Supply chains may start to look very different over the coming decades if the intended benefits of the Regional Comprehensive Economic Partnership (RCEP) are realised. The deal, under negotiation since 2012, was agreed in November with 15 countries across Asia signing up. Several of the region’s major emerging markets put their names to the deal, as did South Korea, Japan and China. The notable exception amongst the signatories is India, which pulled out of negotiations amid fears local producers would be disadvantaged by a lowering of tariffs while China also resisted Indian ambitions to widen the scope of the deal to include trade in services and deepen economic ties in the pact further. Still, member states of the RCEP make up nearly one-third of the global population and contribute 29% of global GDP – more than both the US-Mexico-Canada Agreement and the EU can claim.

The RCEP aims to reduce tariffs on merchandise trade between the member states over the next 20 years. It will also supersede a number of bilateral trade agreements in the region and offer one set of rules for trade and customs procedures. For supply chains in the region, new ‘rules of origin’ will likely have the most significant impact in the short-term. The RCEP’s single set of rules will replace a complex network of regulation and treat parts and components from all member states equally. While previously a product finished in Indonesia containing Australian parts could be subject to tariffs based on rules of origin elsewhere in the region, the new RCEP framework will remove such complications and likely encourage manufacturers and retailers to seek suppliers and partners within the trade region.

The potential benefits of the RCEP for member nations are significant. The Peterson Institute for International Economics estimates that by 2030, the RCEP could add $186bn to global national income annually while also adding 0.2% to the economy of its member states. Analysis from the Brookings Institute argues the RCEP could add $209bn to world incomes each year, and $500bn to world trade by 2030. Perhaps more importantly, the analysis goes on to suggest that along with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the RCEP will “offset global losses from the U.S.-China trade war, although not for China and the United States. The new agreements will make the economies of North and Southeast Asia more efficient, linking their strengths in technology, manufacturing, agriculture, and natural resources.”

The RCEP promises much. It doesn’t go as far or cut tariffs as deeply as the CPTPP, but in combination, the deals have huge potential to change trade and supply chains in the region. It should also be remembered that while the RCEP has been agreed, nine member nations are still to ratify it, meaning any effects won’t happen quickly. The RCEP is designed to realise its goals by 2030, by when other wider changes from the RCEP may also be taking effect.

The RCEP is the first regional multilateral trade deal China has signed up to. Upon its agreement, China’s Premier Li Keqiang, described the RCEP as “a victory of multilateralism and free trade”. It extends China’s influence in the region and positions Asia’s largest economy to gain markedly at the expense of two economies that have chosen to remove themselves from agreements – India and the US.

Both the US and India were set to be a part of the deals – CPTPP and RCEP, respectively – but withdrew. That pushed the agreements towards the promotion of intra-Asian trade with China and Japan acting as the poles around which regional integration will coalesce. The ASEAN nations were also the key players in getting the RCEP agreed, showing a new level of influence in regional policymaking. As such, while the RCEP makes incremental progress towards reducing tariffs and unifying trade rules in the region, the supply chains across Asia which support those gains are likely to change too. By the time RCEP achieves its goals in 2030, supply chains in the region are likely to have a distinctly more intra-Asian orientation than today.

Source: Transport Intelligence, November 19, 2020.

Author: Nick Bailey

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