Economic Policy Analysis by Rhea Haddad, Staff Writer

December 15th, 2020

On November 15, fifteen countries, members of the Association of Southeast Asian Nations (ASEAN) along with China, Japan, South Korea, Australia, and New Zealand, signed the world’s largest free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), which aims at promoting economic growth and social and cultural development in the region. This pact, which accounts for about 30% of the global economy, symbolizes the fruition of long negotiations between its countries, and its signing was undoubtedly accelerated by the protectionist trade policy pursued over the past 3 years by the United States under Donald Trump. 

While several trade agreements already relate the members together, the RCEP addresses crucial areas that are not covered yet. It is expected to gradually reduce tariffs on a large range of goods and services and establish a new set of rules on investment, competition, and intellectual property. 

Additionally, the RCEP will play an important role in strengthening market-driven economic integration in East Asia and the relations between China, Japan, South Korea, and Southeast Asia. The Peterson Institute for Financial Economics(PIFE) predicted the gains from the agreement in two different circumstances.

In a first pre-Sino-American trade war scenario, the RCEP is estimated to add $186 billion to the world’s economy, by 2030, from which $164 billion are added to the Asian member countries’ GDP, representing 0.3% of their real income.

In a more pessimistic scenario where the trade war persists, the benefits of the RCEP are expected to surge, reflecting greater gains for both China and the United States. In this context, China profits directly as an RCEP member, but both countries take advantage of more efficient Asian supply chains which somewhat offset the costs of the trade war. The PIFE estimates an increase of $209 billion to the world’s economy by 2030 of which $179 billion are added to the Asian countries’ GDP. 

It is not surprising that China, Japan, and South Korea will be the biggest beneficiaries of the deal as they are the largest countries accounting for 80% of RCEP’s GDP and are not jointly partners of any current free trade area agreement. Nevertheless, other countries including Malaysia, Thailand, Vietnam, and New Zealand will also achieve important increases in revenues by 2030.  

Nonetheless, the economic treaty is not a win-win deal for everyone. In fact, India, which recently withdrew from the negotiations afraid to see its market submerged by Chinese imports, is emerging as the main loser. Though its GDP could have increased by up to $60 billion had the country signed the agreement, it is expected to suffer a loss of $6 billion. 

Hence, India’s position strongly highlights the conventional dilemma of international trade: a country as a whole can benefit from increased trade, but the latter usually contributes to potentially destabilizing redistributive effects for an economy. 

While the impact of RCEP on trade is likely to be gradual, its geopolitical effect must not be underestimated. Though it is often mislabeled as “China-led”, RCEP is a triumph of ASEAN’s middle power diplomacy. 

As a matter of fact, the importance of a comprehensive East Asian trade deal has long been known, but neither China nor Japan were politically accepted as leaders for the initiative. In 2012, the deadlock was overcome by an East Asian deal involving India, Australia, and New Zealand which placed ASEAN in charge of negotiating the accord. This “ASEAN centrality” was therefore the cornerstone of the RCEP which would have never been launched without it. 

The RCEP will help China deepen its ties with its neighbors and speed up Northeast Asian economic integration. If the partnership promotes mutually advantageous prosperity, its members could gain worldwide influence.  

Under the Trump administration, the Sino-American trade war has unfolded, negatively impacting both countries along with the rest of the world. Instead of attempting to limit China’s inevitable economic and technological development, the United States must focus on opening its markets and adhering to global trade rules and norms. 

The COVID-19 pandemic will leave long-lasting economic scars on all countries. The time has come for the United States to commit to reinstate multilateral trade and economic cooperation to ease the pain and accelerate the recovery for all.