How the RCEP Changed the World of Trade
Updated: Jan 18
By Suraya Roos
The world of international trade changed on November 15 2020, when fifteen Asian and Pacific countries reached the Regional Comprehensive Economic Partnership (RCEP). Together, these countries form the biggest trade bloc that has ever existed, and together, they have enough clout to tip the global trade scale in favour of the oriental hemisphere. Notably absent from the RCEP agreement are economic giants India and the United States of America (USA).
The fifteen countries taking part in the RCEP are China, Japan, South Korea, Australia, New Zealand, and the ten countries of the Association of Southeast Asian Nations (ASEAN) Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia. They make up 30% of the world’s population with 2.2 billion people, and roughly 30% of the global gross domestic product (GDP) with $26.2 trillion.
The RCEP makes it cheaper for member countries to do business with each other, with trade tariffs to be partly or completely lifted. Supply chains and production processes that span different countries within the RCEP will run smoother with fewer border formalities and lower costs for importing and exporting goods. Another great advantage is that the agreement simplifies the ‘rules of origin’, that determine a product’s "economic nationality". These rules can get really complicated when a product is sourced and produced across different countries, and they have consequences for tariffs, taxes and quota. But when the RCEP comes into force, all products that are produced within the RCEP, are considered to be from the same origin and follow a standard set of rules.
India, led by Prime Minister Narendra Modi, pulled out of the RCEP negotiations in 2019. The reason was that India’s import was far more than its export, and this trade deficit had increased during previous periods of trade agreements, with ASEAN, and also with Japan and South Korea. India’s trade deficit with China is also still too large, even without a trade agreement. So, instead of joining RCEP and opening the doors to more imported products from China and other RCEP countries, India rather focuses on creating more manufacturing output. India tries to boost its own production through its recently announced Production Linked Incentive (PLI) scheme, and in line with its policy of ‘self-reliant India’. The RCEP agreement is still open for India to join at any time. Many RCEP members are very keen to see India join, because of the size of its economy. India would add a lot more power to the bloc, and it would also counterbalance China’s dominance within the group.
President of the United States of America (USA) Donald Trump withdrew from the Trans-Pacific Partnership (TPP), the previous trade agreement with Asia and the Pacific countries in 2017, on his very first day in office. It had been one of Trump’s campaign promises and was in line with his ‘America First’ policy. The RCEP has roped in many of the USA’s former trade partners, including sizable economies such as Japan, South Korea and Australia. The USA’s biggest and longstanding rival when it comes to seizing global power, China, called the agreement ‘a victory of multilateralism and free trade’. The South China Morning Post wrote that China had ‘scored a victory’, by signing an agreement that excludes the USA.
The previous president of the USA, Barack Obama, was keen on trading in the Asian Pacific region. His administration was able to hold China off from tipping the economic power scale through the Trans-Pacific Partnership (TPP). One of the purposes of the TPP was to sign up enough of China’s trade partners to force China to play by the USA’s rules. But with President Trump pulling out of the TPP, China regained its leverage over the region. And this immense trade agreement without the USA and India has left China feeling triumphant.
It is yet to be seen what the next USA president is going to have to do to match the USA’s economic influence to that of the RCEP bloc. In his campaign, president-elect Joe Biden promised that his administration would improve the USA’s relationship with the rest of the world and strengthen alliances in Asian democracies.
Biden clearly asserted that the USA wants to take back the lead from China when asked at a press conference whether the USA should join the RCEP. Biden reminded the world that the USA makes up 25% of the economy in the world. He also said that he was looking to work together with another 25%or more, so that ‘we can set the rules […] instead of having China and others dictate outcomes [...]’. Biden did not confirm whether the USA will join the RCEP or not.
It will be harder for companies from non-RCEP countries to compete with RCEP members, having to deal with tariffs, regulations, customs procedures, and having less access to other markets and supply chains across the RCEP zone. This means that non-RCEP economies, not only the USA but also the European Union (EU), and the United Kingdom (UK), will have to look elsewhere for partners in trade and manufacturing. This will likely bring India, the Philippines and other regions back into their scope.
Some problems that may arise for the RCEP in the future are first of all to see if it even comes into effect. Some member countries still need to convince their parliaments, and there are still many issues that aren’t resolved among the members. Furthermore, the RCEP member countries are very diverse, in terms of culture, size, economy and resources. There are large and small countries, there are wealthy and poor countries, and there are technologically advanced countries and countries that are still developing. And lastly, the RCEP agreement does not deal with rules about employment, or the environment, and it doesn’t set many standards for the quality of products and processes. Members can trade easily with each other, but it remains to be seen if trade disputes can be solved just as easily.
Suraya Roos is an intern at M74, and a recent graduate from the Open University Malaysia, where she received a BA in English Studies. She is also an English teacher. Her passions are languages, cultures and communication.
The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for content.