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Fifteen countries in the Asia-Pacific region on Sunday signed a trade deal to create the largest trading bloc in the world. The new pact represents almost a third of the global population and over $26 trillion in gross domestic product.
China, Japan, Australia, New Zealand, South Korea, and the 10 countries that make up the Association of Southeast Asian Nations (ASEAN) signed the Regional Comprehensive Economic Partnership (RCEP), a pact eight years in the making that analysts estimate will strengthen economic ties within the region and add $200 billion to the global economy per year by 2030.
Many RCEP constituents already have trade agreements with one another. The new deal doesn’t cover state-owned enterprises, labor, or the environment, and it only briefly mentions controversial issues like intellectual property protections, meaning it will not result in any dramatic economic changes in the short term.
Subscribe to Eastworld for weekly insight on what’s dominating business in Asia, delivered free to your inbox.Still, the agreement is considered a geopolitical victory for China, since it helps the regional giant formalize and strengthen links with other countries in Asia and potentially step into an economic vacuum created by President Donald Trump’s protectionist withdrawal of the U.S. from global free trade agreements.
The RCEP marks China’s first membership in a multilateral trade deal.
Chinese Premier Li Keqiang said the RCEP was “not only a landmark achievement of East Asian regional cooperation, but also a victory of multilateralism and free trade.”
According to a June 2020 working paper published by the Peterson Institute for International Economics, a nonprofit research group, the RCEP will increase the economic integration of China, Japan, and Korea, since it lowers trade costs between members. The lower trade costs will “accelerate the decoupling of the East Asian and U.S. economies,” the paper says.
The signatories inked the deal at a virtual ASEAN summit chaired by Vietnam. “I am confident that RCEP will soon be ratified and come into force, further bolstering our post-pandemic economic recovery and delivering shared prosperity to the people and businesses of all participating countries,” Vietnamese prime minister Nguyen Xuan Phuc said on Sunday. The deal is supposed to be ratified within the next two years.
The RCEP will lower tariffs, give RCEP members preferential access to the regional market, and lower costs for companies with supply chains across multiple countries in Asia. The latter provision could persuade more multinationals to locate their supply chains in the RCEP region.
The RCEP isn’t as comprehensive in scope as the Trans-Pacific Partnership (TPP), the proposed free trade pact between Pacific Rim countries that President Donald Trump pulled the U.S. out of in 2017.
China was not included in the TPP, which would have increased U.S. influence in the region, nor is it part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the agreement that the 11 TPP constituents signed in 2018 after the U.S. dropped out.
Compared to the CPTPP, the RCEP encompasses more than four times as many people and two times the GDP; it’s also larger than the European Union by both those metrics.
The new pact does not include India, Asia’s second-largest economy. India withdrew from talks in November 2019 over concerns that the terms of the agreement would hurt local producers and would expand India’s existing trade deficits with RCEP member nations, especially China, which represents India’s largest bilateral trade deficit. The RCEP remains open to India returning to join the agreement.
