Written by Kate Whiting, Senior Writer, Formative Content
|• The Japanese government has approved the world’s largest trade deal.
• The Regional Comprehensive Economic Partnership (RCEP) could come into force next January.
• Deborah Elms, Executive Director of the Asian Trade Centre in Singapore, explains what it is, how it differs from other trade deals and what has to happen next.
RCEP is a big deal, literally and metaphorically. When it’s signed off, the Regional Comprehensive Economic Partnership will create a free trade zone covering about 30% of the world’s gross domestic product, trade and population.
It also marks the first time Japan has had an agreement with China and with South Korea.
The Japanese government approved the deal at the end of April – and expects it to boost GDP by 2.7% and create more than half a million jobs, according to Kyodo News.
RCEP – which has been over a decade in the making – will eliminate tariffs on 91% of goods as well as introduce rules on investment and intellectual property to promote free trade.
It covers 15 member countries, but there’s also some overlap with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Here, Deborah Elms, Executive Director of the Asian Trade Centre in Singapore, explains what RCEP is, how it differs from other trade deals and whether it will come off.
What actually is the Regional Comprehensive Economic Partnership?
It’s a trade deal that sets up trade in Asia, for Asia. We’ve had a lot of trade in Asia; of course, we’ve had a lot of raw materials, parts and components that move back and forth. And they’re often given final assembly [in Asia], but they’re typically then shipped to the US or Europe.
We don’t have as much final production that ends up in Asia. One of the reasons we don’t have that is because trade in the region, especially for finished goods, is too difficult, too expensive – tariffs in place, non-tariff challenges, etc. – and so you have less trade in the region than you should have.
It’s not a perfect agreement, but RCEP makes it more likely that firms will create supply chains in Asia, for Asia. As the agreement comes into force and becomes more meaningful for firms, then it will accelerate over time.
|How RCEP compares to other trading blocs|
How significant is the approval from the Japanese government?
In order for RCEP to come into force, we need six out of 10 members of ASEAN and three out of the five dialogue partners [China, Japan, South Korea, Australia and New Zealand]. I’ve always thought that the challenge is actually the dialogue partners, because their internal procedures are more complicated than most of ASEAN. In ASEAN, it’s really simple to approve something.
Dialogue partners, though, have procedures and processes and committee reviews which Parliament, or [the Japanese] Diet, needs to approve, and it can be time-consuming. The fact that [China and Japan] have already said yes is a miracle, and especially for Japan to have moved so quickly, because approval through Diet can be time-consuming. Although I think it has huge benefits, RCEP also has some political minefields for Japan, because it’s the first time that they have an agreement with South Korea, and with China.
What else needs to happen now before it can come into effect?
We’ve got four countries that have said they’re ready: Singapore, Thailand, China and Japan. We need to get to the six members of ASEAN and we need to pick up at least one more of the dialogue partners. I feel pretty confident now that with China and Japan in place, that we will have the other dialogue partners coming on fast enough to be able to start. They need to do this sooner rather than later because the end of the year in this region gets very complicated.
We have summit season and the ASEAN agenda actually has to be certified and approved and then handed over to the next chair. And the same thing with APEC. The officials can get so distracted with all these other commitments and then we might miss the [RCEP] deadline. They’re really aiming to have this come into force on 1 January . But that means that you have to approve it by 1 October, because it’s 60 days later. So your timelines are pretty tight now.
Can you see it happening or might there be stumbling blocks along the way?
I could see it going either way. TPP or CPTPP came into force earlier than imagined. TPP was triggered when you had six... they all wanted to be the sixth, and then sort of by accident, they went earlier than they thought [they would]. It actually came into force on 29 December , which was year one. And then year two started on 1 January . So we actually had double rounds of tariff cuts in three days. It’s because they were just so enthusiastic, they all wanted to be able to say, ‘Our approval brought it into force’. The same thing could happen with RCEP. I do think it will happen, which is good news, but I don’t think we’re going to have all 15 countries.
How will it impact the COVID-19 recovery of the bloc?
RCEP is especially important in post-COVID, because you need to keep trade lanes open – and this is a trade-dependent region. But you also need to have new sources of economic growth. It seems clear that we’re going to have an uneven recovery coming out of COVID, so you want to be harnessed to different possible engines to drive recovery. I think having an Asian agreement with Asian powerhouse economies in it is really helpful. It’s helpful, not just for those economies, and not just for big multinationals, but it’s also very helpful for smaller businesses, because you need to start that rebound in growth somehow.
And it’s going to be challenging – [COVID-19 case] numbers just keep going crazy. This region is really struggling, including many of our ASEAN members, like Laos and Cambodia. The Philippines numbers keep going up. Thailand has had to keep shutting down. This is a region that is really going to be hit hard with COVID and they’re going to need whatever they can, in my view, to help push a recovery.
What are the differences between RCEP and the CPTPP?
There is a big gap in quality, in coverage, in depth and breadth and a lot of that is attributable to a very simple thing: in TPP, you joined voluntarily, you wanted to be subject to high ambition, high quality, you were excited about that. In RCEP, you joined it because you had to, because you are a member of ASEAN or you had an existing agreement with ASEAN.
The variety among the members in RCEP is also breathtaking. On any dimension: population size, wealth, landlocked versus archipelago countries, services versus trading goods, imports versus exports, RCEP is really, really diverse.
Trying to balance all of those objectives meant that the final agreement in RCEP is, by default, less ambitious, with more loopholes. But that doesn’t mean it will stay that way – it is likely to be improved over time. It follows ASEAN’s own models, which is every five to 10 years, we have a full-on upgrade. ASEAN also has a track-record for bringing forward deadlines. We have really long time-horizons in RCEP, of 20, 21 years. I think those will come forward over time, as everybody develops some comfort and familiarity with this agreement.
|RCEP members are also in the CPTPP / Image – Brookings|
What does RCEP cover?
For intellectual property (IP) rights coverage, RCEP is astonishingly good. This is a region that’s not known for doing IP rules. They don’t have a lot of IP chapter commitments in a lot of other trade deals and what they’ve embedded in RCEP is way beyond what people imagined. IP is really hard, it’s a whole ecosystem that has to come together, so the IP commitments for me are one of the most surprising things about this agreement. What they don’t have are rules on labor, worker or human rights or anything on the environment.
There’s no interest in doing so at an ASEAN or Asian level at this point. The members will engage in those conversations in other settings. Viet Nam has robust chapters with the European Union, the CPTPP members have done it with each other, but they don’t want to do so at this time with Asia. They said we’ll move on and focus on key economic issues, full stop. And while you can make an argument that worker rights are important, or environmental rules are important for trade, they’re not as central as, ‘Let’s deal with our tariffs’.
Are these things that might come on-stream as RCEP evolves?
I don’t want to say never, but I would be surprised. In part, because a lot of these countries see their own comparative advantage as lying in different labor standards and different environmental provisions. It doesn’t mean that they are anti-environment or anti-workers, it just means they would say, for us to level up across a really diverse region, and have something that makes everybody happy, is probably impossible anyway.
Those who are at the top end of worker rights, human rights, labor rights, environmental protection, climate change policies, are not going to be satisfied with whatever is below that. And those who are way below that are going to say, that’s already too big of a stretch. How are you going to meet in the middle on these fairly sensitive topics? They said, let’s just focus on what we can realistically achieve and move on. Asia is an awfully pragmatic region. If it can be done, we’ll do it, but we’re not going to spend a lot of time moving things that can’t be moved.
Why has it taken so long?
RCEP was launched at the end of 2012. They started negotiations in 2013. But they didn’t roll up their sleeves really, until 2014. It’s been a while – and they were almost done when India dropped out. We’ve lost a year. They announced a substantial conclusion in November of 2019 and were ready to sign in March and then move ahead last year, but because of India dropping out, and then COVID, there was no way to accomplish that.
What impact did India dropping out have on RCEP?
It depends on who you talk to, but particularly for the Japanese, it was a very big deal. It was a blow because, while they all have lots of trade agreements in the region, we have very poor trade agreements with India, if they exist at all. It was a loss both of opportunities for RCEP members into India, and then in my view, India’s opportunities to be part of the supply chains.
Is there still scope for India to join in the future?
Officially, it’s possible. There’s a footnote that says the whole agreement is open to new members 18 months from the date of entry into force. But India got a special provision, which is if India chooses to join at any time, it can simply come back, it does not have to wait 18 months. But even pre-COVID, there was not enough interest in it. There’s too many groups who dislike it.
What does RCEP mean for other trading blocs? And will the world become increasingly split into these different trading areas?
Most trade experts dislike trade agreements, because they are preferential and there are benefits for being in and penalties for being out. Once you start making large regional trade agreements, the incentives for you to align your supply chain – whether it’s goods, services, or investment – around that geographic space goes up. Then once you set those in place, they’re very hard to dislodge.
There will be business changes as a result of RCEP, even among companies that actually aren’t using RCEP. Once you have CEOs who start ‘thinking Asia’, it doesn’t really matter whether the agreement covers the thing that you care about, your brain is saying, ‘There are benefits in Asia, I should invest in Asia, I should plan for Asian distribution’. That’s going to be very new and it’s self-reinforcing. The more you have CEOs who say, I think Asian First, the more you end up with Asian outputs. So we will see splintering in that sense.
How does it fit with the World Trade Organization?
From a trade negotiating perspective, once you have this platform in Asia, it’s easier to negotiate or discuss future rules on trade in RCEP, as opposed to discussing them somewhere else, such as in Geneva.
I can imagine discussions on the new standards for AI or blockchain or the sharing economy taking place in RCEP. It wasn’t planned that way from the beginning, but they’re going to start making work plans, policy objectives, capacity building programmes, sit down together and come up with new standards. I think it’s a big deal. Many
of the members are still committed multilateralists, who believe strongly in the World Trade Organization (WTO) system in general, and the importance of global trade. But I think they will also say, it’s too difficult to do stuff in Geneva, so let’s just do it here first, let’s have a demonstration project in Asia and then maybe that gets pulled back into the WTO or somewhere else.