RCEP: The World's Largest Trade Deal

For decades, the European Union has been thought of as the world's largest regional trade deal, measured by the number of countries involved and their combined GDP, but that has now changed. On November 15, 2020, a group of 15 Asian Pacific countries signed what is now by some measures the world's largest regional trade deal. Known as the Regional Comprehensive Economic Partnership (RCEP), the deal involves all 10 countries from the Association of Southeast Asian Nations (ASEAN) and 5 of its major trading partners: Australia, China, Japan, New Zealand, and South Korea. The RCEP includes countries that account for one-third of the global population and GDP.

The primary impact of the RCEP will be to progressively reduce tariffs on the cross-border trade of goods between member states by around 90 percent. Notably, it is the first regional trade deal to link the economies of China, Japan, and South Korea, and as such may provide an impetus for closer regional integration between these big three Asian economies. The deal will allow businesses to sell the same goods within the bloc, without having to meet separate requirements and fill out separate paperwork for each country, which will significantly reduce the need for customizing products so they meet local country regulations. The rules of origin terms in the RCEP are also very relaxed. To qualify for tariff reductions under the RCEP, at least 40 percent of a product's value should be produced in one or more of the 15 member states. That leaves 60 percent of value that could come from countries outside of the RCEP, such as the United States, Germany, or India (by contrast, rules of origin requirements under the USMCA are as high as 75 percent for products such as automobiles).

On the other hand, the RCEP is not seen as a "high-quality" trade agreement because it does not cover many services and agricultural products. Moreover, tariffs are page 292agreed upon between countries rather than harmonized across the board. For some countries, sensitive issues such as agriculture will not be touched. The RCEP also has no rules at all on labor, the environment, and the subsidization of state-owned enterprises. Protections for intellectual property are weaker and less rigorous than those included in other recent trade deals, such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) signed in 2018 between 11 Pacific Rim nations, excluding China. Despite these limitations, economic analysis by Australia's Productivity Commission has suggested that a deal would increase GDP between member states by as much as 4 percent, while a retreat into protectionism would lead to an 8 percent drop in GDP.

Negotiations on the RCEP started when talks aimed at establishing another major trade pactThe Trans-Pacific Partnership or TPP (now the CPTPP)were under way. China was not a party to the TPP, which at the time was slated to be the world's largest regional trade deal. Many observers considered the RCEP to be a way for Beijing to counter American influence in the region. When negotiations started back in 2012, India was also involved, but India pulled out over concerns that lowering tariffs on Chinese goods would only increase its yawning trade deficit with the country. India also worried that its poor farmers would be flooded out of the market by Australian grains and milk from New Zealand.

Negotiations proceeded slowly until 2017 when President Donald Trump pulled the United States out of final negotiations to establish the TPP and placed tariffs on many of America's trading partners, including China. One of the unintended consequences of that decision was that it gave negotiations to establish the RCEP added momentum. The negotiating countries quickly came to the conclusion that they needed to push back again growing protectionism, even as the United States under Trump chose that path. As academics at the Australian National University have noted:

In signing RCEP, Asia has chosen openness over protectionism, regionalism over nationalism, cooperation over confrontation, and solidarity over suspicion. They have sent a clear and unambiguous signal to the world: that Asia remains very much open for business, committed to the open regionalism.

P. Drysdale and A. Triggs, "Asia Pushes Back Against Global Protectionism with Big Trade and Cooperation Agreement," East Asia Forum, November 6. 2019.

The RCEP leaves out the kinds of provisions on the environment, labor, and state-owned enterprises that America insisted be included in the Trans-Pacific Partnership. Because the RCEP includes China (and the TPP pointedly did not), the pact is often described as a "Beijing-led" initiative to write the rules of globalization to its liking (as opposed to the TPP, which was an American-led initiative to write those rules). However, ASEAN members bristle at that notion. ASEAN has organized the negotiationsalmost 30 rounds of themand ASEAN representatives argue that even though the RCEP has been painted as a China-led initiative, it has always been an ASEAN-led initiative. Be that as it may, there is no doubt that China will be the dominant economy in the RCEP and that the trade deal will do little to hold in check China's historic tendency to subsidize state-owned enterprises, many of which are exporters.

Question:

What will be the benefits of the RCEP to member states?

Are the relaxed rules of origin in the RCEP beneficial or harmful for (a) the global economy, and (b) countries that are not members of the RCEP?

What are the limitations and potential negative consequences of the RCEP? How might these limitations impact regional and global trade going forward?

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