Any economic benefit from the unprecedented agreement will not occur immediately. It is expected to take effect within two years, after it has been ratified by the member countries. But the strong signal it sends about the region’s commitment to integration cannot be under-estimated, especially given recent concerns about de-globalisation.
"What is notable is this is the first multilateral free-trade agreement China is a part of.”
With the removal of trade barriers in the region and greater harmonisation, economic integration between ASEAN and China, Japan and South Korea will be greatly enhanced. Supply chain shifts already underway in the region will accelerate.
Negotiations for the RCEP began in May 2013 and lasted 31 rounds. The agreement involves the 10 ASEAN members together with China, Japan, South Korea, Australia and New Zealand. These 15 countries account for around 30 per cent of global GDP, 30 per cent of the world’s population, and 27 per cent of global trade.
What is notable is this is the first multilateral free-trade agreement of which China is a part. India, which participated in the earlier negotiations, opted out of the RCEP in November 2019. However, the door remains open for India to join in future.
The principal aim of the RCEP is to bridge two existing and longstanding proposals by adopting an open ascension scheme: the East Asia Free Trade Agreement, which focuses on ASEAN plus China, Japan and South Korea; and the Comprehensive Economic Partnership which added three economies, Australia, New Zealand and India to ASEAN.
The RCEP is less ambitious in terms of trade issues covered and utilises a clear step-by-step approach, in comparison with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
One key difference between the RCEP and the CPTPP is while the RCEP covers standard items such as trade in goods and services, investments and dispute settlements, it does not extend to more onerous areas such as the environment and labour and food safety standards.
But one of the benefits RCEP will bring is harmonisation of tariff schedules and rules of origin, helping streamline the various existing and overlapping ASEAN FTA rules (commonly known as the ‘noodle bowl’ effect).
Furthermore unlike the CPTPP, which applies the same standards across all countries, RCEP recognises the individual and diverse levels of development and economic needs of members. The agreement has provisions for special and differential treatment for the CLMV economies (Cambodia, Laos PDR, Myanmar and Vietnam).
The Peterson Institute for International Economics estimates the RCEP will add $US186 billion to the global economy by 2030. They estimate most of the gains will go to China ($US85 billion), Japan ($US48 billion) and South Korea ($US23 billion).
Within ASEAN, the biggest beneficiaries will be Malaysia, Thailand, Vietnam and Indonesia. The estimated benefits may not seem large for some ASEAN countries but it still has the effect of expanding the economic pie in the region. If India were to join the RCEP, the additional gain to the global economy is estimated at $US53 billion.
For Australia and New Zealand, the immediate benefits from RCEP will not be large, estimated at $US1 billion each. This is because both countries already have existing FTAs with China and ASEAN. But there is a longer term benefit from greater integration with Asia, a region which is expected to post much stronger economic growth compared with Europe or the US.
In addition, Australia and New Zealand stand to gain from being on the ground floor as the Mekong economies develop faster under the RCEP as they stand to benefit from differentiated treatment and technical assistance.
Separately, China, Japan and South Korea have also been negotiating their own free trade deal. This could now get a renewed push with the RCEP agreement signed, further paving the way for more trade and investment flow in the region.
The focus will now turn to how US President-elect Biden will seek to engage in the region with regards to trade when he is sworn in.
The US is not part of the two large trade deals in the region – the RCEP and CPTPP. Having the US as part of either trade agreement will greatly enhance the benefits and provide a boost to longer term growth prospects for the region.
Khoon Goh is Head of Asia Research at ANZ
This article was originally published on ANZ’s Institutional website