China Economy & Business Japan Korea Macroeconomics South Asia Trade
Econographics December 3, 2021

The RCEP ratification and its implications

By Niels Graham

On January 1, 2022, nearly one year after it was signed, the Regional Comprehensive Economic Partnership (RCEP) trade agreement will go into effect following the ratification of the agreement by Australia and New Zealand. When it enters into force, the 15-member partnership will be doubly historic: it will be both China’s first multilateral trade agreement and the world’s largest free trade agreement. Equally remarkable to China’s presence in RCEP is the United States’ absence. 

Conceived during the 2011 ASEAN Summit, RCEP was designed to integrate the disparate trade agreements between ASEAN nations and their key trading partners (ASEAN+1 free trade agreements) into one unified agreement. As a result, more than 80% of trade liberalized by RCEP is already covered by an underlying ASEAN-plus-one FTA. Although the economic impact of the deal on ASEAN and its five partner nations will not be groundbreaking, RCEP is a significant achievement for free trade in Asia through its advancements in rules of origin, intellectual property protection, and tariff reduction. Equally, if not more important, will be RCEP’s geoeconomic implications for the US, China, and the region as a whole. 

To get a better picture of the current state of Asian trade, explore our interactive data visualization below.

Although RCEP largely harmonizes trade flows covered by ASEAN+1 FTAs, it does make new linkages between ASEAN’s partner nations. Most notably, RCEP is the first free trade agreement between China, Japan, and South Korea— three of the four largest economies in Asia. As the graphic above shows, China is the largest trading partner for Japan and South Korea and both nations are among China’s top five trading partners. Despite the volume of trade flowing between these countries, China and Japan had not previously signed an FTA. As a result, tariffs were determined by the most favored nation treatment (MFN) standard stipulated by the WTO. 

RCEP changes this. As a part of the agreement, China will eventually reduce tariffs to zero on 86% of Japanese goods— an important expansion from the 8% of Japanese imports that are currently tariff free. Similarly, Japan’s Schedule of Tariff Commitments show they will eventually cut tariffs to zero on 88% of Chinese goods— up from current levels of around 60%. Ultimately, China, Japan and South Korea may gain far more from this agreement than ASEAN through the new linkages encouraged by RCEP’s tariff reductions.

RCEP has implications for China beyond its enhanced trade connections. Although Chinese leaders do not directly cite RCEP as an indication of China’s ascendancy over the US leadership in Asia, it does signal that Beijing will solidify its role as the driver of the region’s economic flows. Further underscoring this point is RCEP’s design as a “living agreement,” with a built-in agenda for future talks on trade liberalization. If the agreement does mature into such a  platform for discussing future trade rules, China’s seat at the table and the US’ lack thereof will be even more consequential. 

Another noteworthy change will be the creation of a common rule of origin. In international trade, rules of origin are the criteria used to determine the national source of a product which then has implications on the duties and restrictions applied to that product. Prior to RCEP, companies had to comply with different rules of origin for each of the five ASEAN-plus-one FTAs. In practice, that meant that companies often had to think of the Asia-Pacific as five different markets because products manufactured to the criteria set forth by the ASEAN-New Zealand FTA would not always qualify for the ASEAN-Japan FTA, for example. RCEP rectifies this through the creation of common rules of origin for the entire bloc. Under the agreement, companies can easily ship goods built according to its rules of origin between all RCEP nations.  The result will be  improved costs for multinational companies with supply chains crossing Asia which will likely encourage businesses to establish supply chains across the bloc. 

Another reason to keep an eye on RCEP? It’s a useful indicator of whether China might eventually be included in the region’s other major FTA:  the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). China formally submitted a request to join the CPTPP in September, but Beijing’s membership is far from guaranteed. Talks to join the CPTPP cannot begin without unanimous consent of all members, which include Canada, Australia, and Japan. Many of these nations are unsure about whether Beijing can comply with CPTPP regulatory requirements — which are far more ambitious in scope and depth than those of RCEP. Unlike RCEP, the CPTPP also has chapters on state-owned enterprise reform, the environment, and labor protections which could complicate China’s accession to the agreement. So, it makes sense that Japan has signalled that it will be using Chinese compliance on RCEP as a tool to weigh its membership potential in the CPTPP. 

Although the US may have turned inward on trade policy, the rest of the world and especially Asia has not. Without a cohesive, externally facing trade policy the US risks being left behind. 

Niels Graham is a Program Assistant with the GeoEconomics Center

Image: Aerial View of container ship terminal in Shenzhen, China Shenzhen, China