Economics Explainers

Explainers: What is the Regional Comprehensive Economic Partnership (RCEP)?

The RCEP was initiated in November 2012 in Phnom Penh, Cambodia by ASEAN with the goal of fostering multilateral trade among the deal’s signatory states and India. While involved in the negotiation process, India withdrew in 2019 over concerns that tariff reductions will harm local producers.

On November 15, 2020, 15 countries–10 members of the Association of Southeast Asian Nations (ASEAN) and China, Japan, South Korea, New Zealand, and Australia–signed the Regional Comprehensive Economic Partnership (RCEP). This mammoth deal, arguably the largest free trade agreement in history, will connect almost a third of the global population and 29% of global output. 

The RCEP was initiated in November 2012 in Phnom Penh, Cambodia by ASEAN with the goal of fostering multilateral trade among the deal’s signatory states and India. While involved in the negotiation process, India withdrew in 2019 over concerns that tariff reductions will harm local producers. 

While the RCEP was an ASEAN initiative, many have viewed it as a China-backed alternative to the Trans-Pacific Partnership (TPP), another major trade deal in the Asia-Pacific region underway in 2012 that excluded Beijing. After former US President Donald Trump withdrew the US from the TPP in 2017, the remaining twelve member states formed the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP). 

What Does the RCEP Cover?

The primary effect of the RCEP is that it consolidates the various free trade agreements that exist between ASEAN and the five other countries into one single framework. The trade deal is expected to remove a series of tariffs on imports over the next two decades, although it mostly codifies the elimination of tariffs on goods that already qualify for duty-free treatment under existing free trade deals. 

The RCEP and the CPTPP, which concluded in 2018, were the two major mega-regional trade agreements signed during the Trump era. Compared to the CPTPP, the RCEP contains fewer and slower tariff reductions as well as weaker rules on investment and intellectual property. It also contains no rules concerning labor, the environment, or state-owned enterprises.

What is most interesting about the RCEP is its “rules of origin”, which set common standards for what proportion of a product must be produced within the RCEP region in order to qualify for tariff exemptions. The terms of the deal specify that only 40% of goods produced by a country need to be manufactured in the region, meaning 60% of goods can be produced anywhere else in the world. According to Peter Petri, a leading trade economist at the Brandeis Business School, the RCEP’s rules of origin are the most lenient he has ever seen in a major trade agreement. 

Economic Significance

Since the RCEP mostly formalizes rather than transforms business between member states, its biggest impact will most likely result from its new rules of origin. For the first time, the deal consolidates the rules of origin definitions and quotas among its member states. This harmonization means that there will be a single certificate of origin that all members can use to sell to others, making the establishment of supply chains that stretch across multiple countries simpler. 

In light of these rules, companies will be able to sell products across the region more easily since they will not run into different rules of origin criteria for each step of the manufacturing process. This will strongly incentivize companies to develop supply and value chains as well as do business within the RCEP region.

The RCEP will also likely facilitate and accelerate Northeast Asian economic integration. On a more symbolic level, it is the first single trade agreement to connect China, South Korea, and Japan. Thus, it can serve as a gateway to unleashing other developments in the relations between the three Asian economic powerhouses. In fact, both China and Japan have expressed interest in resuming negotiations on the China-South Korea-Japan free trade agreement.

Geopolitical Significance

While analysts have said that the RCEP’s economic benefits are modest and unlikely to materialize for years, the deal is nonetheless a geopolitical victory for Beijing. “The diplomatic messaging of RCEP may be just as important as the economics–a coup for China,” wrote Citi Research analysts in November. 

Against the backdrop of concerns surrounding de-globalization and heightening US-China tensions, the RCEP is significant for three main reasons. First, the deal is evidence of East Asia’s commitment to deeper trade integration and recognition of its economic benefits. Second, it undercuts the perception that Beijing is turning inwards with its “dual circulation strategy.” This is a term that emerged as leaders deliberated China’s 14th five-year development plan (2021-2025) which emphasizes the domestic Chinese market. Lastly, the RCEP shows the US that Asia-Pacific economies are prepared to adopt a “two-track foreign policy”, at least in relation to economic policy. Analyzing China’s role in shaping the world order in 2018, Yan Xuetong, a distinguished Professor and Dean of the Institute of International Relations at Tsinghua University, envisaged a return to bipolarity. However, in stark contrast to well-defined military-economic blocs characteristic of the Cold War, this new era of bipolarity will be one in which most states “adopt a two-track foreign policy, siding with the United States on some issues and China on others.” 

Over the past two years, tensions between China and the US have escalated significantly, starting with trade and bubbling over into the technological and financial realms. Under the Trump administration, the US withdrew from regional economic networks and prioritized isolating China from them. With America’s renouncement of its leadership role in regional free trade, the RCEP reinforces the idea that Beijing is the main driver of regional economic flows and signals that it is prepared to step into the US’s shoes.

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By Shuyi Li

Shuyi Li is a third year Political Science and Economics major at the University of California, Los Angeles. Growing up in three different countries fueled her passion for international relations, especially US-China relations.

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