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Breaking new ground in collabaration

The Regional Comprehensive Economic Partnership is a free trade agreement among the Asia-Pacific nations and is the largest trade bloc in history. Provisions of the agreement came into force at the beginning of 2022. This article looks at what the agreement is and what it will look like going into the future...


Leviathan

As stated by Shehadi for Investment Monitor, on the first day of 2022, the Regional Comprehensive Economic Partnership (RCEP) went live (at least for the first 10 ratifying countries and then also for the Republic of Korea on 1st February 2022). What came into force was the largest trade bloc in human history, an agreement that covers one-third of the entire population of the planet. It is a result of a decade of negotiations and with the cooperation of 15 countries based throughout Asia and the Pacific.


The driving principle behind the trade agreement is to reduce barriers to

business. The deal represents over 30% of the world’s GDP with the only other trade blocs within the ballpark being the US-Canada-Mexico agreement (28% of the world’s GDP), and the EU (18%). The agreement is in contrast to the relative protectionism that

has been growing throughout the world over the last few years, especially in western and developed economies.


As reported by the Financial Times in November of 2020, the Chinese premier described the agreement as “a victory of multilateralism and free trade”, and Singapore’s Prime Minister said, “this is a major step forward for our region.” The sheer scale of the agreement is impressive even considering at one time it was also going to include India (who backed out of the arrangement quite late in negotiations in 2019)








As shown in figure 1, trade in the region was already well interconnected before the

agreement’s inception. China, for example, in 2019 imported $738 billion and exported $688 billion within the existing bloc’s boundaries.


This equates to an intra-RCEP trade flow of over $1.4 trillion. Even Brunei, importing to the tune of $3 billion and exporting $7 billion saw a wholesale flow of trade of $10 billion. All told, the 15 countries traded goods with a value of $2.3 trillion. What the RCEP will be looking to achieve is to strengthen the ties of this preexisting business even further with the reduction of tariffs and the further opening up of trade corridors. It goes without saying that with the boost to this business will come to a need for a variety of support in the form of financing, especially now that the agreement has been activated.


Winners and Losers


UNCTAD (and as described by Wong for Chinese Macro Economy) has claimed that the

RCEP will boost trade in the region by 2%, equivalent to $42 billion. It is expected that

tariffs on over 65% of trade will effectively be reduced to zero on the agreement’s activation.


Over the next 20 years, this proportion is anticipated to rise to 90%. Additionally, through the “rules of origin” part of the deal, businesses that obtain materials from countries within the bloc – and export to other ones – will qualify for preferences around tariffs, which will lead to a reduction in costs and foster the free flow of goods throughout the region.


It is anticipated that with the attraction of the elimination of tariffs and

their associated costs, “trade diversion” will occur: where members originally traded with non-bloc members, that trade will be brought within the bloc and garner trade

within it further.


UNCTAD have claimed this will be equivalent to around $25 billion. There appear to be a number of obvious and huge payoffs with the advent of the agreement.


However, some experts have noted how the deal has limitations and remaining

uncertainties. The intricacy of the agreement’s framework suggests that small and

medium-size businesses may find it harder to realize the benefits of the deal.


Wong reports that Wing Chu of the Hong Kong Trade and Development Council said

“…companies will need to consider the RCEP offers carefully if they want to capitalize on

the benefits fully.” Of note as problematic for SMEs will be proving that 40% of the inputs into its products have been sourced from within the bloc, or that the product was subject to a tariff modification if not, as set out in the agreement’s rules of origin. It is fairly evident that should a business not be able to demonstrate the origination of the inputs into its product, it will then not be able to enjoy the tariff concession offered by the agreement.


SMEs are not just more vulnerable to this manner of regulation (perhaps not being

able to demonstrate the tracking of materials from their source), but they are financially

less able to endure the imposition of the tariffs themselves.


In theory, the agreement is designed to open up free trade throughout the region. But the benefits to countries that already have bilateral agreements of their own in place may prove to be minimal.


As mentioned above, the region’s countries are already widely interconnected and those countries within the bloc who have already established deals with one another may not see much change.


The RCEP too is looking to assist in the development of trading via e-commerce. The

the agreement hopes to make transactions safer and easier through online contracts and robust digital payment services. However, this framework is perceived at present as being more of a guide rather than a hard vehicle providing a rigorous and secure avenue for the flow of money. Issues such as data standards and information privacy across boundaries have been left out of the RCEP, something in the modern age becoming forever more critical.


The Competition

In contrast to the RCEP and considered to be its main competition, is the CPTPP or the

Comprehensive and Progressive Agreement for Trans-Pacific Partnership. This agreement is comprised of 11 countries: Australia, Brunei, Viet Nam, Singapore, Peru, Mexico, New Zealand, Malaysia, Japan, Chile, and Canada, and combines economies that makeup over 13% of the world’s GDP (as discussed by Torrey for The Diplomat). Like the RCEP, the CPTPP is one of the largest trading bloc’s ever created representing $13.5 trillion dollars.


In parallels with the RCEP and the withdrawal of a massive economy that was India, the CPTPP saw the withdrawal of the US soon after Donald Trump became president (when the CPTPP was known as the TPP – the Trans-Pacific Partnership). Only later did Japan come in to take the economic lead in the place of America. After ratification, the deal became effective on 30th December 2018, and so has been in operation for over three years.


Singapore is acting as the commission chairman in 2022. It is widely thought that the CPTPP has tighter controls around things like digital markets, the green movement, labour, and government-owned or backed entities. In order to compete effectively, the RCEP itself will have to evolve to encompass these things in the days ahead and it is expected that this will be helped by the anticipated joining of further countries in the region to the agreement in the future

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