What is RCEP?
The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement in the Asia-Pacific region between the ten ASEAN (Association of Southeast Asian Nations )Members and five of their FTA (Free Trade Agreement) partners. It was signed virtually on November 15, 2020, by 15 nations in the ASEAN Summit. The signatories of RCEP are: Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam.
A 510-page, 20 chapter document, RCEP is the first free trade agreement between China, Japan, and South Korea (three of the four largest economies in Asia), and is the first multilateral free trade agreement to include China.
The Brookings Institute estimates that the RCEP deal will increase global GDP by $500 billion in the next 10 years, but estimates vary widely as with all trade deals. The United States and India were originally slated to be member of the RCEP but withdrew under Trump and Modi.
What Happens Now that RCEP is Signed?
Now that RCEP trade deal is signed, the next step is its ratification by the 15 signatories. Once it is ratified, it will take effect for those countries post 60 days. However, ratification is a process that can take months to starts and years to complete.
According to a report, if implemented by all 15 members, the RCEP will create a large market with 2.2 billion consumers, about 30 per cent of the world’s population. This covers a GDP of nearly $27 trillion, accounting for about 30 per cent of global GDP, and will become the largest free trade region in the world.
How RCEP will Impact Global Trade
At a time of uncertainty caused by the global pandemic coronavirus, the RCEP seems to be a new opportunity for countries to increase their global trade and economic activity for the future. Though no one can predict the precise impact of RCEP on the global economy, there are estimates speculations that it may bring about positive change to at least regional-international trade.
Moreover, if implemented, the RCEP aims to create a fair trade environment across Asia by creating legally-binding framework on trade policy, intellectual property, dispute settlement and more, as explained below:
- Tariff Exemptions on Products – RCEP countries will benefit from lower tariffs on products sourced and traded in the region, which in turn, will strengthen ties between all of them. RCEP eliminates tariff on almost 92% of goods between the trading countries. The entire trading region will see more income over time in the form of regional sourcing. For instance, a product may be designed in Japan, its parts pulled out from China , it is assembled in Australia and can be sold in Singapore without triggering tariffs. Basically, the RCEP members would be able to source more freely within their region, which should result in them trading more freely in general.
- Leadership May be Shifting East – The inclusion of China and the absence of the United States in the RCEP signals that the Asia Pacific region is moving ahead on its own. While the deals may be less comprehensive, they are still getting closed. However, this is just the beginning and this situation can be reversed as anyone can join RCEP within18 months after it has come into effect. Whether US and India will join RCEP and the situation would be reversed is another question facing the global economy in 2021
- RCEP could Improve Relations Between Countries – RCEP has opened door for many countries that had not been trading with each other for sometime. For instance, with RCEP, relations between South Korea and Japan could improve as now, both the countries are bound by their first ever free trade agreement. Recent tensions spiked in 2018, with Japan removing South Korea from its “white list” of trade partners and implementing export restrictions on components for the semi conductor industry. On the other hand, the South Korean public was boycotting Japanese goods which hit some sectors hard. Under the RCEP agreement, both countries will eliminate tariffs on 83 percent export items between them
- One/Common Rule of Origin (RoO) Will Boost Trade – One of the most significant changes under RCEP is that there will be one rule of origin for all the trading countries. At present, each regional FTA has its own RoO; With RCEP, the investors will have to require only one certificate of origin for trading in the entire bloc. They will not have to go through the tedious processes of checking the specific rule of origin criteria in each country. This would lower transaction costs for trading with multiple countries and help in diversification of supply chains
- Drive Investment in RCEP bloc – According to United Nations Conference on Trade and Development (UNCTAD), RCEP will play a critical role in developing poorer economies in post-pandemic world. There are high chances that the RCEP members will invest more in each other and boost development. The RCEP bloc includes three Least Developed Countries (LDCs): Cambodia, Myanmar and Lao People’s Democratic Republic. Though these countries already get their Foreign Direct Investment (FDI) from other RCEP members, the RCEP could lead them to play a stronger role in global value chains (GVC)
- Simplified & Streamlined Customs Procedures – The RCEP provides for simplified custom procedures and associated facilitation provisions that will expedite clearance of goods, including the release of express consignments and perishable goods within six hours of arrival
While signing of the RCEP is a significant move for regional trading, its ratification and implementation is in process and may take months or years. However, not only should the RCEP foster stronger regional trade, but it could also give an opportunity for further diversification of supply chains.