)
Shoppers walk past a Happy New Year decoration outside a mall in Shanghai, China on 19 December 2020. (Qilai Shen/Bloomberg)

Despite being strategic allies of the US in Asia-Pacific, Japan and Australia have China as their biggest trading partner. They recognise the importance of maintaining close economic and trade ties with China for their own economic development. Due to China’s economic prowess and the size of its market, the RCEP is significant in helping their exporters expand into the Chinese market and gaining global market share. Economics is ultimately the deciding factor for these countries in signing the RCEP agreement.

With economic globalisation, the emerging economies such as ASEAN and China have grown significantly, resulting in changes in the global economy, global trade and geopolitics. The Trump administration’s unilateral strategy of “America First” has brought insecurity to the US allies in Asia-Pacific. It can be said that signing the RCEP agreement is a vote of no confidence by these US allies against the Trump administration.

The limitations of the RCEP

The biggest regret of the RCEP is India’s eventual withdrawal from the negotiations, which will dampen the influence of the RCEP. India, after all, is a regional power and a rapidly emerging economy. Its significant economic potential, young and abundant labour force and expanding middle class are reasons why MNCs covet the Indian market.

On the surface, there are two main reasons for India’s withdrawal from the RCEP negotiations. First, India wants to protect its weak, domestic industries such as dairy and textiles from direct competition from the products of the RCEP member nations. Second, India is concerned that its trade deficit will further increase after joining the RCEP. Currently, India has trade deficits with 11 of the 15 RCEP member nations, among which the trade deficits with China and South Korea are the largest.

Therefore, the RCEP cannot achieve the goal of driving the reform of the rules of the global economy and trade. Its main goal is to help member nations deal with the challenges of a global economic downturn and declining global market demand by accelerating regional economic integration.

People crowd along a road in a shopping area in Mumbai, India, on 11 November 2020. (Sujit Jaiswal/AFP)
People crowd along a road in a shopping area in Mumbai, India, on 11 November 2020. (Sujit Jaiswal/AFP)

However, the fundamental reason for India not joining the RCEP is that it believes that the RCEP is not a mere economic and trade agreement but also of strategic geopolitical significance. India does not want China to take advantage of the RCEP implementation to gain greater access to the Indian market, thereby securing geopolitical and economic advantages in Asia, especially in South Asia.

The RCEP agreement is built upon, and is an extension and expansion of, the existing bilateral FTAs of member nations. It is not the most open FTA due to its low coverage of trade imports for which 90% of tariffs will be eliminated. It also does not set strict standards and restrictions for its member nations in areas such as intellectual property rights protection, labour market, competition policy and internet rules.

Compared with high-level regional FTAs such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement, the RCEP agreement firstly lacks depth and breadth in free trade. Second, it is less open in market access for the services trade and industrial investments. Third, the RCEP negotiations were focused on the traditional issues, with little attention to new rules formulation. For example, the agreement excludes important issues such as state-owned enterprises, labour standards, government procurement and environmental protection, which are the important issues of concern in establishing a high-level regional free trade zone.

Therefore, the RCEP cannot achieve the goal of driving the reform of the rules of the global economy and trade. Its main goal is to help member nations deal with the challenges of a global economic downturn and declining global market demand by accelerating regional economic integration. By concluding the RCEP agreement, market access among member nations can be improved and the sectors for two-way investments can be increased, thereby growing regional trade and investments.

Related: Hostile ties with China make it impossible for India to return to RCEP | The overstatement of the RCEP | China has entered the 'gilded cage' of RCEP and is considering the CPTPP. What's next? | RCEP affirms ASEAN’s irreplaceable East Asian centrality | RCEP: The start of a new ‘China-centric’ order?