Home Globalisation & Geopolitics Understanding the implications of the RCEP and the CPTPP

Understanding the implications of the RCEP and the CPTPP

Inclusivity, transparency and sustainability are important next steps in realising the full potential of these mega trade deals

Asia has driven globalisation for the past two decades, and in particular since the Global Financial Crisis of 2008-09. In the past two or three years, with all the rhetoric around the ill-effects of globalisation in several key western economies including the US, Asia’s importance in global economic integration bas become even more evident.

This isn’t surprising, for several economies in East and Southeast Asia have grown and prospered over the years on the back of export-led models of economic growth. Moreover, the region is home to some of the most complex, sophisticated value chains.

Trade and economic integration in the Asia-Pacific are expected to receive another shot in the arm once the Regional Comprehensive Economic Partnership (RCEP) comes into force at the start of 2022. The RCEP, along with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is not Asia-driven but has several Asian members, demonstrates there is still an inherent belief that free trade or freer trade is a good thing.

The significance of these two mega trade pacts was the focus of discussion on a panel at a conference organised by the Pacific Basin Economic Council (PBEC) last week. The PBEC Virtual Week 2021 brought together several prominent thought leaders to discuss a variety of issues impacting the region and its people.

Speaking about the significance of the RCEP, Siddharth Poddar, managing editor of Unravel and co-founder of StoneBench, said: “Amid growing anti-globalisation rhetoric in many pockets in the West, the RCEP showcases Asia’s belief in openness and globalisation.”

Looking at the trade pacts through the lens of Mexico and Brazil

In Asia, for the most part, the RCEP and the CPTPP are looked at from the perspective of the US and Asian economies and businesses. However, Evodio Kaltenecker, assistant professor of International Business Technology of Monterray in Mexico, alluded to the implications of the trade pact on other signatories such as Mexico.

He pointed out that many tend to overlook the importance of Mexico in the CPTPP and how it is different from other economies in Latin America, in that Mexico’s chief exports are those of manufactured goods such as electronics and vehicles, and not resources or primary goods. Mr Kaltenecker also pointed out that since the onset of the trade war between the US and China, Mexico has benefitted greatly to become the US’ chief trading partner. It is an interesting dynamic in all the talk around the implications of the trade war on Asian economies.

There is little doubt that mega trade pacts such as the RCEP and the CPTPP are here to stay, and they will benefit Asian economies.

Brazil’s exports in 2019, for example, largely comprised commodities such as soya beans, iron ore, and concentrates and petroleum. And its top export partner was China, underlining its reliance on the Chinese economy, as opposed to the Mexican economy which in fact competes with China to secure exports into the US.  

Underlying geopolitical trends

Trading agreements are not established in a vacuum – geopolitical developments play a key role in how trade agreements are created. This issue has come to the fore with the withdrawal of the US from the originally planned TPP and China’s recent application to join the CPTPP, which was closely followed by Taiwan’s application.

After the American withdrawal from the TPP, Japan assumed de factor leadership of the trade agreement and has been a driving force for its completion. The US, on the other hand, is now in a dilemma, particularly given China’s keen interest in joining the CPTPP.

There is little doubt that the US is concerned about China joining the agreement. Speaking on the panel, Robert Koepp, founder and CEO of Geoeconomix, was of the view that the US may pose a problem for China as it “enjoys indirect veto rights on China’s entry through terms of the USMCA (NAFTA 2.0)” and “may also influence Mexico to use its veto against China.” According to the panellists, however, the reality is that it may never come to that, because even other countries such as Australia and Japan have their reservations about China becoming a part of the CPTPP.

The panel discussion organised by the Pacific Basin Economic Council (PBEC).

But what then are China’s key motivations for joining the CPTPP? There is a school of thought that believes this is China’s push to assume what it sees as a void in global leadership as far as the global rules-based trading system is concerned – an opportunity to showcase its maturity as a responsible global stakeholder.

Yu Hong, senior research fellow at the East Asian Institute (National University of Singapore), offered a different perspective. In his view, China will use the CPTPP negotiations to push forward long-pending domestic reforms. For instance, he said, China has sought to reform its state-owned enterprises for a long time now, but has seen little success. He believes China could be looking at the CPTPP to help drive such reforms domestically.

He added that China could also have applied to join the CPTPP as it wants to be part of a high-standard free trade deal and not be marginalised.  

But throw Taiwan’s application to the CPTPP into the mix, and what bargaining chops various economies will employ is anyone’s guess.

Winners and losers in Asia

The RCEP will have a big, positive economic impact on all the 15 countries party to the deal. It is comprehensive in terms of commitment and covers areas such as trade in goods; rules of origin; customs procedures; and trade facilitation. It will also help facilitate the development and expansion of regional supply chains; making it easier for companies to source, sell and setup manufacturing bases across the RCEP countries without much paperwork.

The RCEP also brings together countries at diverse levels of development. On the one hand, it has developed economies such as Singapore, South Korea, Japan and Australia, and at the other end of the spectrum, it has developing economies such as Laos, Myanmar and Cambodia. On the face of it, this means the benefits from the trade pact should accrue to all participating countries. The developed economies will have large untapped markets to sell their products more easily in, while developing economies will benefit from the inflow of knowhow, and hopefully, capital, as companies look to invest in them to benefit from lower costs of production, particularly given low tariffs.

But Pamela Mar, executive vice president – knowledge and applications at Fung Academy, said that while there is little doubt that all economies will benefit on the whole, there will inevitably be winners and losers in each of the economies.

She said that while the larger companies have the resources to make sense of, prepare for and adapt to changes in trade policies, new rules and standards, SMEs may not be able to derive benefits from these FTAs as they don’t have a clear enough understanding of what the changes imply. These are comprehensive trade pacts with several complicated, nuanced features that smaller companies find harder to navigate.

Panellists were of the view that participating countries’ governments should reach out to industry associations and various chambers of commerce that represent small businesses to bring better awareness. They also have a role in equipping smaller companies with emerging digital capabilities to benefit from such FTAs.

Amid growing anti-globalisation rhetoric in many pockets in the West, the RCEP showcases Asia’s belief in openness and globalisation.

On the face of it, SMEs stand to benefit immensely from these FTAs. Digitalisation of trade is one of the prominent features of the RCEP, for example. If implemented well, this will result in trade in goods becoming quicker and easier for SMEs. Small businesses will also benefit through digitalisation of the trade finance network and its processes, but the harmonisation of digital trading standards is important.

“The RCEP provides a very good basis for moving towards a future of trade that is transparent and harmonised,” Ms Mar said. “But it won’t be good enough if SMEs are left behind.”

SMEs are the lifeblood of the region’s economies in terms of the employment they generate and their contribution to GDP. They are going to be critical if we are to create the new jobs required. “We’re not going to get there without the SMEs playing a full and growing role,” said Ms Mar.

Outlook for the year ahead

There is little doubt that mega trade pacts such as the RCEP and the CPTPP are here to stay, and they will benefit Asian economies.

However, a lot more must be done to ensure that all businesses—big or small—draw benefits from them. To this end, governments have an important role in bringing about greater transparency, and in providing greater support to SMEs.

While geopolitical trends can be decisive in decisions relating to the membership of these pacts, it is important to bear in mind that these are still economic agreements intended to benefit consumers. Or at least should be.

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