RCEP Trade Deal: Significance of Massive Asia Pacific Pact

Trade deals are economically significant and have a real impact when companies use them to access previously limited markets, but they are a political creation with economic implications that are not usually seen immediately after implementation. The Regional Comprehensive Economic Partnership (RCEP) is no different in that it will take years to know which countries and companies have benefited most from this political deal.

What is important to investors to note, however, is that RCEP is now the second major trade deal focusing on Asia being signed without the United States. In this article, we'll look at RCEP, why it matters, and what it may be signaling for the future of global trade.

Overview of RCEP

The RCEP comprises 15 countries, including seven that were part of the CPTPP. The countries that signed the deal on Nov. 15 are:

• Australia (CPTPP member)
• Brunei (CPTPP member)
• Cambodia
• China
• Indonesia
• Japan (CPTPP member)
• Laos
• Malaysia (CPTPP member)
• Myanmar
• New Zealand (CPTPP member)
• Philippines
• Singapore (CPTPP member)
• South Korea
• Thailand
• Vietnam (CPTPP member)

India was initially part of the RCEP but has since pulled out. It should be noted that the door is open for the country to join later. The deal covers roughly one-third of the world's population and just under one-third of global GDP. The Brookings Institute estimates that the deal will increase global GDP by $500 billion in the next 10 years, but estimates vary widely as with all trade deals. Most agree that the RCEP has the potential to add well over $100 billion to national incomes within the trading block.

What Makes RCEP Different

Despite having seven CPTPP members as part of the RCEP, the RCEP is a different type of trade deal. The CPTPP went a long way to harmonize key points such as intellectual property, environment, labor, and rules around state-owned enterprises. All these areas in the CPTPP required higher standards among many signatories in order to enjoy freer trade with other members. The RCEP is silent on almost all of these points, which has been spun as a direct influence of having China involved as the largest, and arguably key, economy.

Even if this is a sign of China's influence, the biggest win for members of the RCEP is having reduced tariffs on products that are sourced within the trading block. This means, for example, that a Japanese-designed car pulling in parts from South Korea and assembled in China can be sold in Australia without triggering tariffs based on third-country content. This sets up an incentive for the RCEP members to source more freely within their region, which should result in them trading more freely in general.

The Layers of Trade Agreements in Asia Pacific

The world of bilateral and multilateral trade agreements requires more than a few whiteboards to map out. The RCEP is China's first multilateral agreement, but the country has a number of bilateral trade agreements, including with Australia – a country that, along with New Zealand, has a deal with every other country in the RCEP.

In these cases, the countries with more developed bilateral agreements generally keep the deeper trade ties but respect the new unified sourcing rules under the RCEP. In this sense, the RCEP still removes a country-of-origin headache from regionally sourced supply chains.

Leadership May be Shifting East

The CPTPP and RCEP are both deals that, judging solely on membership location, tilt toward Asia. Most importantly, these do not involve the United States. The United States has signed the United-States-Mexico-Canada Agreement (USMCA) that replaced NAFTA recently, but the last free trade agreement other than that was signed with Panama in 2007. The United States' 14 free trade agreements encompass 20 countries, but only three of these countries are also members of RCEP.

The exit of the United States from the CPTPP represented a pull back for a country that once was a global champion of free trade. The inclusion of China in RCEP and the absence of the United States suggests that the Asia Pacific region is moving ahead on its own. The deals may be less comprehensive, but they are still getting done.

The Bottom Line

RCEP members will benefit from lower tariffs on products sourced and traded in the region, making the ties between these countries deeper. The larger economies like China, Japan, South Korea, and Australia will likely benefit the most at first, but the whole region will see more income over time in the form of regional sourcing.

The most important takeaway, however, is that the United States may be losing its global leadership on trade to nations within the Asia Pacific region. Of course, this situation can be reversed – the door is still open for the United States on the CPTPP, for example – and the hopes are high that an incoming Biden administration will do just that. Whether that reversal takes place or not is another loaded question facing the global economy in 2021.