With the spate of news stories fawning over the signing of the Regional Comprehensive Economic Partnership (RCEP), an Asian-Oceanian-centric trade agreement, one would think it is a revolutionary enterprise, destined to upend protectionism for a third of the planet’s economy and population. 

While it certainly sends an uplifting signal in the midst of an otherwise deeply gloomy global economic period as the Covid-19 pandemic continues to constrain the functioning of markets, businesses, workers and consumers, we should not lose sight of the fact that even if the RCEP becomes effective, which depends on ratification by at least the 9 of the 15 signatory countries required, many of the agreement’s provisions are akin to ‘new wine in old bottles.  And some of that wine does not have much alcoholic content. Or it may even not be wine at all.

The most straightforward way to think of RCEP is that integrates existing free trade agreements between the 10 Association of Southeast Asian Nations (ASEAN) states—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam—while bringing in 5 other countries: China, Japan, South Korea, Australia and New Zealand. 

RCEP has been billed as creating the “newest and largest free trade area” in history. This claim is over-stretching the truth. In two dimensions.

In terms of its scale, it is true that in terms of population (2.2 billion people or 30% of the globe’s inhabitants) and economic output ($26.2 trillion or 30% of global GDP), it is very big.  However, assessing a change in the stance of a trade policy regime governing the span of economic transactions is determined jurisdictionally.  China is obviously the most populated country on earth; but how its firms, consumers and workers vie in the international marketplace with those in other countries is condition by the set of rules determined by Beijing.  

In this regard, it is probably more meaningful to measure the scale of RCEP (or of any other trade agreement for that matter) in terms of how many individual countries will, as a result of an agreement, operate under uniform rules.  15 jurisdictions are clearly many countries.  By way of comparison, however, the World Trade Organization (WTO) has 164 member states (of which all RCEP countries are members).

By the same token, RCEP falls short of deserving the moniker “free trade area,” and certainly not much of a “new” one.  Unifying the on-going set of free trade agreements among 10 of the 15 signatories, hardly qualifies as new. 

So how much of the additive provisions of RCEP pertaining to all the 15 countries can be considered as elements of a bona fide free trade area?  

That the agreement calls for the first ever trade agreements between China and Japan, as well as between South Korea and Japan, may indeed be a positive step in that direction. But it is fulfillment of the core of RCEP—a commitment to reduce 90% of the tariffs among the signatories—that will determine if the promise of creating a large free-trade becomes a reality.

There are, however, three problems that stand in the way of realizing such a promise.

First, these commitments for tariff reduction are to be phased in over 20 years. One must ask: how relevant, then, will RCEP be to altering trade flows and economic performance in the near term or even the medium run?  

To give some perspective as to what is at stake to take 2 decades years to implement significant policy reforms designed to help countries become more resilient to dynamic changes in world markets, consider how much the global economy has been altered because of policy changes over the past 20 years.  It was 19 years ago that China joined the WTO; 12 years ago that the U.S. sub-prime housing crisis led to the collapse of the global banking system; and only 5 years ago that Greece, in the depths of its debt crisis, voted to halt further austerity measures being imposed by the EU, causing massive runs on the country’s banks and subsequently their closure and across-the-board restrictions on cash withdrawals.

Second, the largest player involved in RCEP—China—hardly has a sterling track record for fully executing on its commitments under trade agreements it signs.  One need only consider that, to date, China has not implemented some of the core reforms it legally obligated itself to do under the terms of its accession agreement to be admitted as a member of the WTO in 2001.

Even more striking is that within 2 weeks after the RCEP signing, China imposed new import tariffs of between 107% and 212% on Australian wines. So much for China abiding by the spirit, let alone the letter, of RCEP!

Third, perhaps most important, RCEP does not include much in the way of structural provisions, such as those requiring China’s liberalization of its state dominated enterprise and banking sectors, the operations of which are laden with explicit and implicit subsidies.

Such subsidies are notoriously difficult to measure, if they can be at all in an economy strewn with fuzzy corporate governance mechanisms and property rights.  In fact, the systemic existence of subsidies in Chinese economy calls into question what will be the actual economic impact on China’s trading partners if Beijing agrees to remove tariffs on its imports.

Why do I say this? If the foundation for the setting of “market” prices charged on imports coming into China—on top of which tariffs are applied—is, itself, artificial and slippery, it may well be hard for the importers to decipher the net effects from changes China makes to its tariff schedule on the final “prices” charged in China.  (Analogously, in cases where countries impose tariffs on Chinese exports, if the underlying “price” China charges the importing countries is itself artificial, the net effect of the tariffs can be offset by China altering the “price.”)

Putting aside RCEP’s tariff provisions, other measures in the agreement may have a better chance for success—although their import in fundamentally overhauling the direction and intensity of trade flows among the signatories will be far more muted. 

In particular, RCEP envisions the establishment of common, region-wide rules governing product standards definitions, e-commerce trade, and intellectual property protection, as well as the unification of “rules of origin”—the criteria that define the “economic nationality” of specific products or specific sub-components of a product in order to determine which tariff rate is applied (since tariffs are defined on a by-country basis).

From a parochial perspective, the plus side of these measures is the facilitation of stronger or newer cross-border supply chains among the region’s signatories—a China-centric regional network to be sure.

From a supra-regional vantage point, however, they could engender even stronger incentives for the ‘decoupling’ of globally efficient supply chains—especially those integrating Asia with North America and Europe—than already is the case as a result of blunt government-administered policy mandates, which are being driven more by politics than economics.

The overarching question about RCEP, of course, is will it make a significant difference in the region by propelling greater efficiencies for businesses, increasing the number of higher-paying jobs for workers and generating higher quality, cost-effective products and services for consumers?  

Putting aside that it will take 20 years from now to see if RCEP’s most effective reforms actually kick in, the answer to this question depends on the extent to which the agreement can foster the second largest economy in the world—China—to transform and conduct itself in a market-based manner.  In the absence of systemic and effective disciplines on China’s state-centric economy incorporated into RCEP, it is hard to imagine that will be the case.  

This is not a criticism of RCEP per se, however.  After all, the 163 other members of the WTO have yet to succeed in bringing about such changes in China over the past 20 years.

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