The Regional Comprehensive Economic Partnership (RCEP) will see Asian importers increasingly spurn business with the EU, US and other non-member markets, cementing the Asia Pacific region’s primacy in global trade, new UN research finds.
In the report, titled A new centre of gravity, the United Nations Conference on Trade and Development (UNCTAD) forecasts that billions of dollars in exports will be diverted away from nations not included in the trade deal, as importers based in the newly launched bloc seek to capitalise on tariff measures contained within the agreement.
The analysis calculates that tariff concessions in the deal will boost intra-Asia exports by nearly 2% from 2019 levels, or approximately US$42bn.
Lower tariffs are expected to redirect trade away from non-member nations to the 15 members of the agreement, equivalent to roughly US$25bn, while also generating new trade between signatories by nearly US$17bn.
“RCEP is set to become the world’s largest trading bloc, and thus a new centre of gravity for global trade. Indeed, RCEP’s tariff concessions are expected to further boost trade within the newly formed partnership not only by creating trade within the bloc, but more so by diverting trade from outside the region,” the report says.
“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,” it adds.
The world’s largest free trading bloc based on the sheer economic might of its members – covering almost a third of the world’s population and 30% of its GDP – came into force on January 1, bringing together the 10 Asean nations, alongside China, Australia, New Zealand, Japan and South Korea.
The deal creates a common rulebook for the trade of goods and services across the RCEP region, where there is already a patchwork of bilateral and plurilateral trade agreements.
It also aims to support the wider business environment through various new rules and requirements covering issues such as intellectual property, e-commerce, regulation of competition and government procurement.
Analysts have previously questioned the potency of RCEP’s various tariff concessions, due to the number of trade agreements in place across the region, not least the Asean bloc and the various deals it has struck.
“A large portion of the trade liberalisation that is viable among the 15 members has already been reaped,” says Stephen Olson, a senior research fellow at the Hinrich Foundation, an Asia-based philanthropic organisation that works to advance sustainable global trade.
Indeed, the average tariff of Asean countries on imports from RCEP partners had already dropped from 4.9% in 2005 to 1.8% in 2020, while intra-RCEP trade was already worth about US$2.3tn in 2019.
At the same time, RCEP has also been delicately negotiated so countries can protect their most prized export sectors, including agriculture and automotive. Only 75% of agriculture tariff lines have been slashed to zero, while 17% have been completely excluded from tariff reductions of any form.
But the UNCTAD analysis suggests that RCEP’s tariff reductions will ultimately disrupt global trade patterns in the years to come, leading to rising competition and consequences for non-member country exporters.
RCEP members have agreed to eliminate tariffs on 90% of goods over the next 20 years, while they have immediately abolished levies on 65% of products traded within the bloc.
Shifting supply chains?
Japan is anticipated to benefit the most from the lifting of levies, with the UNCTAD report predicting the country’s exports to member countries will rise by about US$20bn – or 5.5% – from levels seen in 2019.
Other major economies including Australia, China, South Korea, and New Zealand are also likely to see “substantial” positive effects from tariff reductions, the report finds. The analysis estimates that China will see exports to the RCEP bloc grow by US$11.2bn, Korea by US$6.7bn, Australia by US$4.1bn and New Zealand by US$1.1bn.
The report says the trade diversion caused by RCEP will also have an effect on major markets not included in the deal, such as the US and the EU – as well as developing economies such as Bangladesh and Pakistan.
The EU is set to lose around 2% of its exports to RCEP countries, equivalent to a loss of around US$8.3bn. Elsewhere, the US is expected to take a US$5.1bn export hit, Hong Kong US$3.3bn and Taiwan US$3bn.
UNCTAD’s analysis says the expected export losses of countries such as Bangladesh, Pakistan and Sri Lanka are more significant when measured in overall percentage terms.
Bangladesh is expected to suffer a 12% drop in its exports to RCEP due to trade being diverted, largely from its textiles and apparel sector.
Even some of the smaller emerging economies within the RCEP bloc including Vietnam, Cambodia, Indonesia and the Philippines are slated to see a decline in exports as a result of tariff concessions, with Vietnam facing a US$1.5bn drop.
But the UN says that even if these countries had declined to join the deal, it would not have spared their domestic exporters from such negative effects.
“It is better to be in than out the RCEP agreement. Not only because being part of the deal creates additional trade that may offset the loses, but because it strengthens economic integration and the benefits that may come with it, such as foreign direct investment, technology sharing, structural transformations, among others,” the UNCTAD report says.
Rules of origin benefits?
Analysts have likewise pointed to new rules of origin requirements contained within the agreement as a boon for RCEP-based businesses.
RCEP exporters will only need to source a minimum 40% of inputs from within the bloc in order for their final goods to qualify for tariff preferences when exported to other RCEP members.
“Intra-Asian trade – already larger than Asia’s trade with North America and Europe put together – will receive a further boost with RCEP’s standardised rules of origin,” says Ajay Sharma, HSBC’s regional head of global trade and receivables finance, Asia Pacific.
“RCEP will make it easier for firms to use Southeast Asia as a production base, and could accelerate the diversification of supply chains and the re-allocation of FDI already underway in Asia,” he adds.
RCEP has already entered into force for Australia, New Zealand, Brunei Darussalam, Cambodia, China, Japan, Laos, Singapore, Thailand, and Vietnam. The Republic of Korea will follow on February 1, 2022. Malaysia, Myanmar, the Philippines and Indonesia are yet to ratify the deal.