The Regional Comprehensive Economic Partnership (RCEP): The Future of Trade in Asia

After 8 years of negotiation, on the 15th November 2020, leaders of 15 Asia-Pacific nations signed a trade deal which enabled them to form the world’s largest trading bloc. In a major step towards greater globalisation and further economic integration, the Regional Comprehensive Economic Partnership agreement (RCEP) seeks to reduce trade barriers in Asia. Crucially, this trading bloc will cover a third of the world’s population and economic output, therefore it will be essential in shaping the future of the continent. This new trading bloc will be larger than both European Union and the US-Mexico-Canada agreement.

What is the agreement?

The RCEP takes the majority of the current agreements signed by the 10 members of ASEAN (Association of Southeast Asian Nations) and combines them all into one multilateral pact with China, Japan, South Korea, Australia and New Zealand. This serves to simplify the arrangement and bring Asia closer to a coherent trading zone like the EU, accounting for a third of the global economy. The agreement also demonstrates the Asian countries’ willingness to support connected supply chains and further interdependence.

The agreement is the first free trade deal between China, South Korea and Japan, a noteworthy achievement. The pact is seen as an extension of China’s influence in Asia, and Japan and South Korea are expected to be among the countries gaining the most out of the agreement. Undeniably though, the benefit of cheaper goods, products and services will be monumental and will spread to Europe and the US.

Notably, the deal will likely further reduce US influence in Asia after President Donald Trump withdrew from the Trans-Pacific Partnership (TPP) in 2017, another large regional trading pact which Barack Obama had supported. As a result, the US now remains on the outside from both the main trading groups in Asia. Consequently, this means that both the EU and the US have no authority when Asia sets its trading rules, eliminating the voices of the world’s traditional trade giants.

Furthermore, India also withdrew from the talks in 2019 due to the concern that competition from cheap Chinese imports and labour will swamp the Indian manufacturers. As a country with relatively few free trade agreements, however, India’s participation would have increased commerce hugely through its large economy. Nevertheless, it is said that there will be provisions for India to join in the future if it chooses to do so.

What does the deal consist of?

The deal consists of all the standard chapters involved within a free trade agreement. This includes customs, services, investment and tariffs etc.

A major aim of the RCEP is to eliminate a range of tariffs on imports within 20 years – eliminating 90% off tariffs. Moreover, a critical change made by the RCEP is of the ‘origin’ – namely the criteria which determines where a product is made. Another goal of the RCEP is to ensure that all countries manufacture products under the same origin – making the transport of goods much easier. Under the RCEP, products from any member nation will be treated equally.

The Future:

In terms of the future, the RCEP will undoubtedly take a while to ratify. As a result, the tariff provisions stated by the agreement will take even longer to come into effect. Nevertheless, it is evident that the deal will shape the future of trade within the region. An impact of the RCEP will be to accelerate talks on a China-Japan-South Korea free trade agreement seeing as all three Asian economies are huge on technology and manufacturing. Nevertheless, the most significant effect will be taking the initial step in creating a coherent trading zone within Asia.

Interestingly, last week, whilst disclosing the 2021 investment themes, Goldman Sachs cast doubt on US and European investments due to the pandemic-induced pressure. The investment bank has recommended that attention should be turned towards China, Japan and South Korea where there is a lower pandemic risk alongside the promising growth outlook, especially as China remains the only economy predicted to grow in 2020. The RCEP serves to consolidate the advice provided by Goldman Sachs, indicating the potential for a profitable future in Asia.

By Bobby Zhu