A group of 15 countries generating nearly a third of global economic output have signed
the world’s largest ever free trade deal. It’s a historic agreement that will have economic
implications far beyond the region’s borders and signals a seismic geopolitical shift,
not only for countries that are part of the deal, but also the ones that aren’t.
The RCEP stands for the Regional Comprehensive Economic Partnership and, when ratified,
will create a trading bloc rivaling the European Union and the U.S.-Mexico-Canada Agreement.
10 of its members make up the Association of Southeast Asian Nations or ASEAN, which
include Malaysia and Singapore. The remaining five countries are Australia, New Zealand,
Japan, South Korea and most notably, China. The world’s largest free trade deal covers a
market of 2.2 billion people, or around a third of the world’s population. Its members are
responsible for $26.2 trillion of economic output, accounting for roughly 30% of global GDP.
While the RCEP is the latest in a long line of trade agreements coming out of Asia,
it wasn’t supposed to be the biggest. Negotiations for the RCEP trade deal
started back in 2013, but it attracted renewed interest in 2017 when President
Donald Trump pulled the U.S. out of a rival Asia-Pacific grouping that excluded China.
Great thing for the American worker, we just did. The Trans-Pacific Partnership, or TPP,
would have involved 12 countries, covering 40 percent of the world economy.
While both the RCEP and the TPP were intended to create free and open markets,
the TPP had more ambitious goals, covering stricter common standards on labor issues,
human rights and environmental protection. The scuttled TPP pact was revived under a new
guise involving the 11 remaining countries — the Comprehensive and Progressive Agreement
for Trans-Pacific Partnership or CPTPP, in 2018. Because China was excluded from the U.S.- led TPP,
observers have described the RCEP as a way for China to counter American influence in the region,
while writing the rules that govern trade in the 21st century.
However, some analysts feel that the economic benefits of the RCEP are limited and could
take decades to fully materialize. That’s because many members of RCEP have already
signed bilateral trade deals and benefit from reduced tariffs. Critics include Australia’s
former Prime Minister Malcolm Turnbull. There'll be some hoopla about the signing
and the entry into force of RCEP. I mean RCEP is a really low ambition trade deal.
We shouldn't kid ourselves. The biggest impact could be the new
‘rules of origin,’ which officially determine where a product was made. These essentially
eliminate tariffs on goods traded between member states, providing greater simplicity than a series
of bilateral free trade agreements, especially for companies with global supply chains.
Take, for example, a company in Thailand building tractors for a client in Indonesia. The two
countries are part of the ASEAN free trade zone, but because some parts of the tractor
are made in Australia, Indonesia might charge a tariff on the finished machine. The RCEP will
remove barriers like this, adding an incentive for members to look within the bloc for suppliers.
The trade deal could also lay the foundations for stronger economic partnerships in the future,
particularly between members that don’t already have free trade deals, as is the
case with China, Japan and South Korea. The three East Asian nations have been
in negotiations over a free trade deal since 2002 without reaching an agreement.
Both Japan and South Korea have close economic and security ties with the U.S., unlike their
contentious diplomatic relationship with China. And despite rocky political relations between the
communist state and Australia, the two have signed up to the deal.
The RCEP is China’s first multilateral free-trade agreement, which analysts say is a political
victory as much as an economic one. The deal comes at a time when the U.S.
and China have locked horns over a number of issues, including the
South China Sea, supply chains and 5G networks. Without U.S. involvement in the agreement, China
could sidestep pressure for major economic reforms or reform of intellectual property rights.
Companies which were already shifting supply chains away from China due to the country’s
trade war with the U.S., may still be able to source products from the country under the new
agreement. The RCEP could also strengthen China’s global infrastructure strategy,
known as the Belt and Road Initiative, while reducing U.S. commercial activity in the region.
While the deal was originally conceived by ASEAN, China is set to gain the most financially from
RCEP, followed by Japan and South Korea. The direct economic benefits for the 10
Southeast Asian nations may be limited due to their existing free trade accords,
with more than 70% of trade inside the bloc already conducted with zero tariffs.
Not only is the deal likely to diminish the United States’ influence in the region, but it could also
cause it to miss out on over a hundred billion dollars’ worth of trade. Another country expected
to forego a large amount of income is India. The South Asian nation was initially involved
in the RCEP negotiations but dropped out in 2019 over concerns that the deal would result
in a flood of cheap imports that would hurt Indian businesses across many industries.
There are concerns among members that without India, the smaller Asian countries will be more
reliant on China, and in turn, Beijing will have more leverage in the region.
How Chinese president Xi Jinping steers the world’s second largest economy in the trade
bloc will be watched closely. The adverse effects of the South China Sea dispute and the Covid-19
pandemic may lead to a more amicable approach to diplomacy that reassures its neighbors. However,
a ‘China first’ strategy cannot be ruled out. For the U.S., its trade policies are affected
by the shifting tides of domestic politics. Trump’s ‘America First’ policies have seen the
omission of the U.S. from two of the world’s largest trade deals, leaving a political and
economic vacuum in the Asia-Pacific region. It may take many years for the benefits of
RCEP to be fully realized but the announcement of the deal signals
that although several leading western countries have adopted isolationist policies,
many Asian nations, and China in particular, are increasingly committed to better trade links,
which could shape the economic and political landscape for years to come.
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