The RCEP, explained

Five ways the RCEP will affect the Asia Pacific economic landscape.

Photo from Boao Forum for Asia

Photo from Boao Forum for Asia

By TIAN Siqi


Last November, 15 Asia-Pacific countries, including Australia, China and Japan, formed the world’s largest free-trade bloc by signing the Regional Comprehensive Economic Partnership (RCEP). The partnership covers a third of the world’s population and economy. It will eliminate almost all tariffs between the member nations within twenty years.

Why does the RCEP matter?

RCEP carries significant symbolic weight, coming at a time of many setbacks to globalization.  Even before the pandemic, globalization had been in retreat. The system of global trade has been undermined by protectionism and unilateralism, climaxing with the US-China trade war and the United States exit of the Trans-Pacific Partnership (TPP).  The pandemic compelled many countries to rethink their supply chains. The signing of RCEP shows the world that globalization will not unwind, and that trade will eventually be more integrated rather than less.

The deal also signals a gravitational shift in global trade towards Asia. “Influential trade deals often take place within the most dynamic trade blocs,” Long Yongtu, China’s former vice-minister of commerce, said during last week’s Boao Forum for Asia.

In addition to traditional trade mechanisms such as tariffs and trade dispute settlement, the RCEP includes cross-border services, foreign investment, e-commerce, and environmental protection.

How does the RCEP affect the bloc?

Elimination of tariffs will accelerate the movement of goods, money and people, improving the competitiveness of individual members as well as the bloc as a whole. A “rules of origin” principle means goods made with imported intermediate materials will still qualify for duty-free treatment by regional partners if the intermediate materials are produced in the RCEP region. Shoes made in Vietnam will not be charged a tariff when exported to Korea, for example, even if Vietnam does not produce the canvas (made in China) or rubber sole (made in Malaysia).

Several member states have adopted a negative list approach, which will open up their service and investment sectors.

Developed, middle-income and underdeveloped countries will come together under a multilateral agreement that serves everyone’s needs.

Is China ready?

China is ready to implement 87 percent of more than 700 obligations, said Cai Qiang, Director of the Ministry of Finance Tariff Department. The rest is under review and will be ready soon. China welcomes trade rules that promote fairness and openness and has been experimenting in its many free trade zones. But trade rules are the only means to an end. “The goal is to benefit all parties and for everyone to win,” he said.

What are the challenges?

Isabelle Durant, of the UN Conference on Trade and Development, said policies should focus on narrowing development gaps between nations, helping small and medium businesses, as well as strengthening competition law. She also called for closer cooperation in investment, digital transformation and climate change.

The deal allows flexibility in the speed and extent of eliminating tariffs. Members can reduce tariffs to suit their own economic conditions.

What about the CPTPP?

Despite and because of the RCEP’s size, the international community is concerned about its political implications, particularly its relationship with the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), the multinational trade agreement formed by the remaining countries after the US withdrew from TPP. Seven of the RCEP members are also part of CPTPP, which intentionally excludes China. A focal point is the attitude and action of the US, which has seen the RCEP as a symbol of China’s growing sway in Asia.

China has expressed its openness to joining CPTPP, or even integrating the two blocs. During BFA, officials have criticized the over politicization of trade rules and warned of potential economic consequences if the US holds back from joining either. The US has the biggest and most open economy in the world. It would be a huge boost to the Asia-Pacific economy if it joined either mechanism.