On 15 November 2020, the Regional Comprehensive Economic Partnership (RCEP) was signed between 10 countries in the Association of South-East Asian Nations (ASEAN) including China, Japan, Australia, and New Zealand. Once completed, it will be the world’s largest trading bloc, making up 24% of global GDP with a combined value of $25.8tn. India dropped out of negotiations over demands for greater service access and concerns lower tariffs could hurt local producers. The agreement will come into force in November 2022.
How does RCEP compare with the other major Asian trade deal the CPTPP?
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a trade agreement between Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, making up 13% of global GDP. It came into force at the end of 2020 and requires a greater degree of economic convergence.
The UK is looking to join the CPTPP this year. The US dropped out of the CPTPP in 2017 and there is speculation about whether Biden would wish to re-join.
Both agreements offer members greater market access and promote private investment through regulatory reforms. The CPTPP and RCEP are not mutually exclusive, as participating countries will benefit from the coexistence of two trading blocs. For example, Singapore’s GDP is projected to increase by 2% if participating in both projects, whereas participating in only the CPTPP increases its GDP by about 1%, and 1.6% for only RCEP.
RCEP features
- Absolute gains – an increase in global incomes by $286bn annually by 2030
- Tariffs – reduces 80% of tariffs, 39% of ASEAN’s food exports will not be removed. Key limitation on ‘special and differential treatment’ means certain rules won’t apply to certain members
- Common standards – Limited common standards apply
- E-commerce – Adds essential security interests as exemption, which further limits RCEP commitments.
CPTPP features
- Absolute gains – an increase in global incomes by US$157bn annually by 2030
- Tariffs – eliminates 100% tariffs – tariff impact is higher as RCEP members start from higher base: Myanmar has average bound tariff rate of 83.4% and Indonesia at 37.1%
- Common standards – stricter common standards on labour, environmental and dispute resolution than RCEP
- E-commerce – CPTPP goes further as RCEP doesn’t mention digital products and the protection of source code. The language is almost identical for both on data localisation and cross-border data flows.
What is the impact of RCEP on UK business in China?
The impact on UK firms in China will depend on their operating structures – many UK firms operating in China do so on an ‘in China - for China’ basis, serving the local market directly. However, those with regional operations will likely benefit from the easing of tariffs and admin requirements, as well as any boost to regional development.
The UK should consider options to ensure British companies are not left disadvantaged in the Chinese market (UK’s third largest trading partner outside the EU and US).
What does RCEP mean for the UK?
Increased trade integration in Asia will encourage the UK to apply to the CPTPP in 2021. Secretary of State Liz Truss told Parliament in June 2020 that the UK was “moving to the formal stage” of its efforts to join (CPTPP) once it leaves the EU. The UK will not wish to lose its place in the queue or miss out on economic integration with the world's fastest growing region.
There is a difference of course between perception and reality. It remains to be seen how the RCEP will work in practice and if China is prepared to play by the rules. But a trade deal of this size, including China and with scope to drive integration of supply chains through rules of origin, is a sign of how the world’s second largest economy (and predicted to be world’s largest by 2030) is reshaping the landscape of global trade.
What does RCEP mean for China-US trade relations?
RCEP poses a potential problem for the US, since it marks a sign of increased Chinese influence in the Pacific region and poses the dilemma of whether the US should join CPTPP to avoid leaving a vacuum for China to fill.
It is likely Biden will focus his trade agenda primarily on competition with China: his nominee for chief US trade negotiator is fluent in Mandarin and has implied that the existing tariffs on Chinese products will stay in place for now. Biden will look to accomplish this with support of allies and renewed focus on human rights.
The RCEP does not make up for losses China faces in the trade war with the US. China’s 0.4% GDP gain from RCEP would not outweigh the -1.1% impact of the US trade war. If Biden decided to soften the US’ approach to China without reengaging on CPTPP or other regional trade deals, then this deal could support China’s growing regional influence.
