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RCEP - the game-changer in the post-COVID-19 global economy?
19 January 2021Tomasz Brodzicki, Ph.D.
Introduction - multilateral integration globally vs.
regional integration
Post-WWII globalization is driven simultaneously by multilateral
integration as well as the formation of regional trade agreements
(RTAs). From an economic theory point of view, multilateral
integration is the first best choice over regional integration (a
second-best choice). WTO member states declare that RTAs should be
complementary to, not a substitute for, the multilateral trading
system.
An RTA is a treaty between two or more governments that define
the rules of trade for all signatories which provide for better
conditions than the general treatment and access to markets than a
basic standard of the WTO (MFN clause). RTAs in the WTO are taken
to mean any reciprocal trade agreement between two or more
partners, not necessarily belonging to the same region (they do not
have to be regional trade agreements as such and could thus span
several regions or countries from totally different parts of the
world).
The overriding principle of the GATT/WTO system is the principle
of non-discrimination. RTAs are discriminatory but are however
considered to be an exception to the principal rule and allowed if
certain specific conditions are met. In general, RTAs should
facilitate trade between parties but should by definition not raise
trade barriers vis-à-vis third-parties and must cover a substantial
part of the trade (rules on formation and operation of FTAs and CUs
under Article XXIV of GATT, Enabling Clause on RTA and global
arrangements of developing states as well as the provision of
Article V of GATS).
Under the WTO rules, all new RTAs have to be notified to the
WTO. In 2006 WTO member states agreed on a provisional mechanism to
enhance the transparency of RTAs and understand their effects on
the multilateral (global) system. Under its provisions, members
notify the WTO about their RTAs, and these are discussed by the
wider WTO membership based on a factual presentation prepared by
the WTO Secretariat.
It is clear from the WTO and trade data in general, that RTAs
are increasing in number and changing their nature (from simple
bilateral preferential trade agreements (PTAs) to more complex
multilateral free trade areas (FTAs)/custom unions (CUs) and
further beyond the scope of standard tariff and border regulations
to a compass a large scope of policy areas such as competition
policy, government procurements, intellectual property rights
(IPRs), structural policies, regional development and so on).
Fifty trade agreements were in force in 1990. There were more
than 280 in 2017. As of 20 September 2020, 306 RTAs were in force
(according to the WTO website) corresponding to 496 notifications
from WTO members.
The current European Union is an example of an advanced deep
integration block that started as a "shallow" agreement and then
deepened and widened (extended to 27(28) the European States from
the original six).
As such RTAs create both static effects on trade (classic trade
creation, trade diversion, trade deflection, and trade
expansion/contraction effects) but also lead to significant
long-term dynamic effects.
The classic economic literature on regional integration
agreements (RIAs) distinguishes free types of allocation effects
(impact the static allocation of resources), accumulation effects
(impact of the accumulation of factors of production and efficiency
and thus growth prospects), and location effects (impact on
location decisions of firms).
The origin of RCEP
The Regional Comprehensive Economic Partnership (RCEP)
Agreement was signed on 15 November 2020 after a long
negotiation period started back in 2012. The RCEP is a
multilateral, regional agreement extending and deepening the free
trade between the member states of the Association of Southeast
Asian Nations (ASEAN) and its existing trade partners China, Japan,
and South Korea (the so-called ASEAN Plus Three) as well as
Australia and New Zealand.
ASEAN itself is a regional economic organization established on
8 August 1967 by five founding member states and then extended, now
comprising ten countries in Southeast Asia. ASEAN member states are
Indonesia, Philippines, Vietnam, Thailand, Myanmar, Malaysia,
Cambodia, Laos, Singapore, and Brunei. East Timor and Papua New
Guinea have the status of observers.
The ASEAN Free Trade Area (AFTA) was signed on 28 January 1992
in Singapore creating a trade block with FTA between the member
states to increase ASEAN's competitive edge as a production base in
the global economy through the elimination, within ASEAN, of
tariffs and non-tariff barriers and to attract more foreign direct
investment to ASEAN. The members introduced the Common Effective
Preferential Tariff scheme, which established a phased schedule in
1992. Unlike the EU, AFTA did not apply a common external tariff on
imported goods (is not a customs union).
ASEAN countries tried to expand the preferential trading
arrangements in the region by forming other FTAs with neighboring
economies. These included in particular: ASEAN-Australia-New
Zealand Free Trade Area (AANZFTA), ASEAN-China Free Trade Area
(ACFTA), ASEAN-Korea Free Trade Area (AKFTA) as well as ASEAN-India
Free Trade Area (AIFTA) that came into effect on 1 January 2010 as
well as ASEAN-Japan Comprehensive Economic Partnership (AJCEP) that
went into effect earlier, on 1 December 2008.
The above created a complex system of trade agreements that
required simplification and at the same time potential deepening of
ties for the benefit of all parties involved. The so-called ASEAN
Plus Three was the first attempt that embraced ASEAN and China,
Japan, and South Korea. This was followed by an even larger East
Asia Summit (EAS), which included in addition to India, Australia,
and New Zealand (ASEAN Plus Six). This group acted as a
prerequisite for a possible East Asia Community (with ambitions
similar to the EEC/EU).
For the time being the discussions and then negotiations led to
the signing of the RCEP Agreement by 15 out of 16 states of the
ASEAN Plus Six group. RCEP is the first multilateral
agreement to include China (mainland) and establishes the first
free trade agreement between China and Japan, as well as Japan and
South Korea.
Objectives of the RCEP Agreement
The objective of the RCEP Agreement is to establish a
modern, comprehensive, high-quality, and mutually
beneficial economic partnership that will facilitate the expansion
of regional trade and investment and contribute to global economic
growth and development.
The RCEP Agreement is declared to work alongside and support an
open, inclusive, and rules-based multilateral trading system within
the WTO. The objectives of the RCEP Agreement are thus in line with
the WTO rules.
The RCEP agreement aims to complement WTO and extend it to areas
not covered or go beyond its provisions. RCEP constitutes for sure
a significant improvement and deepening of integration in the
region in comparison to the prior system of ASEAN Plus One
FTAs.
RCEP aims to strengthen the position of states within global
value chains but also to build stronger and deeper regional value
chains. Simultaneously RCEP aims to boost responsible and
constructive competition between parties involved to drive overall
productivity which is key to long-term competitiveness and economic
growth.
Scope of RCEP Agreement
RCEP Agreement comprises 20 Chapters. The base chapters
concentrate on trade in goods including rules of origin, customs
procedures and trade facilitation, sanitary and phytosanitary
measures, standards, technical regulations, and conformity
assessment procedures as well as trade remedies. The agreement
covers as well as trade-in services including specific provisions
on financial services, telecommunication services, and temporary
movement of natural persons (related to trade in services).
Besides, the Agreement has provisions on investment, IPRs,
electronic commerce, competition, SMEs, economic and technical
cooperation, government procurement as well as legal and
institutional areas including dispute settlement.
In terms of market access, the RCEP Agreement achieves
liberalization in trade in goods and services as well as
investments.
We have to note that the RCEP group is diverse with countries at
a different level of development, different levels of
sophistication of firms, and varying sizes. The signatories differ
significantly in terms of economic needs. Taking this into account,
the Agreement is supposed to be mutually beneficial to countries at
a different level of development. Thus, it provides a certain level
of flexibility and special provisions and treatment for Cambodia,
Laos, Myanmar, and Vietnam and adds additional flexibility for the
least developed states.
The diversity of the level of economic development of
signatories, different levels of technological sophistication, as
well as different political systems and institutional setups could
create potential tensions within the block itself.
Ratification & potential extension of RCEP
agreement
RCEP will enter into force following ratification by at
least six ASEAN countries and three non-ASEAN signatory countries
and it will take the effect 60 days after it has been ratified. The
process of ratification can be lengthy and take several months,
nonetheless, it should be completed in 2021.
It is worth to stress that RCEP is open for accession by other
states 18 months after its entry into force. India, as an original
negotiating state, could become an additional member thanks to its
fast-track accession possibility. The accession of India would mean
the introduction of the original plan of the ASEAN Plus Six.
India decided to opt-out of RCEP at this stage due to
concerns over the potential of excessive imports in particular from
China within the scheme of the current agreement that could
endanger domestic industry and agricultural sectors.
Indian entry into RCEP would thus require the introduction of extra
safeguard measures and renegotiation of the terms by all parties
involved.
The economic significance of RCEP
RCEP's countries account for about 29% (USD 25.8
trillion) of global gross domestic product and approx. 29% (2.3
billion) of the world's population.
The accession of India would significantly increase the
shares to approx. 1/3 of global real GDP in 2020 and the share
could increase by 5% to 2030 (according to IHS Markit Global Link
Model). With India's access, the population of RCEP would go up to
3.65 billion people which is 47% of the world
population.
Upon entry into force, RCEP will be the world's biggest
FTA as measured by GDP—larger than the Comprehensive
and Progressive Agreement for Trans-Pacific Partnership (CPTPP),
the European Union (now weakened by 2020 Brexit of the UK), as well
as NAFTA (now USMCA).
RCEP countries are responsible for roughly 25% of global
trade in goods and services (USD 12.7 trillion).
In comparison to the rest of the world, most of the
countries of RCEP dealt well with the escalating COVID-19 pandemic.
Some RCEP countries are already growing strong. RCEP could give a
further boost to the region's economy and increase its global
significance.
The IHS Markit GTA Forecasting data shows clearly that
RCEP countries play a significant role in global trade
already. RCEP countries trade intensely with each other
but also play a crucial role in exports to the rest of the world.
It is worth stressing that the significance of RCEP in global
exports is significantly larger in volumes than in the real value.
Thus, the RCEP plays and will play an increasingly influential role
in global transport networks, in particular maritime
transports.
Due to RCEP, the trade within the region is likely to
grow faster than trade with other parts of the world - thus the
significance of the region's value chain for RCEP countries will
increase but also the significance of RCEP globally will
grow.
The significance of RCEP countries in terms of the value
of their exports in 2020 varies from 27.1% in the case of China to
87.8% in the case of Laos. It's equal to 44.0% for Japan,
50.0% for South Korea, 61.5% for New Zealand, and 68.3% for
Australia. It's below 50% for Cambodia (42.0%), Vietnam (44.9%),
and the Philippines (48.4%). For India, the share of RCEP is only
21.8% - so it is lower than for China (mainland).
The intra-RCEP-region merchandise exports amounted to
USD 2.05 trillion in 2020.
It is also important to note that the significance of
RCEP is particularly strong as it includes for the first time China
(mainland) as a part of the multilateral regional trade
agreement. China is a rapidly growing global player as can
be seen in the following two graphs depicting the share of
countries in RCEP exports (within and outside of RCEP) in 2000 and
2020.
Upon entry into force, RCEP will be the world's largest
regional trade agreement in terms of GDP & population.
The Agreement extends beyond the typical FTA in trade in goods
extending to trade in services and investments. RCEP could
potentially widen (extend to other countries such as India) and
deepen (similarly to processes observed in the case of EEC/EU or
MERCOSUR). From a geopolitical perspective, it constitutes
the first case in which China enters a multilateral regional trade
agreement.
RCEP will enter into force in 2021 unless there are any
significant problems with ratification (please note the
recent trade tensions between China and Australia). Asia's
trade policy landscape is set for a major change.
RCEP can thus due to its size and intended scope create
significant quantitative and qualitative effects regionally and
globally both in the short and the long run (significant static, as
well as dynamic effects, are very likely). It could strengthen the
economic position of the region as the main focus of economic
activity spurring the growth of the region but also globally which
could be a crucial element of recovery from COVID-19. RCEP
increases the likelihood of establishment of the world's largest
regional value chain with the growing role of intra-regional
economic activity.
The cultural, social, economic, and political
heterogeneity of the block will be a challenge to its functioning
and progress will depend on the balance of costs-and-benefits for
all participating states.Realizing the potential
benefits of this mega-regional FTA will crucially depend on
addressing the major challenges in particular divergent political
and economic interests of this diverse group.
It is worth looking at RCEP from a broader perspective though.
Over several decades, the global trade system itself is
likely to develop into a system of several large RIAs or
mega-regional trade agreements (e.g. European, Pan-American &
Asian) with a significant role in the global trading system and
potentially large tensions between them. The development of RCEP
can be considered a significant step in this process. This could
speed up the process of emergence of the so-called FTA of Americas
and puts extra pressure on the European Union significantly
weakened due to Brexit.
The current UK-EU post-Brexit trade agreement is likely
to be only a temporary solution and the UK taking into account the
balance of benefits and costs of Brexit and the terms of the
current agreement with the EU from a perspective of several years
could reconsider it by renegotiating its terms and potentially
consider the re-entry into the EU within the next decade. Taking
all the above into account RCEP can constitute a potential
game-changer for the global economy in the post-COVID-19
world.
It will also be interesting to observe the impact of
RCEP and its trade rules on the multilateral system and the
potential erosion of the WTO dominance in global trade governance
despite the statements made on the complementarity of both
systems.
The real value of merchandise exports in 2020 (GTA
Forecasting, USD billion)
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