The Asia Trade Deal

The world's biggest free-trade zone should boost economic growth and investment in Southeast Asia

ZÜRICH - 22. März 2021.

Vietnam, Indonesia and Malaysia are seen as the big winners as the trade deal encourages the construction of regional supply chains in Southeast Asia, says Adrian Ashurst President of World Box Business Intelligence.

In November 2020, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP), a free-trade deal consisting of the 10 members of the Association of Southeast Asian Nations(ASEAN),[1] as well as South Korea, China, Japan, Australia and New Zealand. The pact aims to eliminate tariffs and quotas on 65% of goods and services traded across the region.

It includes provisions on intellectual property, telecommunications, financial services, e-commerce and professional services, which should generate opportunities for cross-border credit information and credit insurance within the region.

Slowburn

The free-trade zone is unlikely to bring significant benefits in the short term because it could take up to 20 years to eliminate a range of tariffs on imports. In addition, the deal needs to be ratified by parliaments in all countries, and that could take time. Although an ASEAN initiative, RCEP is regarded by many as a China-backed alternative to the comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), also known as TPP11, a proposed deal that excluded China but included many Asian countries. Twelve member states signed the CPTPP in 2016 before President Donald Trump withdrew the US in 2017.

Moreover, most of RCEP’s constituent members already had either bilateral free-trade agreements (FTAs) with one another, or co-membership of other trade blocs, or both. Significantly new are market access arrangements introduced as a result of RCEP are Japan–China and japan–South Korea. The RCEP’s level of liberalisation is less positive than has been seen in other trade pacts. While the CPTPP eliminates tariffs on 99% of goods traded among its parties, the figure for RCEP is 90%.

That being said, RCEP is significant in terms of the size of the region it covers and the scale and dynamism of the economies it includes. It is the world’s largest trading bloc, bigger than both the US–Mexico–Canada Agreement and the European Union, accounting for nearly a third of the global population and economic output.

Southeast Asia will benefit significantly from RCEP (US$19 billion annually by 2030) but less so than Northeast Asia because it already has FTAs with RCEP partners, according to the Brookings institution, a US non-profit public policy organization.[2]

 

Boost for regional supply chains

The new ‘rules of origin’ – which officially define where a product comes from – could have the biggest impact, and encourage foreign direct investment (FDI) into Southeast Asia. That’s because, while many RCEP member states have FTAs with each other, RCEP is much easier to apply. So, while a product made in Indonesia that contains Australian parts might face tariffs elsewhere in the ASEAN free-trade zone, that will not be the case under RCEP. That could give companies in RCEP countries an incentive to look for suppliers and build supply-chain networks within the trade region.

Overall, RCEP is likely to benefit countries with developed industrial policies – namely China, Japan, Korea and Australia, along with New Zealand in terms of agricultural products – that support the growth of higher-value industries, according to Kate Lappin, AsiaPacific regional secretary at Public Services International. In Southeast Asia, Vietnam, Indonesia and Malaysia will gain the most in the long term, says Aidan Yao, senior emerging Asia economist at AXA Investment Managers.[3]

The ability to run regional supply chains more efficiently should also help China, given its major global presence in digital technology and services and its “Made in China 2025” strategy, which prioritises 10 key sectors, including robotics, aerospace and clean-energy cars, according to Chris Rogers, research analyst at S&P Global Market Intelligence unit Panjiva.[4]

Indiaand US shun RCEP

India was also part of the negotiations, but it pulled out last year mainly due to escalating tensions with China. India feared a surge in Chinese imports that could hurt local producers. The various measures India has taken to reduce its exposure to China would have sat uncomfortably with its commitments under RCEP, according to the Indian Express newspaper.[5] However, RCEP signatories have made it clear that the door is open for India to join in the future.

The US, under the leadership of former president Trump, also declined to participate in RCEP due to similar concerns about China. President Joe Biden may come under pressure to rejoin CPTPP (which was part of the Obama administration’s ‘pivot’ to Asia and was intended to counter China’s rise by improving economic cooperation with regional allies)and to apply to join RCEP. However, Washington would likely demand major revisions to both trade agreements to protect US jobs and workers’ rights. Forging narrower, sectoral deals instead could provide a more viable alternative.

 

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[1] The Southeast Asiansignatories to RCEP are Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

[4] Ibid.


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