The world’s largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), came into force in 2022. In light of rising protectionism and unilateralism, RCEP can help renew globalization and even possibly upgrade it. Due to its size and the vibrancy of its member economies, the young FTA holds promise. The trade pact brings together 15 countries at different levels of development and diverse political and economic systems. As such, aiming for lofty standards is understandably unrealistic. This said, while tariff rate differentials compared to other existing FTAs may be marginal, RCEP has the potential to implement and update rules in other areas like technical regulations, e-commerce, rules of origin, and investment.
RCEP also integrates several existing FTAs by ASEAN with key dialogue partners, reinforcing the bloc’s commitment to maintaining its central role in shaping the region’s trade architecture. As the biggest member economy and ASEAN’s largest trade partner for 15 consecutive years, China has a big stake in the success of RCEP. ASEAN has become China’s largest trade partner and a top destination for Chinese outbound investment. Chinese companies wanting to expand into Southeast Asia to sell in the region and beyond can gain from RCEP. Along with its high-standard peer, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), RCEP could serve as a building block for the long-aspired and much broader Free Trade Area of the Asia-Pacific (FTAAP). Meanwhile, the United States’ reluctance to re-engage in multilateral FTAs may undermine its position. This is especially so as Beijing expressed interest in joining CPTPP and the Digital Economy Partnership Agreement (DEPA).
Differentiation and learning curve
As in any new undertaking, there will be some growing pains in terms of knowing and adjusting to the RCEP rulebook. Lack of familiarity with such rules may create some initial confusion or frustration. Member countries must work to harmonize their regulations and procedures, which may entail some compliance costs. However, the strength of RCEP’s dispute settlement mechanisms could set it apart from other FTAs. The ability to resolve trade disputes within the bloc through prescribed remedies could significantly enhance its appeal. Conversely, if members increasingly opt for non-RCEP solutions, this could undermine the agreement’s credibility.
Countries and firms that proactively prepare and act fast are poised to take advantage of RCEP. Aside from the legal and regulatory context, knowing the political and economic climate of member economies is important. The diversity of its members means that the FTA’s impact may be uneven. Trade or industry ministries should orient companies about RCEP and the benefits it brings. Perhaps recommendations on coping with the challenges that come with it can also be shared. Governments and the private sector should let the public know that free trade offers more gain and that steps are being taken to address its shortcomings. Doing this will allay resentment of globalization. It can also prevent populist backlash, which may manifest in unbridled resort to restrictive measures or even withdrawal from the trade accord.
Chambers of commerce and business associations should help prepare their members through sector-specific sessions. Such information drives and consultations should reach small and medium enterprises, which may be vulnerable to possible unintended adverse effects of the new trade deal. Law or business consultancy firms may help enterprises navigate the new landscape. These outfits may develop expertise in RCEP rules, their interpretation, and trade dispute cases. This can position them to advise local and foreign businesses on how to seize gains the new trade deal can unlock while mitigating risks and losses. As RCEP progresses, more companies will become confident and active in utilizing its rules.
U.S.-China trade war and RCEP
The prospect of escalatory tariff wars and trade and capital flow restrictions between the US and China may affect RCEP members, especially ASEAN countries. Washington may tighten the screws on what they view as backdoors used by Chinese firms rerouting their goods to ASEAN for re-export to America. Substantial production in ASEAN may be the key for them to continue to access Western markets. Production may move to RCEP members that have FTAs with the U.S. or are not subject to U.S. restrictions. Caps or limits on components sourced from China can be a sticking point. This will put countries that source inputs from China and sell final goods to the U.S., like Vietnam, in a bind. As such, while ASEAN countries may benefit from relocating capital in light of de-risking or firms adopting a China+1 or more strategy, such gains may be fleeting. In the long run, a full decoupling will disrupt integrated supply chains and compel firms and countries to make hard choices.
Furthermore, while restrictive measures that are more protectionist in nature may support local industries, this may lead to inefficiency and higher costs. In the case of renewables and electric vehicles, this may mean delays in the transition to cleaner energy and mobility. For countries with existing producers to protect, like U.S.’ Tesla for EVs and GE for wind, hydro, and solar energy solutions, protection against cheaper Chinese imports may make sense. However, for countries that do not have such producers, inviting foreign firms to set up shops to manufacture such goods for sale in-country and abroad is appealing. For countries that have bold plans or nascent industries, partnerships and joint ventures may be a way to accelerate industrial upgrading or create national champions. Indonesia is trying to establish a complete EV ecosystem by inviting Chinese companies to process nickel at home to produce batteries and EVs. Malaysia is positioning itself as a “neutral and non-aligned” chip manufacturing hub.
If Chinese companies face more headwinds in the North and West, they may go South and East. Beijing may double down in expanding its trade and investment in emerging and developing economies. This can be seen in the eleven-year-old Belt and Road Initiative and is likely an impetus behind its new Global Development Initiative. This can also be the spirit behind the upgrading of the ASEAN-China Free Trade Agreement (ACFTA), proposals to unilaterally open up to ASEAN countries, and the implementation of RCEP.
