Have you ever talked or discussed about the European Union? Have you ever read or seen something about the US-Canada-Mexico Agreement on Free Trade? Well, these are two examples of large free trade areas built by international agreements. The processes to establish them are usually long, and the changes they bring to the international scenario are dramatic. This article aims to talk about one of these free trade areas, the largest one. It has been created, but it is still in process of ratification. I am referring to RCEP, the Regional Comprehensive Economic Partnership, the largest free trade area ever seen in the world.
What was signed on November 15th is an agreement establishing a free trade area in South-East Asia, the first one in the region’s history. Given the numbers regarding the population and the economic activity of this part of the world, RCEP will connect 2.2 billion people, 30% of the world population, 28% of the global GDP and 28% of global trade. The sheer size is impressive and unprecedented.
Who are the members of this trade bloc? The question is pretty natural, even if one knows South Asian dynamics there could be some surprises in the answer. In fact, 10 of the 15 members come from ASEAN (Association of South-East Asian Nations): Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam. The remaining five members are China, Japan, South Korea, Australia, New Zealand.
Looking at the members of the trade bloc, the heterogeneity of the countries is surprising. RCEP involves huge countries like China and tiny countries like Brunei. Moreover, the differences in GDPs are extremely large, connecting China (14 trillion), Japan (5 trillion), Australia (1.3 trillion) with Laos (18 billion) and Cambodia (27 billion). Considering these differences, the agreement has been built to increase the terms of all the members.
Before looking at the goals of RCEP, let’s dive into the birth of this idea. The very beginning of the project has been labelled inaccurately as “China-led”, because neither China nor Japan had been architects of the project. The Agreement is in fact the victory of the middle-income ASEAN countries, given their huge efforts in establishing a free trade area in the region. Negotiations started in 2012, led by the ASEAN countries, and in a relatively short time they obtained the signature of the 15 members by the 15th of November . However, different countries are still in their ratification process, so we need to keep track of the updates coming from them.
Which are the goals and the economic benefits RCEP is establishing?
Following the publication of the Agreement, which you can find here: https://rcepsec.org/legal-text/ , I cite the 4 goals enhanced.
- establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment and contribute to global economic growth and development, taking into account the stage of development and economic needs of the Parties especially of Least Developed Country Parties;
- progressively liberalise and facilitate trade in goods among the Parties through, inter alia, progressive elimination of tariff and non-tariff barriers on substantially all trade in goods among the Parties;
- progressively liberalise trade in services among the Parties with substantial sectoral coverage to achieve substantial elimination of restrictions and discriminatory measures with respect to trade in services among the Parties; and
- create a liberal, facilitative, and competitive investment environment in the region that will enhance investment opportunities.
Which are the economic and political implications of the Agreement?
Addressing the economic implications of such a trade bloc, political implications come in. In fact, RCEP can be also seen as a Chinese action, or reaction, to the US withdrawal from the TPP (Trans-Pacific-Partnership) under the Trump administration. The withdrawal and the harsh tones of the debate among China and US didn’t benefit the relationships among Washington and East-Asian countries. As a result, we are now surprised to see China, South Korea and Japan together in the same free trade area. The historical divisions Japan-South Korea and Japan-China are at a turning point. The long-lasted ally, the US, left a vacuum of power which could be filled by China, increasing their relationships with Japan and South Korea.
Coming back to the economic implications, let’s first look at the numbers: according to Brookings RCEP could add $209 billion annually to world income, and $500 billion to world trade by 2030. However, the focus is on intra-RCEP trade. Since the lower trade costs between member states and the harmonization of the rules of origin, higher intra-trades are expected by $428 billion. At the same time, a decreasing trend of trade among non members is expected too. Particularly negative effects are expected for countries which are strongly connected to RCEP states, but are not part of the agreement.
To conclude, RCEP is a dramatic change in global trade, in the political realm and in economic terms of the member states. The continuous growth of South-East Asia can be further boosted by this historical agreement, making South-Asian countries acquire more and more independence from external forces and relying more on a regional relationship with partners. RCEP can lead to an even faster growing South-East Asia, and can perhaps be central in our world.