RCEP under Profound Changes Unseen in a Century: Features, Impacts and Opportunities

Shen Minghui Guo Minying

Research Fellow, National Institute of International Strategy, Chinese Academy of Social Sciences

Associate Research Fellow, Institute of Statistical Science, National Bureau of Statistics

The world today is undergoing profound changes unseen in a century, that are accelerated by the global spread of Covid-19 pandemic. On November 15, 2020, 15 member parties including China signed the Regional Comprehensive Economic Partnership (RCEP). On March 8, 2021, the Chinese Government declared official rectification of the RCEP. In the future, as other signatories rectify the agreement (when six member states of the ASEAN and three non-ASEAN countries do so), this Free Trade Area (FTA) will become operational, one that boasts the worlds largest population, largest economic and trade size, and greatest development potentials. Not only is the RCEP the most important milestone in the Asia-Pacific regional economic cooperation, it has also injected strong driving force to the ebbing economic globalization and the international economic and trade cooperation.

Background and Features

of the RCEP

Since 2008, negotiations on global mega free trade agreements have continued to come about. The so called gigantic free trade agreements are referred to large free trade agreements participated by major global economies. During the years of the Obama administration, the United States (US) successively launched talks on the Trans-Pacific Partnership (TPP) and on the Transatlantic Trade and Investment Partnership (TTIP) in an attempt to build with Japan and Europe “21st century high-quality free trade agreements”. After Trump took office, US trade policy moved towards populism and protectionism. Not only did the country announce to withdraw from the TPP and renegotiate the US-Korea Free Trade Agreement and the United States–Mexico–Canada Agreement (USMCA), it also went in for serious trade frictions with its major trading partners. In spite of the readjustment of US trade policy, the overall trend of global mega FTA negotiations remained unchanged. After the US withdrew, Japan and the rest of TPP members signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018. In 2019, the Economic Partnership Agreement signed between Japan and the European Union (EU) went into effect. On December 30, 2020, Chinese and European leaders jointly declared the conclusion on schedule of negotiations on China-EU Comprehensive Agreement on Investment (CAI). At the same time, China-Japan-South Korea Free Trade Agreement is in active progress.

Propelled by global mega FTA negotiations, FTA negotiations and the work on economic integration in Asia-Pacific region picked up speed. In 2011, the 19th ASEAN Summit was held in Bali Island, Indonesia, which proposed to integrate all existing “ASEAN+1” free trade agreements centering on the ASEAN, eventually leading to a comprehensive economic agreement. In 2012, leaders of the ASEAN and China, Japan, South Korea, Australia, New Zealand and India adopted a joint statement on the RCEP, planning to start the first round of talks on the RCEP by May 2013 and to conclude the agreement by the end of 2015. However, influenced by factors of global upsurge of populism and protectionism, India and some other countries hesitated in the negotiation process, and the participants in the RCEP process continued to postpone the deadline for reaching the agreement. At the 3rd RCEP Summit held in November 2019, India, whose attitude had always been rather negative, announced to defer its entry into the RCEP. By November 2020, the RCEP process after eight years and 31 rounds of negotiations eventually reached conclusion.

The RCEP is engaged in constructing a cooperative framework of high quality economic partnership facing the 21st century. In theory, it is easier to negotiate for integrating the five existing “ASEAN+1” free trade agreements than to work for a new one by reinventing the wheel. Facts attest that integration of several free trade agreements was no less difficult than starting from back to square one. Two tough issues lie across in front of the participants, which are agenda-setting for the talks and degree of liberalization. Judging by the published agreement text, the RCEP has well handled the differences between various free trade agreements, featuring comprehensiveness, progressiveness, inclusiveness and openness.

First, it covers comprehensive areas. The RCEP agreement consists of 20 chapters and four appendices of market access commitment forms. In the main body of 20 chapters, there are both traditional content like trade in goods, trade in services, investment, and rules of origin and clauses at a higher level such as cooperation on e-commerce which is reached for the first time in a regional scope. Besides 90% liberalization of trade in goods on the average level, the number of sectors opened by the RCEP evidently increases. For instance, on the basis of its commitment to opening 1oo service sectors at the entry to the WTO, China adds 22 new sectors including research and development, management consulting, services related to manufacturing, and air transport, and loosens up restrictions on foreign ownership in 37 sectors including finance, law, construction, and ocean shipping.

Second, it has made a series of explorations on high standard rules. In regard to trade in services, seven signatories including Japan and South Korea adopt the mode of negative list, the rest of eight signatories including China adopt positive list but commit to changing into the mode of negative list in six years after the RCEP comes into effect. The RCEP has also made unified rules of origin and adopted the principle of regional accumulation of origin, which gives full accumulation of product value from any of the RCEP members, greatly reducing the difficulty in satisfying the standard of origin and applying for preferential tariffs.

Third, it gives full display of inclusiveness. There are great differences between the signatories of the RCEP in economic system, level of development, and size and scale, including both major economies like China and Japan and under-developed ones like Cambodia and Laos. If a unified standard had been adopted, it would have been very difficult for many a less-developed country to participate in the process of regional economic integration. Therefore, the RCEP borrows successful experience of East Asian cooperation in the past, gives full considerations to features including diversifying regional economies, and fully satisfies the basic interests of various member countries on the basis of keeping free trade by granting less-developed countries certain grace period or exception clause. For instance, the RCEP requires some of the less-developed countries to perform fewer tasks in synchronized tariff cuts than other member countries, providing a grace period of 20 years for some of the products to subject to zero tariffs, even not until 2040 for sensitive ones.

Fourth, it carries forward the feature of openness in Asia-Pacific regional cooperation. During the period of the Trump administration, US foreign strategy displayed strong exclusiveness. Although the Trump administration claimed its “Indo-Pacific Strategy” to be “free and open”, it imagined China to be a threat and competitor and should be contained by using US allies and all means at its disposal. In comparison, through signing the RCEP, US allies such as Japan, South Korea and Australia have chosen openness rather than protectionism, regionalism rather than nationalism, cooperation rather than antagonism, and unity rather than distrust. These countries send a clear signal to the world that the Asia-Pacific region remains persistent in open regional economic integration. For India which announced to withdraw from RCEP negotiations, the RCEP signatories keep a welcoming attitude and allow the country to return to the RCEP as a founding member even after the agreement comes into effect. The Article 20.9 provides that the agreement shall be open for accession by other economies after the RCEP enters into force, which by actual action practices the idea of “open regionalism”.

Impact and Significance

of the RCEP

The conclusion of the RCEP bears multiple impact and significance. On political plane, the RCEP highlights the determination of Asia-Pacific regional economic integration, being conducive to enhancing mutual trust between regional countries. On economic plane, the RCEP will advance deepened regional integration, increasing the overall welfare level of Asia-Pacific region. On regional plane, the RCEP has integrated many existing free trade agreements, helping to ameliorate the Spaghetti Bowl Effect. On global plane, the RCEP boosts confidence in economic globalization, providing new dynamics to multilateral trade talks.

1. Enhancing Political Mutual Trust

The impact of the TPP led Asia-Pacific regional countries which had originally been entangled with the EAFTA or the CEPEA to feel compelled to turn to cope with a major external challenge. For the above countries, to keep the development momentum of Asia-Pacific regional cooperation was obviously more important than to dispute over the plans for Asia-Pacific regional cooperation, and the fact that the ASEAN initiated RCEP negotiations reaffirmed the central position of the ASEAN. In perspective of the historical process of the Asia-Pacific regional cooperation, the more priorities are given to economic development in national and regional agenda, the more likely it is to ameliorate and even to resolve security issues, and the easier it will be to reach regional consensus and achieve stability of regional order. It is precisely because regional cooperation can produce clear benefit, especially help to rescue economy dragged by a reversed globalization and the pandemic that Asia-Pacific countries took joint action and cooperated with one another to work for early conclusion of the RCEP.

2. Increasing Economic Welfare

Against the background of COVID-19 pandemic, the signing of the RCEP is of important significance to the recovery of regional and global economy. According to the estimates of the Peterson Institute for International Economics, by 2030 the RCEP will add US$186 billion every year to the global GDP and bring 0.2% economic growth to its member countries. The latest research results of the Brookings Institution also indicate that by 2030, the RCEP will add US$209 billion every year to global income and add US$500 billion to world trade, and it is estimated that the combined economic benefit of the RCEP and the CPTPP will be enough to make up for the loss to global welfare caused by China-US trade friction. From the perspective of its member countries, the RCEP will markedly promote economic growth and attract foreign investment. It is very likely that the conclusion of the RCEP will strengthen a development trend that has lasted for decades, and in which the global economic center of gravity will continue to shift to the Asia-Pacific region.

3. Improving Regional Governance

At the beginning, the ASEAN took the RCEP for a project of integration, aiming to improve regional economic and trade governance and ameliorate the Spaghetti Bowl Effect. The objectives of RCEP integration are not limited to the “ASEAN+1” free trade agreements with China, Japan, South Korea, Australia and New Zealand but also involve complicated relations among the foresaid five countries. To integrate several free trade agreements, the RCEP provides a set of rules of origin that cover all the markets of 15 members, which allow accumulative accounting for added value of origin for any one of the members so as to make it easier for Asia-Pacific products to be identified as RCEP originated and enjoy the treatment of RCEP preferential clause. Not only does this provision help reduce compliance cost of foreign trade enterprises and markedly increase utilization of the RCEP agreement, it is also conducive to promoting effective allotment of resources in the Asia-Pacific region and improving overall competitiveness of Asia-Pacific regional exports.

4. Boosting Confidence in Globalization

An American scholar believes that the RCEP magnifies US decline in Asia-Pacific economic and political affairs, and that its symbolic significance outweighs its actual value. In fact, the conclusion results not so much from the decline of US influence as from the extension of Asia-Pacific regional free trade policy and belief in open regionalism. This can be attested by reflecting on the TPP negotiation process. Before US participation, the TPP negotiations had already been there initiated by countries including Singapore, and after US withdrawal, Japan and the rest of the participants ultimately concluded the CPTPP. The RCEP itself is not a result of excluding the US. To the contrary, the vision of open economy and free trade embraced by the RCEP has brought about new opportunities for the ebbing economic globalization.

Opportunities for China Arising from the RCEP Process

In the coming decades, the RCEP is hopeful to become an important force for economic growth in the Asia-Pacific region. In the short run, the RCEP conduces to supporting all countries in the Asia-Pacific region to jointly combat the COVID-19 pandemic and to promoting regional economic recovery through inclusive and sustainable development. In the long run, the RCEP has brought together countries varying in level of development, its success or not depending on whether it can facilitate its member countries to achieve mutual benefit and win-win situation.

First, it conduces to constructing a new development paradigm of “dual circulation” of domestic and international economic cycles. On domestic plane, the high standard trade and investment rules of the RCEP will urge China to improve business environment, expand opening to the outside world, and shape an open economic structure at a higher level. At the same time, the RCEP will also conduce to improving Chinese enterprises capacity of allocating resources in domestic and international markets, to further optimizing the pattern of foreign trade and investment, and thus to promoting high quality development of Chinese economy. On international plane, the RCEP is conducive to expanding export market for Chinas intermediate products like semi-products and parts and consolidating its important position in Asia-Pacific regional industrial chain and supply chain. It is worthwhile to pay attention to the fact that the COVID pandemic makes it more necessary for enterprises to depend their existence on mutual trust, expand the necessity for collaboration and communication between the upstream and downstream of the industrial chain, and produce a type of more stable and mutually beneficial supply relations. For Chinas foreign trade and investment activities, the RCEP will create an equitable, transparent and stable policy prediction and construct close cooperation ranging from production to supply and sales, which promotes a closer trade and industrial division of labor relationship between China and other Asia-Pacific countries.

Second, it helps guide economic recovery of the Asia-Pacific region and the world at large. The COVID-19 pandemic has led to steep drop of total global demand, dragging the world economy into the most serious recession since the Great Depression and putting under challenge the process of economic globalization after decades of development. By overcoming the negative effect of the pandemic in the first half of 2020, China became the only major global economy to achieve positive growth. The RCEP is the first regional free trade agreement in the true sense of the word China has acceded to. As a major consumer country in the Asia-Pacific region, Chinas accession to the RCEP will not only largely improve its own external trade environment, thereby providing new dynamics to its own economic development, but also produce “spillover” effect essential to the benefit of economic integration for other RCEP members. As the importance of trade within the Asia-Pacific region greatly increases, the conclusion of the RCEP will further boost regional members in sharing the dividend of Chinas development, which in turn accelerates regional and global post-COVID economic recovery.

Third, it benignly interacts with the rules of the CPTPP. The RCEP and the CPTPP represent two paradigms of free trade agreements in the Asia-Pacific region. Between the RCEP and the CPTPP, there is no simple competition over the rule-making power for trade. In fact, the relationship between the two is one of mutual complementation and mutual promotion, the interaction between them having important value for rule-making of the Free Trade Area of the Asia-Pacific (FTAAP) and even the global multilateral trading system. At present, China actively considers joining the CPTPP, fully indicating that China has already taken it for its mid and long term development goal to achieve opening-up at higher levels.

Fourth, it helps implement the FTA upgrading strategy. On the one hand, the RCEP for the first time consists of not only a free trade agreement of China-Japan and China-Japan-South Korea simultaneous joint participation but also Chinas first free trade agreement with any of the worlds top ten economies, which improves the countrys position in the global trading system. And on the other hand, the RCEP accelerates Chinas network building of high quality FTAs. The RCEP is the first free trade agreement signed by China that adopts the mode of negative list for investment arrangement clauses, laying a favorable foundation for China to conduct further free trade negotiations with developed economies and further improving Chinas capacity of participating in global economic and trade rule-making.

Fifth, it helps improve the level of institutionalization of the Belt and Road Initiative (BRI). At present, the institutional construction of the BRI is still at the initial stage. As the BRI moves from the stage of “freehand brushwork” of planning to that of “meticulous painting” of intensive execution, for which it is imperative to enhance software building with rules and mechanisms as the main construct. The economic “spillover” effect of the RCEP is also conducive to promoting more countries joining the BRI construction to raise level of economic and trade cooperation, and providing inclusive cooperation with best practices. Through multi-staged and step-by-step regional cooperation, it is possible for less developed economies to better adapt to regional integration and achieve sustainable development, which is also an important contribution by institutional combination of the RCEP with the BRI.

Conclusion

As President Xi Jinping remarked, “To address issues emerging in the course of economic globalization, countries should pursue more inclusive global governance, more effective multilateral institutions, and more robust regional cooperation”. Todays world undergoes profound changes unseen in a century, the trend of the global economic center moving to the East being increasingly evident. As the Asian economies have mutually complementing comparative advantages and the region is endowed with rich labor, capital and technological factors, the conclusion of the RCEP helps construct transparent, equitable and predictable policy environment in the Asian region, and promote integration of industrial chain, supply chain and value chain in the region. The conclusion of the RCEP embodies the unswerving pursuit of an open, inclusive and mutually beneficial international economic order by Asian economies, heralding the entry of Asian economic integration into a new historical period. At the same time, the RCEP has important bearings on promoting Chinas high level open-up and high quality development. As Chinas commitments to the RCEP in many areas of market opening and trade and investment facilitation surpass its commitments to the WTO and all other previous free trade agreements, not only does the RCEP conduce to achieving trade growth and post-COVID recovery, it will conduce even more to accelerating Chinas economic structural reforms, and improving the overall efficiency and competitiveness of Chinese economy. Its potential value is far greater than its direct trade benefit.