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RCEP kicks in as China seeks to lead regional economic integration

Left out of world's largest trade bloc, U.S. prepares response

A container terminal in China's Zhejiang Province in August: The 15-member RCEP pact is connecting China, Japan and South Korea under a free trade agreement for the first time.   © Reuters

SINGAPORE -- An Asia-Pacific agreement to create the world's largest trade bloc entered into force on Saturday, ushering in a new phase of regional economic integration.

The launch of the Regional Comprehensive Economic Partnership comes as countries seek to escape the pandemic malaise and shore up supply chains while China, the group's largest member, strives to raise its profile in Asia's mechanisms for integration. How Beijing opens its economy through the pact will be closely watched as the U.S. -- not party to the deal -- prepares a response of its own.

RCEP encompasses 15 Asia-Pacific countries covering about 30% of the world's gross domestic product and population. Initially, it takes effect among 10 members that completed ratification earlier: China, Japan, Australia, New Zealand, Brunei, Cambodia, Laos, Singapore, Thailand and Vietnam. South Korea will follow on Feb. 1. The remaining four signatories are Indonesia, Malaysia, Myanmar and the Philippines.

One practical effect of RCEP coming into force is that businesses and supply chain partners "will be able to enjoy preferential treatment for exports to, and investments in [the first 10 countries] from Jan. 1, and South Korea from Feb. 1," said Locknie Hsu, a professor at Singapore Management University. "This can significantly enhance regional economic connectivity."

RCEP will have a "significant impact" on international trade, the United Nations Conference on Trade and Development (UNCTAD) noted in a study published in mid-December. "The economic size of the emerging bloc and its trade dynamism will make it a center of gravity for global trade."

"In the current context of the pandemic, the entry into force of RCEP can also serve an additional purpose: trade resilience," UNCTAD added. It observed that trade within existing agreements has proved more resilient against the COVID-19 downturn.

At the core of RCEP are tariff concessions, with the members due to eventually eliminate levies on more than 90% of goods traded within the bloc. This will particularly benefit China, Japan and South Korea -- Asia's biggest economies, which are now connected by a free trade agreement for the first time. Tariffs on Japan's exports of some electric vehicle components to China, for example, will be removed, according to Japan's trade ministry.

The UNCTAD study estimated that tariff concessions by RCEP participants will increase exports within the region by 2% compared with the 2019 level, or about $41.8 billion, by diverting trade away from non-member economies and spurring new trade inside the bloc.

Japan is expected to be the biggest beneficiary, with overall effects on exports estimated at $20.2 billion, followed by China at $11.2 billion and South Korea at $6.7 billion.

On the other hand, Vietnam and Indonesia are likely to see adverse effects -- minus $1.5 billion and minus $0.3 billion, respectively -- due to trade diversion within the region. Some of China's imports from Vietnam, for instance, are expected to be replaced by imports from Japan because of the stronger tariff liberalization between the region's two largest economies.

Gao Feng, Chinese commerce ministry spokesperson, told reporters in late December that "all preparations for domestic implementation are in place." The ministry will promptly issue a "guideline for high-quality implementation of RCEP" to help local governments and businesses make the most of RCEP's rules, seize opportunities created by market opening, and "promote higher quality and deeper regional economic integration in East Asia."

China has shown an eagerness to participate in other regional pacts as well.

In September, it applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a higher-standard mega trade deal that took effect in late 2018 among 11 economies. China has also applied for the Digital Economy Partnership Agreement (DEPA) launched by Singapore, New Zealand and Chile.

China's moves have fueled its rivalry with the U.S., which has neither RCEP nor CPTPP membership. President Joe Biden's administration is preparing a new economic "framework" for the Indo-Pacific region that would cover areas such as the digital economy and clean energy. The details are yet to be announced, but during her trip to Asia in November, Commerce Secretary Gina Raimondo said the framework will be "flexible and inclusive."

"It is likely that some RCEP countries will be invited to join this new economic framework," professor Hsu said.

Now that RCEP is officially in force, one key question is whether its membership will expand and how the countries will deepen liberalization. RCEP will open for accession 18 months after the date of entry into force, with an exception for India, which withdrew from the negotiations in 2019 but is allowed to return anytime after the launch. RCEP members are slated to review the deal's content every five years.

Some members, such as Japan, are holding out hope for India's participation, believing it would balance China's influence. But the South Asian country, which pulled out due to fears of the impact on domestic industries, has not indicated any intention to come back.

Meanwhile, Hong Kong has expressed interest. Chief Executive Carrie Lam in September said at the Belt and Road Summit that the city was keen to begin formal discussions on accession as soon as RCEP is ready to take on new partners. The Association of Southeast Asian Nations also "welcomed" Hong Kong's interest at an ASEAN-Hong Kong meeting the same month, saying the Chinese special administrative region is "well-placed to add value to RCEP."

"Should Hong Kong accede to the RCEP, operators of supply chains seeking to tap the RCEP's trade advantages could more readily include Hong Kong businesses in such chains," Hsu said. "While Hong Kong already has FTAs with ASEAN, China, Australia and New Zealand, it does not presently have individual FTAs with Japan and South Korea. Joining the RCEP could therefore allow Hong Kong to enjoy important new trade and investment benefits with these two countries, and vice versa."

Experts say further liberalization of trade and investment, and agreements on new areas such as the environment, will be crucial for RCEP.

"As the U.S.-China confrontation progresses, issues such as human rights, labor rights protection, environmental measures, subsidies to state-owned enterprises, and unfair trade practices in Asia, have surfaced," Toshiki Takahashi, a researcher at the Tokyo-based Institute for International Trade and Investment, wrote in a column on the organization's website in late December.

"RCEP members," he stressed, "have to adequately address these issues in further negotiations in the future."

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