The Regional Comprehensive Economic Partnership (RCEP), a historic trade agreement accounting for nearly 30% of global GDP, was signed on 15 November 2020 by fifteen Asia-Pacific countries, including China, Japan, South Korea, Australia and New Zealand. With the potential to impact lives of one third of the global population, RCEP is being heralded as the world’s largest free trade agreement (FTA).
As an FTA, the RCEP aims to expand trade in goods and services, investments, technology transfer and exchange, and promote growth within the region. So, the deal is economically significant – it will incentivize regional supply chains and can take the Association of Southeast Asian Nations (ASEAN) closer to the envisaged ASEAN Economic Community 2025. Additionally, it aims to support an open, inclusive, and rules-based multilateral trading system.
However, on balance, opinions have been fairly varied on the RCEP’s ambition and achievement. The impacts for inclusive and sustainable development, both multidimensional in nature, are less clear at this stage. Understanding asymmetries in how winners (those who gain from increased trade and investments, etc.) and losers (those affected by potential job losses, effects on natural resources, etc.), not just within RCEP, but also for non-members, the FTA will be especially important in linking with a multilateral agenda, and as economies recover from the COVID-19 crisis. A critical question is if the RCEP can in fact contribute towards global cooperation and sustainable development.
There are potential opportunities and ways in which RCEP’s regional approach can strengthen global cooperation for trade, investment and sustainable development, and there are also areas that require further research.
The direct effect of a trade bloc of the size of the RCEP will be through price changes. The commitments to reduce tariffs, especially reductions in non-tariff barriers (NTBs) are likely to have an immediate impact on the price of imported goods in member countries – and this could directly affect household welfare (positively or negatively depending on differential effects for consumers and producers) and thus poverty. For non-member countries, effects will depend on their complementary relations with one or more of the countries in the RCEP; and, this could either help boost consumption, production and investment in these countries, or trade diversion may negatively affect these countries, raising prices and reducing consumption.
The biggest attraction of the deal is the common ‘rules of origin’ – harmonising requirements and standards for businesses in RCEP member countries. In essence, if a company in Vietnam or Cambodia for example, produces electrical apparatus, it will now be eligible for concessions with all RCEP members, instead of separate FTAs with each individual country. While the gap between existing tariff rates and new RCEP rates could be small, the possibility to ship products across all of Asia without necessary changes has been highlighted as extremely significant.
Small and medium enterprises
Furthermore, technical cooperation between ASEAN nations and the more advanced countries like Japan and South Korea can also promote competitive products and contribute to capacity building for small and medium enterprises. Building on this, there may also be specific opportunities for South-South cooperation for trade, investments and knowledge exchange with non-member countries that may further augment cost-effectiveness in these regional supply chains.
Additionally, with the signing of RCEP, the shifting axis of power is clearer than ever before. While China will have an important voice in RCEP, it remains to be seen if this influence will be moderated and balanced by equal partnerships and the cited principle of ‘ASEAN centrality’. India has chosen to withdraw from the deal, but the door remains open as the joint leader’s statement underlines the importance of India in RCEP. Yet, India has a negative balance of trade with RCEP and has been wary of opening its markets to cheap Chinese competition, and with estimated adverse effects from re-joining the deal.
Impacts for smaller RCEP countries
Overall, however, net economic effects will be complex to identify across producers and consumers, and the actual impact on poverty and development outcomes will critically depend on the constraints faced by the poor in the smaller RCEP economies. These constraints may include institutional quality, infrastructure, business environment, etc. In fact, it is critical to acknowledge that RCEP membership is fairly diverse and this presents challenges. Several poorer countries in South East Asia are grappling with policy and fiscal space as a direct result of Covid-19. This will no doubt present complexities in the implementation of RCEP and will require additional considerations and some flexibility.
The diversity of RCEP however also presents key opportunities in terms of investment prospects and with potential for furthering investment for development. These are often not fully covered in assessments of the benefits of a FTA, as it is difficult to estimate the potential investments that may result from greater regional integration. But a recent UNCTAD report highlights especially that “the partnership could further boost both project finance in infrastructure and industrial investment to increase global value chain participation.” At the same time, the benefits from such integration in-country will depend largely on the linkages with the rest of the economy.
Interestingly, at least 65 percent of the services sectors will be fully open to foreign investors under RCEP, including professional services, telecommunications and financial services. This will no doubt make the region very attractive to outside investments, facilitated by streamlined customs procedures and unified rules of origin. The region is also experiencing very rapid increases in the demand for health services, and the degree to which government health systems effectively engage private companies and align regulatory arrangements along with prioritising the right to health, will be especially important with rapid emergence of knowledge-based companies that could become health sector disrupters.
RCEP’s impact on sustainable development
Finally, RCEP’s contribution to broader sustainable development challenges will depend on, both, cooperation within RCEP and facilitating linkages with non-member countries. Within RCEP, greater inclusion of small and medium-sized enterprises to the regional supply chains can promote their linkages with global supply chains. However, thus far, RCEP has been critiqued for lacking provisions to safeguard workers’ rights, labour and environmental standards. There is also a risk that a post-pandemic recovery may be hampered without such accounting. So, while the gradual elimination of barriers combined with building regional infrastructure and improving the business environment can boost trade within the region and further integration into global value chains, it’s vital to protect against any negative knock-on effects for local food producers, small-scale and women entrepreneurs, pastoralists and other minority groups.
In summary, as any FTA, RCEP will create winners and losers, not just across member countries but also within these countries, with likely opportunities for linkages with and opportunities for non-members. More evidence on the direct effects of the RCEP processes immediately in the post-pandemic period and over the medium/long-term would improve our understanding of how its regional approach will have implications, and its role in strengthening global partnerships and sustainable development. Specific policies and South-South as well as trilateral partnerships will be needed in ensuring that the benefits are inclusive and sustainable and the concerns in terms of social, environmental and geopolitical effects are effectively managed.
This blog is part of our blog series ‘Voices on Inclusive Trade’. Other blogs in this series:
- Can inclusive trade policy tackle multiple global challenges?
- Pathway to UK-India Free Trade Agreement: call for focused advocacy
- The future of UK-India trade and development – part one
- The future of UK-India trade and development – part two
- Trade, human rights and EU-India negotiations
- Two developments for South-South trade and investments post Covid-19
- A new WTO chief creates opportunity to realise a globally inclusive trading system
- Amid shifting global trade dependencies, can the South provide greater certainty?
- Designing for Impact: South-South Trade and Investment
- Reflections on South-South co-operation on trade and investment ahead of BAPA40
For more on inclusive trade and development, Watch our Inclusive Trade event series.
Saon Ray is senior fellow at Indian Council for Research on International Economic Relations, New Delhi
Acknowledgement: Authors acknowledge discussions with Gerry Bloom at IDS and with Badri Narayanan Gopalakrishnan at Infinite Sum Modelling Inc.