What RCEP does — and doesn’t — mean for the global economy

The Regional Comprehensive Economic Partnership (RCEP) was signed a week ago by the 10 countries of the Association of Southeast Asian Nations (ASEAN) and five countries with which ASEAN has free trade agreements – Australia, China, Japan, New Zealand and South Korea. RCEP encompasses almost one-third of the global economy and population, making it the largest regional free trade agreement in the world. So what does all this mean for the global economy?

RCEP creates a more unified Asian market…

RCEP cements Asia-Pacific’s status as the driver of globalization as cross-border integration has stalled or reversed in other major economies. It untangles the “noodle bowl” of Asian trade agreements. Its most impactful provision is establishing common rules of origin for its 15 members, allowing companies to sell within the bloc without complying with different national or bilateral trade agreement standards for defining origin. RCEP therefore creates a common trading zone for the region, much like the EU has done for Europe and NAFTA/USMCA has done for North America.

Importantly, RCEP includes the three Asian economic powerhouses of China, Japan and South Korea. This is significant given current geopolitical tensions between these countries. These governments clearly recognize the value in tying their economies together more closely. In fact, of the estimated $186 billion that RCEP will add to the global economy, $85 billion will accrue to China, $48 billion to Japan and $23 billion to South Korea. These economies will benefit not only from increased trade in intermediate and complementary goods but also from more interconnected innovation systems.

…but that market is not very deep…

RCEP is not ambitious in its scope. RCEP will eliminate tariffs on about 90% of industrial goods among its members. While this sounds extensive, it is actually a relatively low percentage for such regional agreements. And RCEP does not cover environment and labor standards or state-owned enterprises.

RCEP lays out basic rules against data localization and intellectual property, and partially liberalizes investment. Although about half of RCEP signatories use a positive list format for investment – meaning that only sectors specifically mentioned are included in market access provision – it will still facilitate cross-border investment by improving transparency and streamlining administrative processes. Cross-border M&A and other transactions may also be facilitated by RCEP because the agreement consolidates existing market access provisions in the current mix of overlapping Asian trade agreements.

…nor is it complete

RCEP notably does not include India, which dropped out of negotiations in 2019 due to concerns about Chinese imports. But India could rejoin once it’s in force. It also does not include the US, which is an important economic partner in the region. RCEP will therefore increase speculation that the US could rejoin the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) under the Biden Administration, to act as an economic counterweight to China in the region. But trade agreements are not a high priority amid the COVID-19 and economic crises, so it is unlikely that Washington will pursue this option in the near term.

And while many RCEP members see the benefit of further supply chain integration, they remain cautious about Chinese influence given that China is by far the largest member in RCEP. Japan will therefore continue to advocate India rejoining RCEP. And Japan, India and Australia will also continue to push their Supply Chain Resilience Initiative to help companies reduce their manufacturing dependency on China. China will therefore gain more regional clout through RCEP – but not as much as some headlines suggest.

So what does RCEP mean for the global economy?

RCEP doesn’t mean much in the immediate term because it is not likely to enter into force until 2022. At least 6 ASEAN members and 3 other signatories must ratify the agreement to it to take effect. While some countries – such as Singapore – are likely to proceed quickly with ratification, others – such as Malaysia and Thailand – may delay due to domestic political concerns. Australia may also be slow to ratify the RCEP, given its ongoing trade dispute with China. So there will be a lot of attention on ratification processes in the coming year.

Once RCEP is in force, it will boost the global economy by providing greater efficiencies for companies operating in or sourcing from Asia. Its common rule of origin for RCEP members will enable companies with operations in RCEP markets to source and sell within the bloc without complying with different national or bilateral trade agreement standards for defining origin. RCEP could contribute to ongoing supply chain reorientation toward or within the bloc. And its investment-facilitation measures are likely to continue RCEP markets’ recent upward trend in attracting foreign direct investment (FDI).

These competitiveness enhancements for the RCEP bloc could induce other regions to boost their economic integration efforts as well. Whether this contributes to further globalization or instead accelerates the trend of rising regionalization of the global economy is an open question.

The views expressed here are mine alone and do not necessarily represent those of EY.