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Leaders from 15 countries have signed the Regional Comprehensive Economic Association, a pan-Asian trade agreement, after a decade of negotiations.
“We signed [RCEP] today, after eight years of hard work, ”said Lee Hsien Loong, Prime Minister of Singapore. “This is a great step forward for our region. At a time when multilateralism is losing ground and global growth is slowing, the RCEP shows the support of Asian countries for open and connected supply chains, freer trade and closer interdependence. “
The pact covers about a third of the world’s economic output and marks a great step towards the economic integration of the region. Here are five things that explain one of the most important trade deals in history.
What is the RCEP?
The RCEP is one of the largest free trade agreements in the world. It takes most of the existing agreements signed by the 10 members of the Association of Southeast Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and combines them into a single multilateral pact with Australia, China, Japan, New Zealand and South Korea.
“By some measures, this is the largest free trade agreement in history,” said Peter Petri, professor of international finance at Brandeis University. “About 30 percent of the world’s population is covered.”
The deal would have been even bigger, but India withdrew from the talks in 2019 and has so far refused to return.
According to estimates by Professor Petri and Michael Plummer, professor of international economics at Johns Hopkins University, RCEP will add $ 186 billion to the size of the global economy and 0.2 percent to the gross domestic product of its members.
Japan and South Korea are among the biggest winners, but the benefit from cheaper products will extend to Europe and the United States.
What’s in the deal?
The agreement has all the usual chapters of a free trade agreement: tariffs, customs administration, sanitary measures, services, investments and others, but two elements are particularly significant.
The first is the rules of origin, the criteria that determine where a product was made. All Asean trade agreements have different rules of origin, so for example, if a company in Indonesia manufactures a bicycle, it might be eligible under a free trade agreement with Japan, but it would need different components to be eligible under a agreement with South Korea.
RCEP will sweep away all of that. “When you make a product for RCEP, it works for all 15 countries. And you only need one sheet of paper, ”said Deborah Elms, executive director of consultancy Asian Trade Center in Singapore.
The second crucial factor is that it marks the first free trade agreement between China, Japan and South Korea. Although the RCEP is a fairly superficial agreement, it is still a big step. “RCEP allows them to achieve something that would have been very difficult politically if they had done it only with each other,” said Professor Petri.
What is left out?
Unlike the overlapping Trans-Pacific Partnership trade agreement, the RCEP is relatively unambitious, removing 90 percent of tariffs compared to almost 100 percent in the TPP. Agriculture is largely absent and service coverage is mixed. RCEP does relatively little to establish common standards for products.
“The critical point of RCEP is that the region is enormously diverse. There are big countries and small countries, rich countries and poor countries, ”said Professor Petri. “The rules have essentially adapted to all these divergent interests.”
Ms. Elms said the e-commerce chapter was a particular disappointment. The 15 countries could not agree on any rules on cross-border data flows or a customs moratorium on data transmission.
However, the biggest absence is India. As a huge economy with relatively few free trade agreements, India’s involvement could have led to a dramatic increase in trade. But New Delhi feared that its manufacturers would be overwhelmed by cheap Chinese competition.
However, the agreement is expected to include provisions should India decide to join.
What does it mean for China and the United States?
A common criticism of the RCEP is the dominant size of China within it, a fear that grew much stronger when India withdrew. The agreement gives China an important voice in setting standards for regional trade, and if Beijing uses that power collaboratively, its soft power will grow. “It is potentially very good for China,” said Professor Petri.
Ms Elms said that China’s sheer scale would make it a major player in the deal. “RCEP has never been led by China or driven by China. This was the Asean agreement, ”he said. “But once the deal goes into effect, it will be difficult for Asean to stay in the driver’s seat.”
The United States is now outside of Asia’s two major trade groups after President Donald Trump withdrew from the TPP. That means that neither the EU nor the US, the world’s traditional trading superpowers, will have a say when Asia sets its trade rules.
What happens next
It will take some time to ratify the RCEP and even longer for some of the tariff provisions to take effect. But RCEP is likely to shape the future of trade in Asia. “ASEAN agreements can be improved over time,” said Professor Petri. “The process is usually slow, but this is not the end.”
Now that they have done so in the context of the RCEP, one of the most significant effects may be accelerating the talks on a free trade agreement between China, Japan and South Korea. Since all three are technological and manufacturing powerhouses, it would be a breakthrough for world trade.
But the biggest consequence may be to take the first step towards the emergence of Asia as a coherent trade area, like Europe or North America. “Asia is integrated, but it is meant to deliver goods to other markets,” Ms. Elms said. “RCEP changes that.”
