As RCEP takes effect, how will world economy benefit?

The signing ceremony of the Regional Comprehensive Economic Partnership (RCEP) agreement is held via video conference in Hanoi, capital of Vietnam, Nov. 15, 2020. (Photo Source: Xinhua)

The Regional Comprehensive Economic Partnership Agreement (RCEP) has officially entered into force, marking the world's most populous and promising free trade area, which has also the largest economic and trade scale and the most diversified membership structure, set sail.

With the agreement coming into effect, trade and investment liberalization and facilitation measures and unified economic and trade rules will significantly reduce operating costs and reduce business risks. It will also stabilize regional industrial and supply chains to provide institutional safeguards, and accelerate the flow of goods, technology, services and capital. Then the "trade creation" effect will be achieved.

Against the backdrop of the world economic recession, de-globalization and global supply chain shocks exacerbated by the COVID-19 pandemic, the RCEP, after eight years of negotiations, has entered into force as scheduled, which is not only a landmark achievement of regional cooperation in East Asia, but also a victory for multilateralism and free trade, and will certainly add new momentum to the development and prosperity of the region. It will also contribute to the recovery of world economic growth.

Rebuilding confidence and promoting post-pandemic economic recovery

At present, the global development environment is facing profound and complex changes. The severe impacts of the COVID-19 pandemic have further increased instability, led to a deep recession in the global economy, a significant contraction in international trade and investment, and suppressed consumption. Under the current international situation, the scheduled entry-into-force of RCEP will help alleviate many risks facing regional economic recovery, boost market confidence, and inject new momentum into the regional and even global post-pandemic economic recovery and long-term development.

Overall, RCEP will substantially boost regional trade and investment growth, and will also play a positive role in promoting global trade and welfare growth. After RCEP coming into effect, more than 90% of intra-region trade in goods will eventually achieve zero tariffs, forming mutually complementary network with existing bilateral FTAs in the region. It will further improve the overall level of regional liberalization, significantly reduce intra-regional trade costs and generate noticeable trade-promotion effects. The "RCEP Impact Assessment Report on Regional Economy" released by the Research Institute of International Trade and Economic Cooperation of the Ministry of Commerce estimates that by 2035, RCEP will drive the cumulative growth of overall regional GDP, exports and imports by 0.86%, 18.30% and 9.63%, respectively. And regional economic welfare will grow by a cumulative $250.3 billion, world real GDP and import/export trade will also increase by 0.12% and 2.91% due to RCEP implementation, and economic welfare will increase by $169.6 billion. The higher level of trade and investment liberalization and more secure institutionalized cooperation environment after RCEP comes into force will accelerate the flow of economic factors to the mutual benefit of member countries. The agreement will not only promote regional investment growth and increase the return on capital for ASEAN countries, but also provide more employment opportunities for regional countries and promote the optimal allocation of human resources. The impacts of RCEP are positive, both in terms of real GDP growth rate and economic welfare. Among them, ASEAN has the highest cumulative real GDP growth rate of 4.47%, and China, ASEAN and Japan have the most significant improvements in economic welfare, with cumulative increases of $99.6 billion, $54.9 billion and $51.2 billion, respectively.

Breaking de-globalization and leading a new wave of globalization

The current globalization has encountered a counter-current, while protectionism and unilateralism have gained momentum. Under the overlapping impacts of the centenary changes and the new pneumonia pandemic, the world has become more foggy and chaotic, with "withdrawal", "dumping" and "decoupling" proliferating, and hegemony and bullying running rampant. That RCEP came into force as scheduled fully reflects the confidence and determination of all parties to jointly uphold multilateralism and free trade and promote regional economic integration, allows people to see light and hope in the gloom, and will lead a new wave of globalization by promoting inter-regional free trade. RCEP is a large regional trade agreement jointly promoted by 15 free trade partners, including ASEAN, China and Japan, and the FTA with the world's largest population and largest economic and trade scale. In 2020, the total population of RCEP member countries reached 2.27 billion, GDP reached $26 trillion, total imports and exports surpassed $10 trillion, both accounting for about 30% of the global total, higher than the existing regional trade blocs.

By lowering or even eliminating market access barriers among member countries, RCEP will make economic ties between countries in the region more seamless and smooth, gradually forming a large open and prosperous regional integration market covering 15 countries, and making important contributions to regional trade and investment growth, economic recovery and development. In particular, as the world's second and third largest economies, in the absence of FTA links between China and Japan, as well as between Japan and South Korea, RCEP will promote the formation of a large market among China, Japan and South Korea, bringing considerable openness dividends, which will become a new source of impetus.

More importantly, RCEP has the most diverse membership structure, with countries having different political and social systems and different levels of economic development. Most of the international economic cooperation organizations represented by the OECD are composed of developed economies, and free trade between developed countries and emerging markets still faces greater challenges, while RCEP has made a useful exploration in this respect. The liberalization and facilitation measures and unified economic and trade rules of the RCEP agreement will not only help form new incremental trade and investment, but also further stimulate the potentials of regional markets, create more new consumer demands, and drive faster economic growth in each country.

Stabilizing expectations and ensuring global supply chain security

The pandemic has dealt a comprehensive blow to global production and demand, leading to a crisis of supply chain breakage or stagnation in many industries, highlighting the vulnerability of the global supply chain system under the international division of labor. Therefore, more and more countries have started to pay attention to the layout of industrial and supply chains from the security perspective, and promote the transformation of global industrial chains to make them more stable and resilient. RCEP, as a modern, comprehensive, high-quality and mutually beneficial free trade agreement, provides institutional guarantees for stabilizing regional industrial and supply chains, helps alleviate many risks and uncertainties faced by enterprises in foreign investment cooperation, stabilizes expectations, and is expected to promote the deep integration of industrial and supply chains among members.

RCEP adopts the rules of origin accumulation in the field of trade in goods, which will bring the trade relations of RCEP members closer and promote the formation of closer and more resilient regional industrial and supply chains. The rules of origin accumulation will extend the scope of raw material accumulation to all member countries in the region and greatly reduce the threshold for enjoying tariff preferences. This will not only help promote the enterprises of member countries to carry out procurement, production and sales activities within the region, but also help deepen regional industrial and supply chain cooperation. Relying on the free trade platform established by RCEP, enterprises of member countries can flexibly procure raw materials and intermediate products within the region in accordance with the principle of optimal allocation of resources, make coordinated arrangements for the division of labor in production, and then export manufactured products duty-free to large markets within the region, thus promoting the construction of closer, stable and more resilient regional industrial and supply chains.

In addition to trade in goods, RCEP member countries have also made high-level openness commitments in trade, services and investment, and established high-level rules on intellectual property rights and e-commerce. The flow of various economic factors will be smoother, and the intra-regional industrial chain, supply chain and value chain will be further consolidated and developed, which will promote higher-quality and deeper regional economic integration in East Asia.

Contributed by Zhu Xiaoneng, Professor and Vice Dean, School of Finance, Shanghai University of Finance and Economics; Li Pan, Assistant Researcher, Shanghai Institute of International Finance and Economics

Translated by Wang Ruoxin