Published in ASEAN News on 22.12.2020
"Regional Comprehensive Economic Partnership" (RCEP) signed after almost 10 years of negotiations
On November 15, 2020, the RCEP free trade agreement, in a video conference, was signed by all 15 participating countries.
In addition to the 10 ASEAN countries Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, Brunei, Myanmar, Laos, Cambodia, which have already concluded free trade agreements between themselves. Are also involved countries China, Japan, South Korea, Australia and New Zealand.
Thus, the agreement consists of quite diverse countries - rich and poor, large and small, highly developed and those where industrialization is just beginning.
Therefore, in the 31 rounds of negotiations - contrary to the name - a not very comprehensive agreement was worked out in order not to structurally disadvantage less developed and smaller economies.
In 2006, the idea of a comprehensive free trade area first emerged, and five years later, the economic ministers of Japan and China, formally proposed the swift establishment of an integrated market at the East Asia Summit.
In 2012, government leaders approved the draft framework of the RCEP and announced the start of negotiations. For a time, the talks were stalled by India, which was supposed to be a counterbalance to China's economic and political dominance in the agreement. Ultimately, India withdrew from the negotiations in November 2019 amid concerns that its domestic market for agricultural products and its market for consumer products would be harmed by Australia and China, respectively.
It is believed that it will take approximately 2 years for the interstate treaty to be ratified by enough countries for the RCEP agreement to be fully effective.
Scope of the Agreement
The RCEP is considered the largest free trade agreement ever concluded.
The combined GDP of all 15 countries is about 26.3 billion USD (for comparison; EU= 18.7 billion), the population is 2.3 billion people (EU=0.447 billion), 30% of world trade takes place in the region (EU=33%). It is expected that the ASEAN+5 region will become one of the most dynamic and fastest growing regions in the world, recovering its high economic growth rates after the pandemic.
The countries also form the world's largest export and second largest import region.
The primary goal of the FTA is to reduce tariff barriers to trade. Customs tariffs on the exchange of goods, services, investments and online purchases will be gradually reduced. Primarily, non-ASEAN countries will benefit from this, as (weighted) tariff rates for trade within the region have fallen from 4.9% in 2005 to 1.8% in 2020. Thus, a further reduction has only a marginal benefit. For products from Japan, on the other hand, only 8% of exported products in China currently receive tariff-free treatment; within 20 years, the share is expected to increase to 86%. For exports from Japan to Korea, the share of tariffed products is currently 19% and is expected to increase to 92%. The situation for other non-ASEAN countries looks similar. In addition, it is China's first free trade agreement, with its important partners Japan and Korea.
Somewhat more important than the further reduction of tariffs are the non-tariff trade facilitations.
For example, it will be possible in the future for public procurement and contracts to be awarded across national borders, labor will be more mobile, and intellectual property will be better protected.
The new rules for determining the countries of origin (ROO) also enable a much better flow of goods in the contracting region.
Rules of origin are a standard component of any trade agreement. They are designed to ensure that trade goods benefiting from concessions are largely, or at least partially, produced in a member country and are not transshipped from a country that does not receive concessions under trade agreements. By harmonizing rules of origin from existing trade agreements among members, RCEP reduces regulatory barriers.
In the future, it will apply to cross-border trade, a harmonized procedure for issuing country of origin certificates.
The problem that prevails in Southeast Asia today is that there are too many bilateral and multilateral agreements, all of which contain different Rule of Origin regulations, thus inhibiting trade.
The introduction of the uniform rules will simplify customs clearance and reduce the associated transaction costs, which are estimated to be between 1.4% and 5.9% of the transaction today.
Extensive supply chains in Southeast Asia are expected to be established as a result of this regulation.
This is because there is already extensive trade in raw materials and (semi-finished) electrical engineering components, machinery, plastic products, textiles and toys between Japan, South Korea and China.
Shortly before the negotiations were concluded, India withdrew. Officially, the reason given was that India was afraid that the national economy could be damaged by dumping prices from Australia and China.
Furthermore, India already has a free trade agreement with ASEAN countries, Singapore, Japan, South Korea and Australia. Indian negotiators have also criticized the lack of regulations regarding Chinese state-owned enterprises, as well as import restrictions on 1500 Indian products to China. This would most likely remain in place even with an agreement; by comparison India uses only 171 import restrictions against China.
The Chinese government has called the conclusion of the agreement a great success.
As the largest economy in the region, the country likely helped shape some of the content to its own favor. For China, the agreement and the resulting sales opportunities, puts it in a good position to offset the cuts in America's exports and thus continue to grow rapidly. Although the coastal population has experienced a rapid rise in recent years, the rural population, which is becoming more dissatisfied, also wants to claim more prosperity.
After the United States withdrew from the Trans-Pacific Partnership (TPP) in 2017 and the remaining countries concluded the new CPTPP, America's influence in Asia declined somewhat.
After the ratification of RCEP, this effect is likely to be strengthened once again, because TPP was a tool to hold back Chinese supremacy over Asian countries. Now the situation has changed diametrically, and China's hegemonic position has been significantly strengthened.
This will increase China's influence in the Asia-Pacific region, while the U.S. has pursued a more protectionist trade policy in recent years.
Although the RCEP is less comprehensive than, for example, the CPTPP, the economic impact is still likely to be higher. In the long run, the ASEAN+5 region has the potential to become one of the most important economic centers in the world.
One important task is the consolidation of the ROO regime, which could increase trade in the treaty region by up to $90 billion per year.
In addition, the agreement links the industrialized countries of China, Japan and South Korea, which have not previously practiced free trade.
For the future, it will be important to see if the RCEP secretariat can work out a missing regulation regarding investor-state dispute settlement (ISDS) in the next two years.
A great opportunity would be if the Asian countries use the RCEP in the future as a platform to discuss future trade and economic issues in Asia or not.
Furthermore, it remains to be seen how the Western world and the World Trade Organization will react to China's possible export of products sanctioned for price dumping via third countries in order to circumvent tariffs (see ROO regulations).