How many members does RCEP

RCEP Agreement: Hidden Effects

While free trade is under fire in many parts of the world, the RCEP (Regional Comprehensive Economic Partnership), which was signed a few weeks ago, is forming the largest free trade area in the world in Asia. The talks were initiated by the ASEAN countries (Brunei, Indonesia, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam). After more than nine years of negotiations, the ASEAN states were able to agree on the agreement with China, Japan, South Korea, Australia and New Zealand. The planned free trade area thus comprises 15 member states, which account for 30% of the world population, 30% of world economic output and 28% of world trade. At first glance, the agreement does not seem to bring much benefit to the Member States. In contrast to most other trade agreements, the tariff and non-tariff barriers between the partners have already largely been dismantled: with the exception of Japan and China and Japan and South Korea, trade agreements exist between all 15 member states. The average tariff rate on trade within the RCEP area was only 1.6% in 2017.

However, the harmonization of the rules of origin is an important achievement of the agreement. Even if the trade barriers to bilateral trade are low, the individual contracts in force to date represent a challenge for exporters. Each of the trade agreements has different bureaucratic rules (rules of origin) that must be complied with in order to obtain preferential market access. Exporters must provide proof of origin that proves “domestic production”. For example, Chinese automobile exporters have to prove that at least 40% of their production is either in China or one of the ASEAN countries in order to be able to export duty-free to Laos; if this proof is not provided, a duty of 20% applies. Similar rules apply to automobile exports to other destinations with which China has a trade agreement. For example, only intermediate inputs from China or Australia may be used for Chinese exports to Australia in order to achieve the share of 40% domestic production. This is costly and inefficient, especially for exporters with complex value chains that span multiple Asian countries. RCEP consolidates and harmonizes the rules of origin of the existing contracts. In future, intermediate consumption from all 15 member states may be used when calculating domestic value added. Therefore, RCEP is expected to result in an even stronger economic integration between the member states, in particular through the expansion of existing supply chains - despite meager tariff reductions.

European companies operating in the region also benefit from more resilient supply chains. Furthermore, a harmonization of standards across all 15 RCEP member countries can be expected. This standardization makes it easier for European exporters to do business with Asia. Nevertheless, Europe will lose overall due to the trade diversion effects created by the new mega-deal: If trade between the Asian countries increases, the demand for goods from the West falls. The RCEP agreement is the Chinese answer to the failed TPP (Trans-Pacific Partnership). China seized the opportunity and plunged into the power vacuum that had developed.

Now the USA and Europe are under pressure to act. Since the negotiations have already been concluded, it would be easy for Biden to revive the TPP. The EU should also intensify trade relations with its Asian partners. Although a trade agreement has already been successfully concluded with Japan, South Korea and Singapore, negotiations between the EU and Australia and New Zealand and the ASEAN countries are progressing only slowly. An investment agreement has been negotiated with China for several years, and a trade agreement is a dream that is still a long way off. The transatlantic alliance between the US and the EU would restore the geopolitical balance. With a far-reaching and modern trade agreement that defines the framework for future trade policy issues such as trade in services, environmental and investment protection or even big data and other innovations, China's claim to leadership could be rejected. However, it is more than questionable whether such an agreement can be expected in the near future. On the one hand, President-elect Biden has his hands full with domestic political issues; on the other hand, the positions between the EU and the USA are quite deadlocked and it is not easy to find compromises - but an agreement would definitely be in the interests of Western countries.

Lisandra Flach and Feodora Teti
ifo, Center for Foreign Trade
[email protected]