What Does the RCEP Trade Agreement Mean for the EU?
The signing of the Regional Comprehensive Economic Partnership on November 15 is no doubt a significant achievement. The RCEP is the largest free-trade bloc in the world, overtaking the European Union, and includes nearly a third of the world’s population and economic output.
WHAT IS RCEP?
The RCEP, the Regional Comprehensive Economic Partnership is a mega trade pact proposed by ASEAN to boost trade among its member states and with its free trade agreement (FTA) partners. It includes the 10 ASEAN members, namely Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, and the bloc's five FTA partners of Australia, China, Japan, New Zealand, and South Korea.
It aims to break down trade barriers and promote investment to help emerging economies catch up with the rest of the world.
HOW "BIG" IS IT?
AROUND THIRTY PERCENT! The 15 participating countries of the RCEP account for around 30 percent of the global population, global gross domestic product and 28 percent of global trade.
HOW IMPORTANT IS IT?
The signing of the deal is "a victory of multilateralism and free trade," Chinese Premier Li Keqiang said.
"The signing of the RCEP is not only a landmark achievement of East Asian regional cooperation, but also a victory of multilateralism and free trade," Li said.
The conclusion of the negotiations of the RCEP will "send a strong message of ASEAN's leading role in supporting the multilateral trade system, helping to create a new trading structure in the region, facilitating trade sustainably, developing the disrupted supply chains and supporting post-pandemic recovery," Vietnamese Prime Minister Nguyen Xuan Phuc said.
WHAT DOES IT MEAN FOR EUROPEAN UNION?
The direct economic effects of the RCEP on the European economy are likely to be small – though they are certainly not negligible – and will be felt only gradually. With the China/Japan/Korea group a major exception, the agreement entails only limited trade liberalisation since numerous trade agreements exist already among the signatories. Agriculture is only modestly affected by the deal and the tariff reductions in manufacturing are subject to many exceptions, with detailed country schedules that carve out sensitive sectors.
Moreover, the implementation period is unusually long for an agreement of this kind, extending to 20 years. Customs and other types of trade-enhancing regulatory reform provisions will help accelerate the region’s integration, but the deal will do little to free trade in services, where only selected sectors will benefit.
The greatest worry for the EU is displacement of its exports to RCEP members due to the preference margins accorded to the other signatories, known in economic jargon as trade diversion.
The table below shows that the EU has important trade agreements in force in Japan, South Korea and Vietnam, indicating that exports to those countries are unlikely to be displaced. However, of the EU’s total exports to RCEP in 2019, most are not covered by trade agreements, including to China, the EU’s second largest export destination, where the applied trade-weighted tariff was 9.15 percent in 2017 (since reduced by about 2 percent).
Other significant markets include Indonesia, Malaysia and Thailand, where the EU faces high tariffs, and Australia, where the EU faces lower tariffs. Considering that the EU’s exports to China are composed mainly of machinery and other manufactures, some displacement of exports by Japan and South Korea on the Chinese markets can be expected.
Other effects on the European economy should not be overlooked. They come in three forms:
• Consumers and the many firms dependent on imports of intermediate inputs from RCEP are likely to benefit from lower prices, reflecting the boost to efficiency in value chains based in the region;
• Exporters to RCEP will benefit at the margin from the region’s higher income and – most likely – faster sustained growth;
• Firms competing with RCEP, whether in Europe or on third markets, will be put at some disadvantage, especially if they are not drawing benefits from the region’s integrated value chains.
The more important implications of the RCEP deal are geopolitical. Many observers have noted that, despite American opposition, China’s trade and inward foreign direct investment (FDI) have continued to thrive in recent years.
The RCEP deals shows quite conclusively that the Trump Administration’s strategy to isolate China and to cut it off from global value chains has failed. Australia, New Zealand, South Korea and Japan are US allies who harbour deep concerns about China’s rising influence in the region.
However, by joining RCEP, they signal that they do not want to, and cannot, sever their economic ties with China, and, indeed, that they see these ties growing stronger. China’s neighbours can hardly ignore the fact that China’s manufacturing sector is today almost twice as big as that of the US and growing about twice as fast. Progress on trade with China would require accelerating negotiations on the Investment Agreement with China that has been under negotiation since 2014 and has proven highly problematic – due to a combination of stringent demands from the EU and China’s unwillingness to budge on important market-access issues. But if a way were found to break the impasse, an agreement on investment could pave the way towards a trade agreement.
If the EU decides to pursue the China option, it should learn from Japan’s adept economic diplomacy, which has so far navigated successfully between China and the US, striking trade deals with both (and with the EU) while retaining its close security alliance and trade ties with the US. In the EU’s case, that course is unlikely to take the form of a major deal with the US along the lines of the defunct Transatlantic Trade and Investment Partnership (TTIP), but rather of a series of limited agreements such as on digital trade.
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