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The Regional Comprehensive Economic Partnership (RCEP) will
consolidate currently overlapping arrangements between the
signatories and unify rules of origin. Negotiations had been
underway since 2012 but the supply chain disruption caused by the
COVID-19 pandemic gave them new urgency and India's exit from
negotiations in late 2019 removed the major obstacle. RCEP provides
scope for deeper trade relations in the most economically vibrant
region of the world - whose trade is already relatively
concentrated in that region. Asian Development Bank estimates
suggest about 60% of Asian trade is within Asia, compared with 40%
in North America, and similar to the 65% in the EU's single market
(based on 2018 IMF data). There are, however, two substantial
caveats. First, seven RCEP members are also signatories of the
Trans-Pacific Partnership (TPP), which already seeks tariff
elimination on 99% of traded goods (viz, Australia, Brunei, Japan,
Malaysia, New Zealand, Singapore, and Vietnam). Second, RCEP's
tariff eliminations will be gradually implemented over 20 years,
allowing each signatory to adopt it at its own pace. (It first
needs to be ratified by nine signatories - most have not indicated
a timeline for ratification.) Further, each member country can
decide which services sectors are open to competition from other
RCEP signatories. - so-called 'positive list members.'
US-China rivalry
A major difference between RCEP and TPP is that it obviates
standards for environmental or labor protections. These were
central to the US's ascension to TPP during the Obama
administration and give rise to a regulatory tension. If the US
under a Biden administration (and/ or to a lesser extent the UK
post-Brexit) were to accede to the TPP, at least the seven
countries that are part of both RCEP and TPP would face a
competitive disadvantage within the RCEP bloc because of the higher
environmental and labor standards TPP trade demands. This adds to
US incentives to (re)join the TPP in an attempt to curb Mainland
Chinese economic influence in Asia, especially the fast-growing
economies of ASEAN (where the idea of RCEP originates). It would
build on existing relationships. Two-thirds of China's trade with
RCEP members is with US-allied countries - diplomatic disputes
between these countries and China are likely to have the US-China rivalry in the
background and quickly turn into economic disputes. (See
forthcoming blog post on Australia-China relations.) Several of
these countries also have longstanding territorial disputes with
China so periodic political opposition to RCEP - and China's
dominant position within it - is likely.
China's Premier Li Keqiang, during an 18 November State Council
meeting, highlighted the importance of domestically implementing
RCEP-related measures "in accordance with the schedule", likely
signaling Chinese commitment to the agreement. RCEP's inclusion of
e-commerce, intellectual property, and technological cooperation is
likely to favor market access in areas where China has a
competitive advantage, including internet platforms, and
telecommunication technology - even if many of these sectors are
seeing a trend towards higher taxation and protectionism on grounds
of national interest. RCEP will also facilitate a proposed
trilateral free trade agreement between China (the world's second
largest economy), Japan (the third), and South Korea (the tenth),
an "RCEP-plus" zone. Japanese and South Korean will be especially
competitive in advanced manufacturing sectors, like
automotives.
India?
India enjoys a clause in the agreement that gives it the
prerogative to accede at a later stage. However, India is unlikely
to rejoin, given its USD60 billion trade deficit with China and its
demand to reduce tariffs in dairy and e-commerce sectors - both
important political constituencies in India. Even guaranteed
exemptions from tariff reductions is unlikely to convince the
current BJP-led parliament (sitting until 2024). However, Australia
and Japan will likely co-operate in future RCEP negotiations to
encourage India to rejoin the group, likely to counterbalance
China's disproportional economic influence. Australia and Japan
probably also assess that India's inclusion into the group will
increase the prospect to counterbalance China's regional political
influence, given increased bilateral co-ordination via the Supply
Chain Resilience Initiative (SCRI).
Even an economic agreement of the potential size of RCEP is
likely to be constrained by geopolitical complications.
Posted 20 November 2020 by Anton Alifandi, Associate Director, Country Risk, S&P Global Market Intelligence and
David Li, Principal Asia Analyst, S&P Global Market Intelligence and
Deepa Kumar, Deputy Head, Asia-Pacific Country Risk Team, S&P Global Market Intelligence and
Hannah Cotillon, Senior Analyst, Asia-Pacific Country Risk, S&P Global Market Intelligence
