The Regional Comprehensive Economic Partnership agreed by 15 Asian nations is a big deal. They generate 30 per cent of the world’s GDP and the RCEP will shape regional and global trade in coming decades. But the immediate benefits for the 10 ASEAN economies will be minimal: it will take up to 21 years before liberalisation covers 90 per cent of trade.

The agreement nevertheless sends a clear message that trade liberalisation remains a driving force for growth in Asia. It unites mainland China and Japan in a trade pact for the first time and links South Korea, Australia and New Zealand to the 10 Southeast Asian nations.

Implementation is likely in 2022 but initially tariffs and quotas will be removed on only 65 per cent of goods traded within the bloc. Existing ASEAN free-trade agreements with RCEP members have already eliminated tariffs on 86 per cent to 90 per cent of goods. South Korea and Japan thus gain most relative to GDP, while China has the greatest absolute benefit.

But do not underestimate RCEP’s impact on ASEAN. It will re-inforce and accelerate ongoing trends, including attracting foreign direct investment and building trade with mainland China.

The most impressive aspect of the pact is the generous and simplified ‘rules of origin’ framework. Only 40 per cent of a product’s content need be sourced from within RCEP to qualify for trade preferences – less than in trade deals such as the US-Mexico-Canada Agreement which sets a 75 per cent threshold for cars. So a mobile phone assembled in Vietnam with Chinese or Korean components can access the Japanese market under RCEP if at least 40 per cent of components come from within the area.

This will help ASEAN attract an even larger share of global foreign direct investment. ASEAN overtook mainland China for attracting overseas investment in 2018 with Malaysia, Vietnam and Singapore offering advantageous terms and a large electronics ecosystem. The bloc’s expected near-13 per cent share of global foreign investment in 2020 is more than double the historical trend.

In 2020, ASEAN became China’s largest trading partner, overtaking the European Union after surpassing the United States in 2018. The ASEAN-China Free Trade Area, effective since 2010, reduced the average tariff on Chinese goods sold in ASEAN from 12.8 per cent to 0.6 per cent and cut the tariff on ASEAN goods in China from 9.8 per cent to 0.1 per cent. And thanks to the lower coronavirus impact on Asian trade, ASEAN-China has become, for now, the world’s largest bilateral trading relationship.

RCEP should confirm mainland China’s role at the centre of Asia’s trade networks. And if Beijing now opens domestic markets, the relationship should not only grow but also become more balanced.

Mainland China overtook the EU in 2018 to become the second-largest source of foreign direct investment into ASEAN, and is top in Indonesia and Malaysia for manufacturing. And the impact of the Belt-and-Road Initiative on trade should not be underestimated, even if it has slowed since its 2015-17 peak.

In short, even if incremental direct trade benefits under RCEP are minimal, when combined with expansion of the investment relationship, the advantageous rules of origin and China-ASEAN trade links, the economic relationship should continue growing.

First published 1 December 2020.

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