This article first appeared in Forum, The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

The Regional Comprehensive Economic Partnership (RCEP) agreement was finally signed two weeks ago, after eight long years involving 31 negotiating rounds and eight ministerial sessions.

After all that effort, the poor negotiators found that the achievement was greeted with less than unbridled enthusiasm. This seems a bit unfair to us. For sure, anyone can pick holes in the RCEP agreement but overall, it will produce tangible benefits for its members while creating a few geopolitical ripples.

The RCEP agreement is actually a big deal. It establishes one of the world’s largest free trade areas encompassing 30% of the world’s population, 30% of global economic output and 27% of world trade. Never before has there been a trade deal that brought so many diverse countries with so many diverging interests into a single trade agreement.

The deal embraces the 10 countries of Asean, China, Japan, South Korea, Australia and New Zealand. Just pulling it off is itself a huge achievement. Certainly, in the process of bridging the vast gaps in living standards, economic development and economic models within this large area, it was inevitable that in many cases, they settled for the lowest common denominator.

Still, RCEP is a consequential deal. It aligns Asean’s separate free trade agreements (FTAs) with its main partners into a coherent one, overcoming the spaghetti bowl of many FTAs with varying rules and definitions in key areas that led to confusion. Take one critical area — that of rules of origin (which confirm whether a product is indeed mostly manufactured in a given country and therefore qualifies for zero-tariff entry into a market). Companies will find it easier to trade across borders because there is now one single set of rules of origin and one set of tariff schedules to follow. Instead of filling multiple forms in many countries, one form will suffice to enact an export transaction.

The deal also cuts tariffs so that 92% of trade in the RCEP region will now be tariff-free. These benefits will improve market access and reduce transaction costs and, hence, boost trade. In addition, RCEP improves the investment environment by encouraging countries to limit the sectors where foreign investment is not allowed.

RCEP also fills a big hole in the network of FTAs in Asia. Because of their historical animosities, China, Japan and South Korea had not been able to agree on an FTA among themselves. With the deal in place, these three trading giants in effect have an FTA — and that will lead to increased exports and imports in that part of the world.

Positive as all this is, there are some shortfalls in the RCEP agreement. There are several areas covered by the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP, which brings together a smaller group of countries, including Singapore) that are not addressed at all by RCEP — environmental issues, labour protections, food safety and how to handle state enterprises. Huge sectors such as agriculture and services are not really opened up all that much.

There were many compromises along the way, which weakened the effectiveness of the RCEP deal — the inevitable price to be paid when so many diverse countries are brought into one agreement. In the end, even the many compromises that were made were not enough to satisfy India that its interests would be adequately protected. Its withdrawal certainly leaves a hole in RCEP.

A study by the Peterson Institute for International Economics estimates that the member countries of RCEP will gain an additional US$186 billion (RM757 billion) of economic value from now until 2030. The biggest gains are in Japan and South Korea, but Asean countries such as Vietnam and Malaysia are also big winners. However, we suspect that the economic modelling may be underestimating the dynamic benefits of the agreement:

And that brings us to a key point. RCEP is not an end point. It is the beginning of a process that is likely to see increasing cooperation and more integration over time. As countries see the actual benefits of cooperation flow and as more trust is built among countries, there will be a tendency to broaden RCEP’s coverage to include sectors that were either left out or under-emphasised. With the ink on the deal now dry, we should expect progress in other areas.

One such area could be the successful conclusion of RCEP negotiations, which will spur countries outside the agreement to seek membership. The deal allows new members to sign on 18 months after the agreement has been formally ratified. Hong Kong has already shown its interest, with both Asean and China immediately agreeing to support its application. The RCEP agreement has a clause in it that would enable India to join easily. However, the Indian authorities have indicated that they are still not ready to join.

Separately, the time-consuming negotiations over RCEP took up a lot of bandwidth of the region’s trade negotiators, leaving them with little time or resources to consider other pending trade initiatives. Now that the deal is done, we should expect movement elsewhere.

For instance, China has signalled once again that it is interested in exploring membership of the CPTPP. Its membership would be ground-breaking, making the CPTPP so large that many other countries would seek membership as well. Already, the UK, which is leaving the European Union, has expressed a keenness to join the CPTPP, something that has been warmly received in Asia.

Another area where we may see changes is an initiative to fill the holes in the RCEP deal. After all, as the agreement was being negotiated, the world changed in so many ways. Digitalisation has taken off and it is certainly a gap in RCEP that e-commerce and cross-border data issues were not adequately dealt with. China, which is now a leader in digitalisation, could well make a big push to fill this gap.

Media commentaries frequently refer to RCEP as a China-led initiative, implying that Beijing leads it and will gain immense geo-strategic advantages from it. This view has merits but it needs to be corrected in some regards.

First, RCEP was led by Asean not China. It was built on Asean’s network of free trade agreements. The agreement gives its member countries considerable powers — the agreement only comes into full legal effect once six members ratify the deal and Asean will have a say on key issues going forward, including approving new members.

If anything, RCEP’s successful conclusion vindicates Asean’s unique role as the go-to platform on which much regional cooperation is based. Asean also gains from how RCEP helps to preserve the momentum of trade opening and shows how broadly accepted rules-based trade regimes can still be constructed despite all the protectionism and nationalism that we have seen of late — its members are highly exposed to trade and anything that buffers them from protectionism and bullying by more powerful partners is welcome.

Second, having said that, China will indeed gain much from RCEP. Its two great rivals — the US and India — are not in the agreement, leaving it as the most powerful economy within the agreement. Japan will, of course, be a balance to China but it does not have the heft that the US has. As a result, China will be able to leverage RCEP to shape how regional integration will be pursued in the future since it will have a big say in which countries join the deal in the future and how RCEP’s provisions are expanded and improved. It can protect its interests — for example, it can block Taiwan, which it considers a renegade province, from joining the agreement.

On this measure, it is probably right to say that the US and India may be disadvantaged by not being part of RCEP. The US now finds itself in an awkward position of not having any institutional mechanism through which it can engage economically with the rapidly growing Asia-Pacific markets — unlike China. Remember that China is not only in RCEP but has also painstakingly built a network of initiatives that expand its economic influence — the Belt and Road Initiative, the Asian Infrastructure Investment Bank, the Lancang-Mekong Cooperation and the many other bilateral economic agreements it has in the region. This is a challenge that the incoming Biden administration will have to address, among multiple other challenges that it will face.

Like many other initiatives pursued by Asean, RCEP appears to lack sizeable and immediate impact. But it would be wrong to underplay its impact. Companies will find it easier to trade across the region and there will be measurable economic benefits, both direct and indirect. Members will enjoy more trade and investment, some of it completely new and some of it diverted from non-members. We also think that RCEP will grow over time, bringing more parts of Asia-Pacific into its ambit and gradually addressing some of its shortcomings.

Its geopolitical impact will also be tangible. Asean has proved its worth as an irreplaceable platform for other powers to engage in. China will certainly gain additional influence. And unless the Biden administration can come up with appealing initiatives of its own, the US could lose out.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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