RCEP kicks in with Thailand, China and 8 other countries

The new Asia-Pacific free trade agreement entered into force on 1 January 2022 creating the world’s largest trading bloc by economic size.

With 15 Asia-Pacific countries covering about 30% of the world’s gross domestic product and population, the RCEP takes effect among 10 members that completed ratification: 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.

By comparison, other major regional trade agreements by share of global GDP are the South American trade bloc Mercosur (2.4%), Africa’s continental free trade area (2.9%), the European Union (17.9%) and the United States-Mexico-Canada agreement (28%).

A significant impact on international trade

An UNCTAD’s analysis shows that the RCEP’s impact on international trade will be significant. “The economic size of the emerging bloc and its trade dynamism will make it a centre of gravity for global trade,” the report says.

It also cites Thailand’s example, where trade creation effects completely compensate for the negative trade diversion effects.

The Commerce Ministry estimated Thailand has 39,366 goods that would benefit from the duty reduction (South Korea has 11,104 items, Japan 8,216 items, China 7,491 items, New Zealand 6,866 items, and Australia 5,689 items). Thailand has 29,891 goods that should enjoy zero tariffs immediately after the pact’s implementation.

Amid COVID-19, the entry into force of the RCEP can also promote trade resilience. Recent UNCTAD research shows that trade within such agreements has been relatively more resilient against the pandemic-induced global trade downturn.

Eliminating 90% of tariffs within bloc

RCEP encompasses 15 Asia-Pacific countries covering about 30% of the world's GDP and population — RCEP encompasses 15 Asia-Pacific countries covering about 30% of the world’s GDP and population

The agreement encompasses several areas of cooperation, with tariff concessions a central principle. It will eliminate 90% of tariffs within the bloc, and these concessions are key in understanding the initial impacts of the RCEP on trade, both inside and outside the bloc.

Under the RCEP framework, trade liberalization will be achieved through gradual tariff reductions. While many tariffs will be abolished immediately, others will be reduced gradually during a 20-year period.

The tariffs that remain in force will be mainly limited to specific products in strategic sectors, such as agriculture and the automotive industry, in which many of the RCEP members have opted out from trade liberalization commitments.

China is expected to open its market to 653 Thai items after originally committing to 33 items, such as pepper, pineapple processing, coconut water, TV receivers, styrene, auto parts and paper.

China is expected to reduce the tax on flavoured pineapples, pineapple juice, coconut juice and synthetic rubber from 7.5-15% to 0% within 20 years, auto parts (electrical equipment for lighting or signalling and windshield adjusters), wire and cable for wiring harnesses used in cars from 10% to 0% within 10 years.

Uneven benefits among members

The report highlights that the RCEP members are expected to benefit to varying extents from the agreement.

Tariff concessions are expected to produce higher trade effects for the largest economies of the bloc, not because of negotiations asymmetries, but largely due to the already low tariffs between many of the other RCEP members.

UNCTAD’s analysis shows Japan would benefit the most from RCEP tariff concessions, largely because of trade diversion effects. The country’s exports are expected to rise by about $20 billion, an increase equivalent to about 5.5% relative to its exports to RCEP members in 2019.

The report also finds substantial positive effects for the exports of most other economies, including Australia, China, the Republic of Korea and New Zealand. On the other hand, calculations show RCEP tariff concessions may end up lowering exports for Cambodia, Indonesia, the Philippines and Viet Nam.

This would stem primarily from the negative trade diversion effects, the report says, as some exports of these economies are expected to be diverted to the advantage of other RCEP members because of differences in the magnitude of tariff concessions.

For example, some of the imports of China from Viet Nam will be replaced by imports from Japan because of the stronger tariff liberalization between China and Japan.