Following eight years of drawn-out negotiations, the largest trade deal the world has ever seen was recently signed into power.
The Regional Comprehensive Economic Partnership (RCEP) outlines the trade agreements between 15 countries in the Asia Pacific region, including 10 members of the Association of Southeast Asian Nations (ASEAN). The remaining five include trade giants and age-old rivals China and Japan, plus Australia, New Zealand, and South Korea.
The signing took place in a virtual meeting room, with member states dialling into large screens via a video feed.
"This is a major step forward for our region," said Prime Minister of Singapore Lee Hsien Loong. "At a time when multilateralism is losing ground, and global growth is slowing, the RCEP shows Asian countries’ support for open and connected supply chains, freer trade and closer interdependence."
The total value of trade between the RCEP member countries in 2019 amounted to $2.3 trillion, a massive 29% of global gross domestic product (GDP). This makes it the largest trading bloc in the world, bigger than both the European Union (EU) and the United States-Mexico-Canada Agreement (USMCA).
The deal couldn't have come at a better time considering the economic devastation wrought by the ongoing COVID-19 pandemic. Trade as a result of the RCEP is likely to add $186 billion to the global economy and increase the GDP of its members by 0.2 percent. This is according to estimates calculated by two economics and international finance professors from John Hopkins and Brandeis Universities
For EU countries, the Free Trade agreements (FTAs) in the RCEP are shallower than existing EU FTAs with the region and the improvement in FTAs between ASEAN nations should serve to benefit international trade. However, with the UK recently leaving the EU trading bloc and the US still locked in faltering trade relations with China, the RCEP could have significant implications for other Western nations.
RCEP and the CPTPP
The RCEP will work in conjunction with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which replaced the Trans-Pacific Partnership (TPP) after US President Donald Trump withdrew from it in 2017.
The original TPP trade deal was signed by twelve member countries, including the US and Australia, in 2016. It includes agreements to cut tariffs more aggressively than the RCEP and has a greater focus on labour provisions and environmental concerns.
Re-signing of the new CPTPP deal took place in 2018 and included remaining members Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam. Australia and Japan now represent the two highest GDP countries that are part of both agreements, forming a potentially beneficial trade corridor with high GDP CPTPP members like Canada and Mexico.
It is uncertain at this point whether the incoming US Democratic Party under Joe Biden will seek renewed membership to the CPTPP deal. Biden had previously said he would not join the TPP but is open to joining the CPTPP if certain conditions are met. Incoming Vice President Kamala Harris has voiced disapproval of the deal, saying it did not meet her standards.
"I will oppose any trade deal that doesn't look out for the best interests of American workers and raise environmental standards, and unfortunately the TPP didn’t pass either test," Harris told the Council on Foreign Relations.
The RCEP has received criticism from some politicians, including former Australian Prime Minister Malcolm Turnbull, who has called the deal 'old-fashioned' and 'low ambition'. Others have noted the lack of depth in the agreement and the omission of details related to e-commerce and the environment.
With no prohibitions on data localization or greater allowance of cross-border data flows, RCEP will do little to help e-commerce businesses throttled by China's overbearing Internet restrictions. In this way, the CPTPP deal offers significant improvements over RCEP. Members of both programs
Key Elements of the RCEP that Could have a Global Impact
Energy and the US
The trade of fossil fuels will be a major factor of the deal, something that could affect US energy companies that are already struggling from the Trump administration's trade war. The deal plans to reduce duties and tariffs on 90% of commodities over a ten year period, ramping up the import of energy goods amongst RCEP members.
Australia stands to benefit the most in this sector, as the single largest exporter of coal and liquified natural gas (LNG) to China, Japan and South Korea. As tariffs on these essential fuels reduce, the US will find it difficult to renew its LNG exports to China. The incoming Biden administration will need to work quickly if it hopes to salvage an energy export relationship with China.
Similarly, US energy exports to Japan and South Korea could be challenged by the RCEP deal. Currently, the US exports approximately 20% of its coal and 30% of its natural gas to RCEP countries. However, there's already some signs of hope for US exporters, with China recently signing its first long-term deal to purchase LNG from US-based Cheniere Energy Inc.
Free Trade Rules of Origin
A key aspect of the deal defines how producers should determine a product's country of origin. Currently, free trade agreements between ASEAN countries differ from member to member, meaning that some products require alterations to enter certain countries.
Under the new RCEP rules, all 15 countries will be able to deal amongst themselves equally, scrapping any specific restrictions imposed on individual members. This will offer savings to both producers and consumers, representing a notable incentive for member countries to trade amongst themselves.
Improved relations for China, Japan and South Korea
One of RCEPs most significant achievements is the formation of the first free trade deal between China, Japan, and South Korea. The three nations have struggled through centuries of territorial disputes, historical disagreements and ideological differences, often leading to failed trade negotiations.
However, since rejoining the global economy in 1978, relations between China and Japan have slowly begun to improve. By the end of 2018, Japanese foreign direct investment in China reached $124 billion, with about 23,000 Japanese companies conducting business in the country.
Most recently, the two have found mutual benefits in the export of essential Japanese components for major Chinese technology firms like Huawei. Now, with the RCEP deal finalised, the two countries look set to become a global technological force to be reckoned with.
The Affect of India’s Withdrawal
India was originally going to be part of the deal but pulled out in 2019 over fears of cheap Chinese imports flooding into the country. With the RCEP deal offering little improvement in the trade of services, India's key export, the country was less incentivized to take part.
With India dropping out, China became a largely dominant force in the RCEP group of countries, raising concerns amongst some members. However, signatories have assured members that India still has the option to join the deal at any time.
The hype around the RCEP deal has been criticised by some for being overblown, which may have held some relevance under normal conditions. However, with the world still reeling from the economic effects of the COVID-19 pandemic, few can say the deal didn’t come at a better time.
The renewal and reintroduction of rules-based trade amongst previously restricted countries will give small businesses a much-needed boost at a time when they need it most. If nothing else, the RCEP deal will reignite faith in international trade and refreshed enthusiasm in entrepreneurship, while minimizing unnecessary bureaucracy and regulations.
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