January 3, 2022
The Regional Comprehensive Economic Partnership, which takes effect on Jan 1, will promote economic growth in the Asia-Pacific region as it will open up markets and counter protectionism in the post-pandemic era, analysts said.
The RCEP, the world’s biggest free trade agreement, aims to establish a unified market by reducing tariffs and non-tariff barriers. It groups 15 Asia-Pacific economies whose combined population, gross domestic product and trade account for about 30 percent of the world total.
Analysts see China, one of the signatories of the trade pact, as a “pivotal market” for other RCEP countries.
“RCEP will play a role in creating some degree of confidence that trade integration — at least in moderate terms — will continue. In an age of growing protectionism and inward-looking policies, this is welcome,” said Manu Bhaskaran, chief executive of the Singapore-based think tank Centennial Asia Advisors.
Francis Chua, founding chairman of the International Chamber of Commerce, Philippines, said RCEP will consolidate all 10 members of the Association of Southeast Asian Nations, or ASEAN, with Australia, China, Japan, South Korea, and New Zealand — the other members of the trade pact — into “a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement”.
ASEAN is comprised of Indonesia, Thailand, Singapore, Philippines, Malaysia, Vietnam, Brunei, Cambodia, Myanmar and Laos.
Chua said RCEP will ensure the opening of markets and strengthen supply chains that can support economic rebound. Apart from requiring trade partners to cut tariffs, he said RCEP will enhance the harmonization of non-tariff measures such as product standards for food safety, packaging and labeling requirements.
At the same time, some analysts have pointed out RCEP’s promise of unfettered trade and its many benefits will take time as the tariff reduction will take place gradually within the next 20 years.
“While any trade agreement coming to force is always good news in a world with more protectionist forces, RCEP is unlikely to help much as the immediate reduction in import tariffs is limited,” said Alicia Garcia Herrero, chief economist for Asia Pacific at French investment bank Natixis.
However, a joint report from the Hong Kong Trade Development Council and the Association of Chartered Certified Accountants said RCEP will strengthen the supply chain as most raw materials and intermediate products will be able to move freely without trade barriers.
Asian Development Bank economists have estimated that by 2030, RCEP will increase the income of its member economies by 0.6 percent and create 2.8 million jobs. They also see a rise in intra-RCEP investment. This is because RCEP prohibits performance requirements — like a specific percentage of domestic content or technology transfer — being placed on investors as conditions for market access.
Sanjay Mathur, chief economist for Southeast Asia and India at ANZ Bank, cited China’s huge economy and how it will serve as the “pivotal market” for RCEP members.
RCEP member countries “will now have (increased) access to the second largest economy in the world, so that is a huge step forward”, he said.
Bhaskaran said apart from providing a huge market, China, as a leading nation in Asia, can nudge RCEP members to adopt “broader and deeper integration” in the region.
Danilo Fausto, president of the Philippine Chamber of Agriculture and Food Inc, has some concerns for the Philippine agricultural sector. While he believes the trade pact will open up markets for Philippine products, the Philippines also has to allow the entry of more imported products — a risky proposition for the nation’s farm sector.
He pointed out that unlike their counterparts in other countries, Filipino farmers do not enjoy big government subsidies, huge land tracts or large credit-access. This has long been a problem in Philippine agriculture which is not among the government’s priority sectors.
RCEP’s expected windfall is good news to a region that has been battling the pandemic for the last two years. Lockdowns and closed borders have led to recession in 2020, with the International Monetary Fund noting that the Asia-Pacific regional economy has contracted by 1.3 percent.
Apart from economic impact, the lockdowns and restrictions had a huge social cost, according to Aimi Zulhazmi Abdul Rashid, associate professor at the Business School of Universiti Kuala Lumpur.
Aimi Zulhazmi said the lockdowns have led to mental health problems, raised divorce rates and increased incidence of child abuse.
“This act of confining people for a long time is (counter) productive. It also increases the cost of health care that put serious pressure on the governments’ coffers,” he said.
Analysts said the more urgent task for the region now is how to open the economies without sacrificing public health.
Garcia Herrero of Natixis noted that Asia-Pacific authorities are also closing borders again “which will further push up transportation costs, making trade more difficult”.
After conducting mass vaccination programs, Asia-Pacific governments started easing travel and social distancing measures in the past few months, keen to revive trade and travel that were disrupted by the pandemic. The IMF forecast Asia- Pacific to remain the fastest growing region in the world, with regional growth seen at 6.5 percent by the end of this year.
But the detection of the fast-spreading Omicron variant of the novel coronavirus has pushed Asia-Pacific officials to recalibrate their plans to reopen borders. Amid new infections and detection of community transfer of the Omicron variant, authorities have started to restore movement curbs that were imposed at the height of the pandemic.
Japan banned the entry of tourists, while returning Japanese citizens and foreign residents will have to quarantine in government-designated facilities.
Elsewhere in the region, Singaporean airlines will no longer be allowed to sell new vaccinated travel lane flight tickets for travel into Singapore from Dec 23 until Jan 20. This also applies to those traveling by land from neighboring Malaysia.
Thailand has reinstated the mandatory quarantine for tourists and scrapped a quarantine waiver, starting Dec 21.
New Zealand has postponed its phased border re-opening plans until the end of February and has increased the quarantine period for returning citizens and residents from a week to 10 days.
The ADB said in its December economic outlook report that the Omicron variant “brings additional uncertainty” to developing Asia. It said that Omicron is highly-transmissible and its economic impact could be “substantial”.
The Manila-based lender said even if there is significant progress in vaccination — nearly half of developing Asia’s population was fully vaccinated as of Nov 30 — this still lags behind a 58.1 percent vaccination rate in the US and 67.2 percent in the European Union. Vaccine progress in the region is also “highly uneven”.
“In 20 economies in developing Asia, the share of the population that is fully vaccinated is still less than 40 percent, leaving them susceptible to renewed outbreaks,” the ADB said.
Mathur, from ANZ Bank, said COVID is an “exogenous shock” to the economic system and that the “situation will not change until the pandemic is behind us”.
“The key to recovery in the near term will be how quickly stringent restrictions on economic activity (like traveling) are relaxed which will then allow businesses, workers and consumers to return to normal life,” Centennial Asia’s Bhaskaran said.