Regional Comprehensive Economic programme (RCEP)

The world’s biggest trade deal

On November 04, fifteen Asian countries agreed to terms for the Regional Comprehensive Economic Partnership (RCEP) that is being termed the world’s biggest trade pact. What began in 2012 as a routine harmonizing of agreements between members of the Association of Southeast Asian Nations (Asean) is now set to turn into a deal creating potentially the world’s biggest free trade bloc. The RCEP is backed by China and also brings in the 10-member Association of South-east Asian Nations (Asean), Japan, South Korea, Australia and New Zealand. India, however, decided against joining the bloc because of significant differences over tariffs and other issues.

 The 35th Asean meeting held in Bangkok declared on November 04 that the Regional Comprehensive Economic Partnership (RCEP) negotiations had concluded after six years of negotiations. During the summit, fifteen out of 16 nations concluded “text-based” negotiations for what they call the world’s largest trade deal, with formal signing now expected in 2020.

At the RCEP’s administrative core is Asean: an intergovernmental grouping of 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. It was proposed that the Asean bloc will be joined with six dialogue partners: China, Japan, India, South Korea, Australia and New Zealand.

While the RCEP is administratively built around Asean, the main mover is actually China. It was pushed by Beijing starting 2012 in order to counter another free trade agreement that was in the works at the time: the Trans Pacific Partnership. The US-led Trans Pacific Partnership excluded China and hence the RCEP was Beijing’s balancing act. However, in 2016, when Donald Trump took control of the US federal government, the US itself withdrew from the Trans Pacific Partnership.

Even now, however, the RCEP is a major tool for Beijing in order to counter the United States efforts to stymie trade with China. Under a protectionist President Donald Trump, the US has since 2018 began setting tariffs and trade barriers to Chinese goods, an economic conflict that has been called the China-US trade war.

Both big and small economies in group

The RCEP is unique as an FTA as it includes some of the world’s largest economies (China and Japan), high per capita income economies (Singapore, New Zealand, Brunei and Australia), major industrialized economies (Japan, the ROK, Singapore and China), middle-income economies with vast natural resources (Malaysia, Indonesia, Thailand, the Philippines and Vietnam) and less-developed, low-income economies (Cambodia, Laos and Myanmar). Indeed, the RCEP is a heterogeneous grouping allowing lots of scope for economic synergies and complementary economic opportunities.

An interesting aspect of the RCEP is its Asean-centrality. All non-Asean members of the RCEP are connected to Asean through existing Asean+1 FTAs, and the RCEP is expected to supersede all these FTAs over time. In the process, it is expected to encourage and enlarge economic relations between Asean and the other RCEP members.

The prospects are particularly strong with respect to Asean and China. Asean is already the second-largest trading partner of China, and the implementation of the RCEP from 2022 should see much greater trade and investment between China and Asean with a positive influence on regional value chains that connect both of them.

Another interesting aspect of the RCEP is its much wider scope. Compared with the existing Asean+1 FTAs, the RCEP reflects much greater access. This will be made possible by the elimination of tariffs on almost 90 percent of traded goods; updated rules of origin allowing the scope of value addition through the entire RCEP geography; stronger provisions on trade in services and cross-border foreign investment; and new rules on facilitating trade in e-commerce.

Economic Logics behind RCEP

The business communities were especially delighted by the outcome of the Summit. This is understandable given the bloc’s economic potential. RCEP is a free trade agreement (FTA) among ten Southeast Asian countries and six of Asean’s Dialogue Partners (Australia, China, India, Japan, New Zealand, and South Korea).

It is aimed at not only consolidating five existing Asean+1 FTAs into a single arrangement but also accomplishing “a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement”. As the world’s largest trade bloc, the pact will have a combined market of 3.4 billion people, covering 45 percent of the world’s population. It will also encompass about one-third of the global GDP.

Critics may claim that RCEP’s quality may not be as high as that of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This is another trade deal among eleven economies which China and India are not parties to. Nevertheless, one should note that RCEP terms can later be amended or upgraded, yielding even greater economic gains in the future.

Moreover, RCEP helps accomplish the Asean Economic Community 2025 (AEC 2025) which is an economic integration scheme among ten Southeast Asian countries. AEC 2025 has five objectives, all of which aim to further integrate a “Global Asean” economy that is cohesive, competitive, innovative and resilient. RCEP has the potential to quicken the region’s drive to be a “Global Asean”.

The Summit’s success was due to other economic factors, chiefly the trade war between the United States and China and the resulting rising uncertainties in the world economy.

Against this backdrop, a regional bloc makes sense as it will restore market confidence in the region and help RCEP economies cushion some undesired effects of the trade war. In short, while Southeast Asian nations’ desire to realise AEC 2025, the US-China spat incentivised RCEP participants to further enhance their economic cooperation.

Beyond Economics

However, these economic factors alone cannot capture the whole RCEP story. From Asean’s viewpoint, RCEP is more than a trade pact. Hence, to comprehensively understand this grouping, one must look beyond economics and focus on its political and strategic dimensions as well.

For one thing, the outcome coined at the 3rd Summit illustrates the grouping’s use of Asean Centrality to influence others’ policy behaviour and shape regional governance. While often mis-portrayed as a China-led bloc, RCEP has been an Asean-led project since its inception. The group’s Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership clearly posits that the talks will recognise Asean Centrality.

 Also, the progress made at this Summit was partly attributed to the strategic posture of Asean Centrality. For instance, Singapore’s Prime Minister Lee Hsien Loong lauded the pivotal roles played by Asean. He remarked that “Asean’s involvement as a trusted, neutral group, has enabled many countries to come together and cooperate under the umbrella of RCEP”.

 The fact that less than half of 20 chapters were agreed last year and four participants. Australia, India, Indonesia, and Thailand − were preoccupied with their elections in the first half of the year connotes that most of the heavy-lifting was carried out in the second half of this year.

 Asean-centred Indo-Pacific?

In other words, finishing all chapters within this timeframe was a daunting task, but the regional bloc was able to pull it through Asean was able to summon different parties to the talks as well as persuade them to work together to reach the outcome. In short, the Summit’s result was an example of Asean Centrality in action showcasing the group’s ability to wield its influence to shape regional architecture beyond Southeast Asia.

Moreover, RCEP can be seen as one of the elements contributing to Asean’s strategy in the Indo-Pacific. In June 2019, ten Asean member states coined the Asean Outlook for the Indo-Pacific (AOIP) which reflects the regional bloc’s view and approach pertaining to the Indo-Pacific concept.

The AOIP was developed to reinforce Asean-centred regional governance as it envisions “Asean Centrality as the underlying principle for promoting cooperation in the Indo-Pacific region, with Asean-led mechanisms”. RCEP was listed as one of the projects that can help realise the AOIP.

It remains to be seen how the RCEP members will persuade India to endorse the agreement which will result in the signing ceremony next year. From Asean’s perspective, Southeast Asian nations will push hard for the final wrap-up. The stakes are high. RCEP’s economic, political, and strategic dimensions make the deal so important that these countries will not let it fail.

Why India opted out?

Although RCEP will be the world’s largest economic bloc, India has opted out of it. Considering India’s past FTA experiences and RCEP’s terms and conditions, pulling out was a Hobson’s choice for us. India registered trade deficit with 11 out of the 16 RCEP countries. India’s trade deficit with RCEP countries stood at $105 billion, out of which China alone accounted for $52 billion.

Finally, RCEP would have been an easier agreement for India to sign, as compared to any potential agreements with the US or the EU, because its focus was on trade liberalisation.

In contrast, agreements such as the Trans-Pacific Partnership (TPP) pose a greater challenge, since they require concessions over a range of contentious non-trade issues, such as environmental and labour regulations, intellectual property (IP) protection, and the operations of State-owned enterprises.

On the flip side: India’s trade deficit with China is large. It accounts for about 40% of its overall deficit. Signing RCEP would have exposed India to risk of surging imports from China and an even wider deficit. However, if these were India’s primary concerns it could have negotiated hard for expansion of market access in the Chinese market in areas of its comparative strength, such as pharmaceuticals and IT services.

On the import side, it could have sought exclusions of especially sensitive sectors and a more gradual liberalisation schedule. This would have allowed India to simultaneously exploit greater market integration with Asia, while giving itself time and economic space to adjust.

Nonetheless, with or without India, the RCEP will be a formidable free-trade zone, bringing together the economies of China, Japan, South Korea, Australia, New Zealand and the 10 members of Asean. Impetus is being driven by United States President Donald Trump’s trade war with Beijing, which has reduced regional economic growth to its lowest level in five years.

New Delhi has been the largest obstacle to an agreement to create a free trade zone among 3.6 billion people and which accounts for around one-third of global gross domestic product. India made clear that it would not bend despite being the lone holdout. If it hoped that obstinacy might force additional concessions — it fears a flood of imports from China — then it was wrong.