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Inside the New RCEP: What You Need to Know About the World’s Biggest Trade Deal

By December 8, 2020March 10th, 2021No Comments
Hands exchanging a shipping container representing global trade

In November of 2020, 15 countries signed the RCEP (Regional Comprehensive Economic Partnership) trade deal. The agreement unites all ten members of ASEAN (Association of Southeast Asian Nations) with five other Asian and Pacific countries.

As the world’s largest free-trade agreement, the RCEP is the result of nearly ten years of negotiations. Policymakers hail it as a major achievement, and experts predict it will have a significant economic impact on the Asian and Pacific region. This blog post explores what the RCEP does, why it was passed, and what it means for companies doing business in the region.

What Is the RCEP?

Member countries designed the RCEP to increase trade by immediately lowering and eventually removing tariffs. Before the RCEP, most member countries negotiated bilateral trade agreements with one another. Navigating the nuances of bilateral deals increases the challenges of international trade. The RCEP introduces one unified trade system for its member countries, removing many of the barriers preventing countries from freely trading with one another.

The RCEP stands out for its size. RCEP countries generate $26 trillion in GDP (gross domestic product), accounting for nearly one-third of the world’s total output. Because RCEP countries boast a combined population of 2.2 billion people, the deal affects more of the world’s population than any other global trade pact.

What Countries Are In the RCEP?

The following 15 countries entered into the RCEP:

  • China
  • Japan
  • Australia
  • New Zealand
  • South Korea
  • Indonesia
  • The Philippines
  • Singapore
  • Brunei
  • Vietnam
  • Laos
  • Cambodia
  • Thailand
  • Myanmar
  • Malaysia

Why Was the RCEP Passed Now?

Policymakers see the RCEP as providing both short- and long-term benefits to member countries.

As COVID-19 continues to disrupt global trade and damage local economies, RCEP member countries believe the deal will help spur economic recovery. Vietnamese Prime Minister Nguyen Xuan Phuc sees the agreement as a mechanism for “further bolstering our post-pandemic economic recovery.” Japanese Prime Minister Yoshihide Suga agrees: “Encouraging free trade is even more important now that the global economy is in a slump, and there are signs of countries turning inward.”

Singapore’s Minister for Communications and Information, S. Iswaran, believes the deal will aid COVID-19 relief efforts and boost the future economic outlooks of member countries. Iswaran sees the RCEP as “a very important signal to global markets that even as we fight the challenge of (the pandemic), we need to continue to build bridges and economic integration.” Iswaran believes the RCEP will set member countries up for economic success far past the pandemic.

What Countries Opted Out of the RCEP Trade Deal?

Despite its prominent role in regional trade, India declined to join the RCEP. The U.S. is also noticeably absent from the trade deal, although it is one of the most influential global economies.

India reasoned that joining the RCEP would flood its market with inexpensive imported goods, hurting domestic production. Prioritizing imports over in-country goods runs counter to India Prime Minister Narendra Modi’s “Make in India” campaign. Under Modi, India has emphasized the importance of strengthening its economy by increasing local production.

The U.S. also opted not to join the pact. Just as Modi prioritizes “Make in India”, President Donald Trump adopted an “America First” policy. Declining to join the RCEP represents a continuation of Trump’s efforts to promote American production.

How Does the RCEP Compare to Other Global Trade Deals?

Experts often compare the RCEP to the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership).

The CPTPP is the current version of the TPP (Trans-Pacific Partnership), which President Barack Obama introduced while in office. When President Trump withdrew the U.S. from the TPP in 2017, the remaining member countries re-formed the trade pact into the CPTPP.

The CPTPP includes RCEP member countries Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam. It also includes Canada, Chile, Mexico, and Peru. Despite the overlap in countries, the two agreements differ in the standards they impose on members.

In general, the CPTPP is much stricter than the RCEP. The CPTPP holds member countries to high standards for intellectual property and environmental protection. It also requires that countries adhere to worker-friendly labor laws and restricts how much countries can invest in state-owned businesses. The RCEP, on the other hand, imposes minimal restrictions, focusing primarily on encouraging free trade between member countries by removing tariffs.

What Does the RCEP Mean for Regional and Global Supply Chains and Economies? 

Experts expect the RCEP to boost the international economy significantly. According to the Peterson Institute for International Economics, the RCEP could lead the global economy to grow by $186 billion annually. Brookings Institute estimates a similar yearly growth figure while predicting that the RCEP would add $500 billion to world trade by 2030.

On a per-country basis, South Korea and Japan stand to benefit most from the deal, according to research. Economists predict each country will see a 1% gain in real income from the trade deal over the next ten years. Malaysia ranks third with an expected increase of 0.6%.

Because it will lessen or remove trade restrictions and tariffs between member countries, officials expect the RCEP to make it easier for companies to set up supply chains that cross borders. Experts believe these supply chains will make RCEP countries more resilient to future economic downturns. Analysts also predict the RCEP will enable member countries to lessen their reliance on China and trade more with one another.

What Does the RCEP Mean for U.S. Companies?

For U.S. companies operating in RCEP countries, the new deal is cause for optimism. Because the RCEP will not introduce new labor or environmental regulations, companies operating in member countries will not have to make significant changes to maintain compliance. The lack of new legislation is welcome news for companies in the region forced to adopt stricter standards following the passing of the CPTPP.

The RCEP also gives U.S. companies incentive to maintain or increase supply chains in Asia and the Pacific. Mary Lovely, a Senior Fellow at the Peterson Institute for International Economics, says that the RCEP’s trade-friendly regulations make it easier for international companies to remain in Asia despite recent American tariffs on Chinese-made goods. According to the Council on Foreign Relations, a think tank based in New York, the RCEP creates new opportunities for U.S. companies to explore alternative markets to China such as Vietnam, Thailand, and Malaysia.

U.S. companies operating in RCEP member countries stand to benefit from economic improvements in those markets. Because the RCEP will strengthen supply chains, ease trade regulations, and increase inter-country access to transportation, energy, and communication, member countries expect significant economic growth. U.S. companies with a presence in those countries are set up to share in the gains.

Seize Expansion Opportunities with a Global Expert

Companies currently operating in Asia and the Pacific are not alone in being positioned to benefit from the RCEP. By entering new markets in RCEP countries, companies at any stage of the global growth process can take advantage of economic prosperity in the region. Velocity Global is here to ensure your expansion into Asia is as efficient, strategic, and cost-effective as possible.

We have experience helping companies move into over 185 countries worldwide, providing everything from growth strategy consultation to risk mitigation and international employee management. Whether you’re testing your first international market or further expanding your presence in the region, we provide all the expertise and support necessary to streamline your move. Reach out to Velocity Global today to find out how.