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All Members Are Already On Board. Will RCEP Boost The Economy?

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The Regional Comprehensive Economic Partnership (RCEP) Agreement started on January 1, 2022.

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement (FTA) between the 10 member countries of the Association of Southeast Asian Nations (ASEAN) and their five trades. Partners (Australia, China, Japan, New Zealand, South Korea) effective 1 January 2022.

India, which joined the negotiations, has not reached an agreement for the time being, but the country’s doors are still open.

RCEP countries

Source: S&P Global Market Intelligence

The agreement provides for elimination of tariffs for approximately one day. 90% of the product range within 20 years. It also introduces common regulations in areas such as competition, services, technical standards, e-commerce, intellectual property and investment. RCEP is, in principle, to create a framework for further negotiations as individual issues in mutual trade grow in importance.

The new agreement creates new opportunities for the Western world, primarily the European Union and North America. Only time will tell if the West will use them. Indeed, the new agreement will strengthen trade ties in the Pacific.

This new situation should encourage the EU to intensify negotiations on trade agreements with ASEAN countries, especially those that have not signed agreements.

When it comes to the US, things are a little different. Over the years, the country has strengthened its position in the Pacific, not only militarily, but also trade.

Indeed, from a military point of view the situation has not changed, but from the point of view of trade relations it has changed. The United States has completely ceded control of the region to China.

regional trade agreements

In 2021, the RCEP group accounted for 1/3 of the world’s population, and is projected to decline to 1/4 of the world’s population by 2040, but remains the largest group. Not all over the world.

It should also be emphasized that the door to India is open and India’s accession could significantly change the proportion of this group in the future. Moreover, compared to his other FTA groups, their share of the world population is much smaller, and these groups are also on the decline.

From the perspective of global trade, the importance of RCEP will increase. RCEP’s global export share is projected to reach 34% by 2040, three times that of CUSFTA and two times that of CPTPP. For comparison, at the same time the share of EU exports is expected to be 27%.

To better illustrate the importance of the RCEP agreement, we used a gravity model to analyze the development of trade. The concept of the gravity equation for interstate trade flows was introduced by Tinbergen.

Inspired by Newton’s law of universal gravitation, he postulated that the value of trade between any two countries is proportional to the product of their national incomes and inversely proportional to the distance separating them.

Conducted research proves that the gravity model is successful and can be used to explain international exchanges. This is also the case when measures of distance between countries are enriched with variables related to the process of globalization.

The model’s estimation results allowed for an economic interpretation. Country size and distance matter. Countries with higher GDP or more population usually trade more. In addition, trade intensity is also related to geographical distance. This is because the more goods are exported, the higher the transportation costs and the larger the carbon footprint.

The integration of supply chains within blocks is favored by the fact that the system connects economies with very different levels of development. This will shift labor-intensive production to developing countries in Southeast Asia.

At the same time, high-tech production and services will be concentrated in Japan, South Korea and China. India may regret not joining the agreement, and Taiwan, excluded from negotiations by China, may also lose its expansion opportunity.

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Editor’s Note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.

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