Since its conclusion last November, the trade implications of the Regional Comprehensive Economic Partnership (RCEP) have attracted immense attention. This is not surprising given its terms, the focus on trade of most free trade agreements (FTAs) and the fact that the volume of foreign direct investment (FDI) flows within the Association of Southeast Asian Nations (ASEAN) and among ASEAN states and others RCEP signatories such as China and Japan lag behind in FDI inflows into from outside the RCEP area. The consensus is uniformly that the RCEP will significantly increase the volumes of trade inside and outside the RCEP area, especially because it is the first trade pact involving China, Japan and South Korea. .
As we showed in our first piece in this series which reconsidered the effect of RCEP on FDI, however, the future implications of RCEP are not so clear. In addition, commentators routinely ignore many other important issues such as the ramifications of RCEP for specific signatory countries and the effects of RCEP on specific sectors such as finance, manufacturing, e-commerce and technology.
The optimistic argument builds on some of RCEP’s trade reforms, which we have already mentioned in our first piece in this series: tariff eliminations and / or reductions, quota reforms, improved environment for trade in services, reduction of complex and costly rules of origin (ROO) and consolidation of several existing bilateral trade agreements. In addition, it is believed that RCEP trade reforms such as harmonization of standards, less stringent sanitary and phytosanitary measures, as well as simplified customs procedures and faster clearance requirements will boost trade.
Those in favor of RCEP further note that various provisions of the agreement, such as better dissemination of information on RCEP, will help small and medium-sized enterprises (SMEs) to join or participate more broadly in the business activities of the RCEP area. . They also argue that the pro-globalization content of RCEP can be of value not only in sending a positive message in an era of increased protectionism and populism in many international economic fields, but also in laying the groundwork for a design and / or an economic agreement favorable to development.
The flaws of the optimistic case, however, are that RCEP’s tariff and quota reforms are not all that impressive (especially since many RCEP signatories already have agreements with other signatories and / or are committed. at higher levels of trade liberalization through CPTPP), have very long lead times, many exemptions or uncertainties associated with trade liberalization, and ignore or downplay the unparalleled benefits of the country’s supply chain. China (which will limit the relocation of value chains) and the lack of a level playing field resulting from the omnipresence of Chinese state-owned enterprises. On top of that, trade restrictions stemming from government industrial policies will limit potential gains. Finally, Cambodia, Myanmar, Laos and Thailand will face difficulties in taking advantage of RCEP due to their political problems, weak state capacity and poor infrastructure. Dr Deborah Elms, a leading trade expert in the Asia-Pacific region, aptly joked about RCEP benefit calculations: “Business models that claim to do so with authority should be taken with a big handful of salt.”
Opponents scoff at RCEP’s conclusion for a variety of reasons, some of which have been mentioned above. Aside from these shortcomings, RCEP does not impose substantive reforms in the agriculture and service sectors to address competition and state-owned enterprise issues, or to properly address e-commerce issues. As many have pointed out, RCEP has no say in environmental or labor matters either.
Some assessments of the trade effects of RCEP simply seem to indicate that many countries such as Australia, Myanmar and New Zealand will only become larger suppliers of agricultural and raw materials to China, Japan and Korea. from South. These gains are certainly significant, but hardly suggest that the RCEP is transforming the composition of trade or catalyzing the offshoring of supply chains as some have assumed. At the same time, trade deficits could swell as China, with its oversized economy, is well positioned to play the trade game while many developing RCEP signatories are not, even if they end up making dynamic gains. Trade.
Moreover, it is far from clear that RCEP will generate the expected benefits in the service sector. The Australian government touts that ‘the doors will open for the export of services, which will allow Australia to gain crucial new access to the financial, banking, health, education and many other sectors. types of other service-related sectors ”. The reality, however, is that foreign service providers in these fields and in fields such as air transportation and professional and engineering services will face significant challenges in China, Japan and South Korea due to existing government policies and the well-established position of national actors in these services. sectors. Long delays in implementing RCEP, limited reductions in tariffs and quotas, as well as omissions and shortfalls are legitimate concerns.
The reality, however, is that RCEP is driving positive change and ultimately will result in an RCEP zone encompassing more market access, fewer trade barriers and new export opportunities, albeit more limited than optimists think.
While we do not have the space here to address the distributive or sectoral consequences of RCEP, a few words are in order. First, it is clear that China, Japan and South Korea will get the most out of RCEP for reasons ranging from cost advantages to their capable multinational corporations (MNCs), to their outsized role in domestic trade. and outside the RCEP zone to the fact that China-Japan and Japan-South Korea do not yet have permanent FTAs. Second, countries like Indonesia, Malaysia and Vietnam will see gains, despite increased competition among themselves and with other RCEP members, if they adopt the required economic and political policies. Third, less developed countries like Cambodia, Laos and Myanmar will find it difficult to fully benefit from RCEP in the absence of improvements in their competitiveness, infrastructure and / or policy environment. Fourth, with regard to sectoral effects, a JP Morgan Private Banking Valuation speculated that automobiles, electronics, and industrial machinery would benefit from RCEP in particular, with he and others arguing that there would be an increase in trade in consumer goods, plastics and raw materials due to changes in markets. tariffs, quotas and rules of origin. Finally, the service sector can witness the growing importance of multinationals from countries like Australia, New Zealand and Singapore given these countries’ strengths in services.
An offshoot of our analysis is that businesses and policymakers should not be overly optimistic or pessimistic about the business implications of RCEP. Second, the government and political leaders should expect the regional economic pecking order to remain largely the same, although Indonesia, Malaysia and Vietnam can climb the ranks considerably. A third is that all RCEP signatories must adopt, among other things, appropriate fiscal, education, infrastructure, FDI, fiscal and trade policies, so that they and their businesses can maximize the benefits of RCEP. RCEP will not pay benefits automatically. A fourth is that in many cases multinationals would do well to focus on first or second level economic actors, because that is where the action is and will be. Finally, companies should not assume that the changes, harmonization and simplifications resulting from RCEP mean that their analytical work will be less necessary. Indeed, the challenges and opportunities associated with RCEP can increase the time required to properly assess where to go and what to do in the new business environment created by the Trade Pact.
In our next article, we will focus on the political ramification of RCEP for China, Japan and South Korea and the restructuring of the supply chain.