How RCEP will boost Asian integration in trade, supply chains and strategic ties

RCEP represents the most significant, ambitious regional trade deal for decades, with medium- and long-term benefits
Strengthened economic ties and standard alignments will help ensure China’s lost supply chain stays in Asia – to the benefit of members and the detriment of India

Aidan Yao

Published: 5:00pm, 16 Dec 2020

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The recent signing of the Regional Comprehensive Economic Partnership (RCEP) between Asia-Pacific nations marks an encouraging reversal to the rising trend of trade protectionism and deglobalisation. The deal has created the world’s largest trading bloc that accounts for roughly a third of the world’s population, gross domestic product and trade volume, helping accelerate the regional economic integration in the Asia-Pacific region.

RCEP is by no means a perfect deal. Compared to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), it has a long transition period for tariff reduction for certain industries, such as agriculture. That is designed to protect them – particularly in less-developed member countries such as Laos and Cambodia – from immediate competition.

Some of its agreement in areas of information-sharing and standards adoption are also non-binding. That creates risk for non-compliance, which might be difficult to address by the existing dispute-settlement mechanism embedded in the agreement.

Nevertheless, RCEP still represents the most significant and ambitious regional trade deal since the formation of the North American Free Trade Area and the European free trade zone. I believe RCEP will have profound impact on the Asian economies in the medium to long term through three dimensions.

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The first is trade. RCEP members will gain from the creation of the world’s largest tariff-free zone, where more than 90 per cent of goods traded will be exempted from tariffs. Two caveats should be kept in mind, though. The first is the long transition period, which will make the gains from tariff elimination gradual and drawn out over many years.

A more important consideration is that there are already many free trade agreements (FTA) among most of the RCEP members. This will make the incremental gains from tariff reductions less apparent for the whole region. Instead, the most significant changes will likely occur between Japan and China or Japan and South Korea, where no bilateral FTA exist currently.

A model study done by the Peterson Institute for International Economics shows that RCEP will boost China, South Korea and Japan’s GDP by as much as 1 percentage point in 2030, and the entire RCEP region by 0.5 per cent of GDP.

RCEP’s synergy with China’s economic strategy will benefit Asia

The second channel of impact is via supply-chain deployment and productivity-enhancing reforms. RCEP has provisions on investment, opening the service sector, tech standards, labour market rules, IP protection and so on.

Although not as strict as the CPTPP, fulfilling these criteria will require member countries to make structural reforms. If diligently implemented, they could create a key source of productivity growth for the less-developed countries in the coming years.

In addition, unified rules of origin will encourage RCEP members to share supply chains within the bloc. This is because components sourced within the bloc will enjoy preferential treatment while those imported from outside may not. This is likely to reinforce the supply-chain reshuffle already under way, with low-margin production capacities migrating out of China to Southeast Asian countries such as Vietnam and Cambodia.

The strengthened economic ties and standard alignments will help ensure China’s lost supply chain stays in Asia. The biggest potential loser is India, which some expected to succeed China as the next factory of the world.

Without membership in RCEP, India is likely to struggle to convert its demographic dividend into trade competitiveness as China did a few decades ago. It could face potential economic isolation as its neighbours build a separate trade ecosystem.

A labourer loads grain sacks on a truck at a railway goods yard in Chennai on December 14. Membership in RCEP could have created the economic opportunities to help India reap the benefits of its demographic dividend. Photo: AFP

Finally, the geostrategic and geopolitical consequence of RCEP should not be downplayed. The Association of Southeast Asian Nations (Asean) has demonstrated its ability to stitch together an ambitious trade deal involving countries at different stages of development. As a result, the success of RCEP’s formation will raise Asean’s voice on the global stage.

China, though not the initiator of the agreement, is a proponent of regional economic integration. It supports globalisation against the backdrop of rising protectionism.

By tying the economic interests of RCEP countries together, it will make splitting Asia by other, perhaps political, means more difficult. In that regard, India’s decision to opt out of the pact could have both economic and geopolitical implications.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers