Establishment of World’s Largest Free Trade Zone Titled “Regional Comprehensive Economic Partnership(RCEP)”

Following eight straight years, ۱۵ Southeast Asian and Oceania countries including ASEAN members ( Malaysia, Indonesia, Singapore, Thailand, the Philippines, Vietnam, Brunei, Cambodia, Myanmar, and Laos) and another five Asian and Oceania states (China, Japan, South Korea, Australia and New Zealand) signed the agreement related to the world’s largest free trade zone named the “Regional Comprehensive Economic Partnership(RCEP)” at the virtual online summit of the said countries hosted by Vietnam on November ۱۶, ۲۰۲۰. The agreement is to come into effect after ۶۰ days since its adoption by at least ۶ ASEAN member states plus three non-ASEAN members.
20 January 2021
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Hossein Mola Abdollahi

Following eight straight years, 15 Southeast Asian and Oceania countries including ASEAN members ( Malaysia, Indonesia, Singapore, Thailand, the Philippines, Vietnam, Brunei, Cambodia, Myanmar, and Laos) and another five Asian and Oceania states (China, Japan, South Korea, Australia and New Zealand) signed the agreement related to the world’s largest free trade zone named the “Regional Comprehensive Economic Partnership(RCEP)”  at the virtual online summit of the said countries hosted by Vietnam on November 16, 2020. The agreement is to come into effect after 60 days since its adoption by at least 6 ASEAN member states plus three non-ASEAN members.

The signing countries to this agreement have a population of two billion two hundred million and a total GDP of $26 trillion, an amount a third of world’s population and a third of the world GDP; this is while the Trans-Pacific Partnership comprises 793 million of world’s population and 26% of the world trade, also, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership contains 495 million of world’s population as well as 13.5% of world’s GDP. As such, the “Regional Comprehensive Economic Partnership (RCEP)” is the world’s largest free trade zone in comparison to the mentioned large trade zones. Due to this, signing this agreement is a crucial and fateful step in the trend of the future developments of the world’s trade end economy and the world trade is expected to gradually lean toward Asia and Oceania.

Establishment of the agreement “Regional Comprehensive Economic Partnership (RCEP)” was first proposed by Indonesia at the ASEAN summit held in Bali on October 14, 2011, and the subsequent related negotiations were formally kicked off at the ASEAN summit in Phnom Penh, the Vietnamese capital, on November 18, 2012, by ASEAN member states. Ten ASEAN member states in addition to six other countries including China, Japan, South Korea, India, Australia and New Zealand followed through with eight consecutive years of 31 rounds of intense, regular and periodic negotiations from November of 2012 to July 9,2020, on how to formulate and regulate the mechanisms and regulations related to forming a free trade zone in the form of the “Regional Comprehensive Economic Partnership (RCEP).”

It is noteworthy that India left the agreement at the ASEAN+3 summit held on November 4, 2019 and ended its seven year of the related negotiations. For the reasons why India ended its membership, the country noted the undesirable impacts the low tariffs would have on the local Indian producers and the more profits that would go to the Chinese coffers due to the agreement. In response to India’s departure, China and Japan asked the Indian leaders to rethink their decision and rejoin the agreement.

The “Regional Comprehensive Economic Partnership (RCEP)” agreement is the cornerstone for establishing world’s largest free trade zone, a diverse combination of the Asia and Oceania region’s countries with three groups of “developed” economies (Japan, South Korea, Singapore, Malaysia, China, Australia, and New Zealand), “developing” (Indonesia, Thailand, Vietnam, the Philippines, and Brunei) and “underdeveloped” (Cambodia, Laos, and Myanmar). The total trade of 15 members of this agreement with one another totally constituted about $2.3 trillion and their total world trade was about $7 trillion in 2019, enjoying 27% of world’s total trade.

The aims of the member states for joining the agreement were creating a regional free trade zone  via reducing trade tariffs among the members, encouraging investment for helping the emerging economies of the member states as well as improving and strengthening strategic ties among the members. Based on this agreement, the reduction and elimination of trade tariffs regarding agricultural and industrial products will come into force in two short term (two years) and long term (twenty years) periods among the members. The members will eliminate about 90% of their imports tariffs in the twenty year, long term period finally reaching zero tariffs.

In the agreement, new trade regulations have been set, one of the most important of which being unifying “Rules of Origin”. These rules facilitate the global and regional supply chains for companies, and in addition to reducing costs and time concerning the exports across the said region, they make attracting more foreign direct investment possible. Reducing companies’ expenses through facilitating exports of their products to any point in the member states, without fulfilling prerequisites of each separate country , improving transparency, sharing information, facilitating trade, smoothing economic cooperation, standardizing international rules concerning e-commerce, and mutual understanding of international standards are among the other benefits of this trade agreement.

Although this agreement is the first free trade agreement which for the first time includes the three big Asian economies (China, Japan, and South Korea) of the four biggest economies of this vast continent, no doubts, China as the world’s second largest economy, stands a better position compared to the other members to shape the trade rules of this region; because China, at present, is a main trade partner to most Asian economies. Over time, China is expected to gradually bring these countries in a more efficient way to its economic and political orbit. The unavoidable result of such a trend will be strengthening China’s geopolitical ambitions in the region. Perhaps because of this, the agreement has been named as a coup by some by which China is trying to expand its influence all over the region and further dominate Asian markets; an issue which has worried India, leading to it, as another Asian economic giant, leaving the agreement.

China’s determining role in the agreement is a clear sign that member states like the BRIX group are looking for a larger share of the world economy and economic competition with the US. These countries’ approach, especially China, Japan and South Korea’s, in expanding economic and trade collaboration without the US presence is of the meaning of their bid to direct the world’s economic hub toward Asia. Such an approach, in case it succeeds, could seriously challenge the western states’ already not so stable economies, especially America’s and its dollar’s dominance over the global trade transactions.

Signing this agreement, with the presence of countries like Japan, South Korea, Australia and New Zealand that have so far mostly moved in the US economy’s orbit, very well shows that Trump administration’s strategy in taking unilateral policies and measures based on extreme nationalism such as waging tariff wars, on one side, have fostered an atmosphere of distrust in the US, and on the other side, have pushed other countries toward closer economic convergence with one another. As a result, Trump’s steps for isolating China and cutting it off from the global value chain have faced a hard wall; therefore, the US is now the biggest absence in the world’s biggest free trade zone.

Seen from another angle, this agreement can be described as a clear symbol for the Asia and Oceania states collectively countering the US unilateralism. A thing that will make competition hard in Asia and Oceania for the US companies and the other countries that are not parties to this agreement. Also, the US exporters are expected to suffer great losses, especially in the energy sector. In addition, for the US economy to rebound domestically requires return to joint efforts and coordination with industrially advanced economies. Thus, perhaps the new US administration led by Joe Biden will adopt a different approach than Trump’s toward Asia and focus on the Southeast Asia region.

China and a great part of the Asian region of the Pacific have considerably outpaced America in constraining the coronavirus and returning to normal life. China’s economy has experienced a 7% growth from January to September of 2020. Despite shrinking GDPs and the resulting recession, due to the pandemic, in other corners of the world, China’s exports are still on the rise, so that 15% of this country’s economic growth has been owing to these exports during the first three months of 2020. China’s neighbors can hardly ignore the reality that China’s producing sector is now two times bigger than that of America and is growing about two times faster than America’s.

The presence of the Japanese, who have defined their security with the US and have security tensions with China, in this agreement shows that even in the eyes of the Japanese the time for the dollar-centered economic order is running out and they are preparing themselves for a multilateral economic order. Such an issue could be the most important message that could be received from the participation of Japan, South Korea, Australia and New Zealand in this agreement. The reality is that over recent years much of the world’s economic growth and geopolitical developments have taken place in the east, not the west.

It is not accidental the “World Economic Forum” that is held every year in Davos, Switzerland, in January, is going to relocate to Singapore this year. A number of experts assess this transfer of place as the increasing trust of this forum in Asia. Does Davos’ relocation to Singapore in 2021 mean that the “World Economic Forum”, as the standard bearer of capitalism and globalization, from now on, will trust more Asia than Europe?

 Hossein Mola Abdollahi, Senior Expert in Studies in Foreign Policy                

       (The opinions expressed are those of the authors and do not purport to reflect the opinions or views of the IPIS) 

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