The new Asia-Pacific free trade agreement (RCEP) set to come into play on 1 January and will create the world’s largest trade bloc by economic size, according to a United Nations Conference on Trade and Development (UNCTAD) study.
RCEP includes 15 Asian and Pacific nations: Australia, Brunei, Darussalam, Cambodia, China, Indonesia, Japan, the Republic of Korea, Laos, Malaysia, Myanma, New Zealand, the Philippines, Singapore, Thailand and Viet Nam.
The RCEP will become the largest trade agreement in the world as measured by the gross domestic product (GDP) of its members – almost one-third of the world’s GDP.
UNCTAD’s analysis shows that the RCEP’s impact on international trade will be significant. “The economic size of the emerging bloc and its trade dynamism will make it a centre of gravity for global trade,” the report says.
Amid Covid-19, the entry into force of the RCEP can also promote trade resilience. Recent UNCTAD research shows that trade within such agreements has been relatively more resilient against the pandemic-induced global trade downturn.
The agreement encompasses several areas of cooperation, with tariff concessions a central principle. It will eliminate 90% of tariffs within the bloc, and these concessions are key in understanding the initial impacts of the RCEP on trade, both inside and outside the bloc.
Under the RCEP framework, trade liberalisation will be achieved through gradual tariff reductions, the report says. While many tariffs will be abolished immediately, others will be reduced gradually during a 20-year period.
The tariffs that remain in force will be mainly limited to specific products in strategic sectors, such as agriculture and the automotive industry, in which many of the RCEP members have opted out from trade liberalisation commitments.
Trade between the bloc’s 15 economies was already worth about US$2.3trn in 2019, and UNCTAD’s analysis shows the agreement’s tariff concessions could further boost exports within the newly formed alliance by nearly 2%, or about $42bn.
This would result from trade creation – as lower tariffs would stimulate trade between members by nearly $17bn – and trade diversion – as lower tariffs within the RCEP would redirect trade valued at nearly $25bn away from non-members to members.
Tariff concessions are expected to produce higher trade effects for the largest economies of the bloc, not because of negotiations asymmetries, but largely due to the already low tariffs between many of the other RCEP members.
While Japan, Australia, China, The Republic of Korea and New Zealand could see the biggest benefits – largely due to trade diversion effects – RCEP tariff concessions may end up lowering exports for Cambodia, Indonesia, the Philippines and Viet Nam by $0.3, $0.3, $0.1 and $1.5bn respectively.
This would stem primarily from the negative trade diversion effects, the report says, as some exports of these economies are expected to be diverted to the advantage of other RCEP members because of differences in the magnitude of tariff concessions.
For example, some of the imports of China from Vietnam will be replaced by imports from Japan because of the stronger tariff liberalisation between China and Japan.
The report notes, however, that the overall negative effects for some of the RCEP members do not imply they would have been better off by remaining outside of the RCEP agreement. Trade diversion effects would have accrued nonetheless.
“Even without considering the other benefits of the RCEP agreement besides tariff concessions, the trade creation effects associated with participation in RCEP softens the negative trade diversion effects,” the report states.
Overall, the report finds that the entire region will benefit from RCEP’s tariff concessions, with most of these gains resulting from trade diverted away from non-members.
“As the process of integration of RCEP members goes further, these diversion effects could be magnified, a factor that should not be underestimated by non-RCEP members,” the report says.
Click here for Just Style’s analysis published in November on why RCEP matters so much to apparel.