Trade agreements are economically important and have a genuine effect when corporations utilize them to gain access to previously closed markets, but they are a political invention with economic consequences that are not always immediately apparent. The Regional Comprehensive Economic Partnership (RCEP) is no exception in that it will take years to determine which nations and businesses profited the most from this political agreement.
What investors should take notice of is that RCEP is now the second major trade agreement concentrating on Asia to be concluded without the United States. In this post, we’ll examine at RCEP, why it matters, and what it could mean for global commerce in the future.
- RCEP is Asia’s second major trade agreement to be concluded without the participation of the United States.
- China is regarded as the RCEP’s crown jewel, with the biggest economy among signatories.
- In terms of aligning economic ideologies on topics like as labor and the environment, the RCEP agreement falls short of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Overview of RCEP
The RCEP includes 15 nations, including seven from the CPTPP. The following nations signed the agreement on November 15:
- Australia (CPTPP member)
- Brunei (CPTPP member)
- Japan (CPTPP member)
- Malaysia (CPTPP member)
- New Zealand (CPTPP member)
- Singapore (CPTPP member)
- South Korea
- Vietnam (CPTPP member)
India was once member of the RCEP but has subsequently dropped out. It should be underlined that the door is open for the nation to join later. The contract covers nearly one-third of the world’s population and little under one-third of global GDP. The Brookings Institute believes that the pact will enhance global GDP by $500 billion in the next 10 years, although predictions vary greatly as with previous trade treaties. Most believe that the RCEP has the potential to contribute well over $100 billion to national earnings inside the trade block.
What Makes RCEP Different
Despite having seven CPTPP members as part of the RCEP, the RCEP is a different type of trade deal. The CPTPP went a long way to harmonize key points such as intellectual property, environment, labor, and rules around state-owned enterprises. All these areas in the CPTPP required higher standards among many signatories in order to enjoy freer trade with other members. The RCEP is silent on almost all of these points, which has been spun as a direct influence of having China involved as the largest, and arguably key, economy.
Even if this is a sign of China’s influence, the biggest win for members of the RCEP is having reduced tariffs on products that are sourced within the trading block. This means, for example, that a Japanese-designed car pulling in parts from South Korea and assembled in China can be sold in Australia without triggering tariffs based on third-country content. This sets up an incentive for the RCEP members to source more freely within their region, which should result in them trading more freely in general.
The Layers of Trade Agreements in Asia Pacific
The world of bilateral and multilateral trade agreements requires more than a few whiteboards to map out. The RCEP is China’s first multilateral agreement, but the country has a number of bilateral trade agreements, including with Australia – a country that, along with New Zealand, has a deal with every other country in the RCEP.
In these cases, the countries with more developed bilateral agreements generally keep the deeper trade ties but respect the new unified sourcing rules under the RCEP. In this sense, the RCEP still removes a country-of-origin headache from regionally sourced supply chains.
Leadership May be Shifting East
The CPTPP and RCEP are both deals that, judging solely on membership location, tilt toward Asia. Most importantly, these do not involve the United States. The United States has signed the United-States-Mexico-Canada Agreement (USMCA) that replaced NAFTA recently, but the last free trade agreement other than that was signed with Panama in 2007. The United States’ 14 free trade agreements encompass 20 countries, but only three of these countries are also members of RCEP.
The exit of the United States from the CPTPP represented a pull back for a country that once was a global champion of free trade. The inclusion of China in RCEP and the absence of the United States suggests that the Asia Pacific region is moving ahead on its own. The deals may be less comprehensive, but they are still getting done.
The Bottom Line
Lower tariffs on items supplied and traded in the area would benefit RCEP members, strengthening links between these nations. Larger economies such as China, Japan, South Korea, and Australia will likely profit the most at initially, but regional sourcing will help the whole area over time.
The most crucial point, though, is that the United States may be ceding its global trade leadership to Asia Pacific countries. Of course, this scenario may be rectified – the door to the CPTPP remains open for the US, for example – and expectations are strong that a new Biden government would do exactly that. Another thorny topic for the world economy in 2021 is whether or not that reversal occurs.
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