Eight years of discussion—that saw the withdrawal of India—have culminated with the ASEAN economies, China, South Korea, Japan, Australia, and New Zealand finally signing the Regional Comprehensive Economic Partnership (RCEP) on November 15.
The RCEP agreement is important both for the messages it sends as well as the economic benefits it will bring to the member economies. It signals strong support for free trade and regional cooperation at a time of escalating deglobalisation concerns, and growing inward-looking, nationalist sentiment in large pockets around the world.
The economic gains from the RCEP are likely to become visible over a longer period. With the bloc accounting for around 30% of the world’s GDP and population, and 26% of its trade, it has the potential to deliver a notable boost to growth.
A long time coming
It is perhaps fitting that the largest trade pact globally in recent history (Exhibit 1) has been signed just as President Trump prepares to leave office. While the focus is on the economic benefits that the deal will yield, the symbolism of the RCEP shouldn’t be underplayed in a world that has seen a shift toward growing protectionism, led by the US, in the past four years.
Exhibit 1: RCEP is among the largest trade pacts globally
Globalisation has been on a downtrend since the global financial crisis of 2008-2009. Partly, this has been a natural economic outcome, reflecting rapid growth and industrial development in some emerging markets, the internalisation of the environmental impact of transport, a shift of production closer to end-markets, and labour-saving technological progress.
With 90% of trade within the bloc likely to be liberalised over the next 20 years, it has the potential to deliver a notable boost to growth in the long-term.
But the downtrend also reflects policies that have erected barriers to trade and investment, such as growing instances of trade disputes. In such an environment, the RCEP sends a clear message to the world in favour of openness and underscores our view that globalisation is unlikely to reverse in the coming decades (Exhibit 2).
Exhibit 2: Globalisation will continue at a slow pace
Long-term economic gains likely, receding trade uncertainty a short-term positive
Economically, gains from the RCEP will likely take time to accrue. Other than Japan-China and Japan-South Korea, all RCEP members already have FTAs in place and we will have to wait and see how RCEP rules stack up alongside the existing arrangements in practice.
As such, the agreement proposes a long timeline of 20 years to eliminate tariffs and restrictions within the bloc. Also, member countries have already lobbied to delay the implementation of certain provisions, according to their individual requirements.
Still, with 90% of trade within the bloc likely to be liberalised over the next 20 years, it has the potential to deliver a notable boost to growth in the long-term. Common rules of origin, which mean that RCEP members will require only one certificate of origin for trading within the bloc, also make it easier to establish supply chains.
The Peterson Institute for International Economics estimates that the partnership can boost global incomes by $186 billion in 2030, barring an escalation in US-China trade tensions.
Renewed US interest in the CPTPP?
The signing of the RCEP is likely to renew interest in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Seven out of 15 RCEP members are also signatories to the CPTPP, which can result in a rethink by the US. Of course, this will involve lengthy renegotiations, including further measures to protect intellectual property rights and tough environmental and labour standards.
It’s also not clear how a renegotiated deal will change benefits to exports and GDP growth for the other 11 members. Our modelling estimates that including the US in the TPP agreement will boost exports for participating countries by at least 1.5% a year in the long term, amounting to an annual 0.1% ($150 billion) gain in GDP (Exhibit 3).
Exhibit 3: The inclusion of the US will have a positive impact on the TPP
As such, we don’t expect Asian members to be worse off than now under any new deal that includes the US, which accounts for around 10% of global goods and service exports. Adding the US to the CPTPP will likely mean a larger boost to exports, including services, than the deal currently generates.
An important globalisation milestone
In all, the tailwinds appear to be turning favourable for the more open Asian economies, both in the short- and long-term, with trade uncertainties reducing with the departure of President Trump and a renewed emphasis on global trade pacts.
The RCEP agreement signals strong support for free trade and regional cooperation at a time of escalating deglobalisation concerns, and growing inward-looking, nationalist sentiment in large pockets around the world.
The signing of the RCEP will no doubt renew optimism and reinstate faith in the importance of trade, which has been among the key drivers of economic growth in the Asia-Pacific. Importantly, it demonstrates that the region is open to cooperation and multilateralism, at an opportune moment.