On Sunday November 15 the countries party to the Regional Comprehensive Economic Partnership (RCEP) announced that trade negotiations had successfully concluded after several years of delays. The deal will be the largest free trade agreement (FTA) in Asia and is expected to create new opportunities for growth, including for South Korea.
The idea of an Asia-wide regional free trade has been around as early as 2001, introduced by the East Asia Vision Group (EAVG). Over time, China and Japan began to advocate for the East Asia Free Trade Agreement and the Comprehensive Economic Partnership in East Asia, respectively, with different partners. The rivalry as to which country should take the lead stalled trade negotiations until ASEAN broke the deadlock in April 2012 with the announced launch of RCEP. On November 20, 2012, 16 countries—all ASEAN members, China, Japan, South Korea, Australia, New Zealand and India—formally initiated the partnership in Phnom Penh. Since then, there have been 31 rounds of negotiations and 19 ministerial meetings.
Given the economic diversity of member countries as well as the complex nature of the Asian “noodle bowl” of FTAs and policies, the RCEP negotiations were not without their challenges. China clashed with Japan and Australia over which provisions to focus on, preferring to address tariffs over non-tariff barriers such as government procurement rules, and largely won. More significantly, India was unable to meet its stated need to protect its domestic market from cheap Chinese imports and ultimately walked away from the deal in 2019. Still, the remaining 15 countries were able to reach agreement. The finalization of Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 without the United States also provided extra motivation to accelerate RCEP negotiations against the looming threat of protectionism.
While much emphasis has been placed on RCEP’s low level of ambition, it is nevertheless a big deal. Once it goes into effect, RCEP will gradually eliminate 90% of the tariff lines among its members over a 20-year period. Though nothing to scoff at, this covers less than some other major agreements. Additionally, around 83% of trade flows between members are already covered by an existing trade agreement, though it is how RCEP consolidates these rules that will likely provide the most significant and immediate benefits.
RCEP streamlines different rules of origin to make intra-regional trade regional much easier. Currently, all of ASEAN’s trade agreements have different rules of origin, governing how much of a product must be sourced from the countries party to the deal for it to benefit from the agreement. In practice, this has meant goods produced in ASEAN intended for export to another member state may face different sourcing requirements. RCEP would reduce the content required to receive tariff benefits to as low as 40 percent for some goods. By creating a singular set of rules, RCEP would effectively eliminate this legal barrier, creating huge opportunities for further trade integration in Asia.
For Seoul, the finished agreement is a very welcomed development. The Korea Institute for International Economic Policy (KIEP) projected a growth effect of 0.41 to 0.62% for the South Korean economy from the reduced tariffs and a subsequent $4.2 to $6.8 billion increase to consumer welfare. Exports to RCEP member countries represent half of Korea’s total exports, of which 25% goes to China and the other 25% to the rest – with ASEAN and Japan making up the largest portion of this share at 17% and 5%, respectively. As such, South Korea will benefit greatly from the liberalized tariffs, in fact with most of these gains expected to come from trade with ASEAN and Japan. Especially favored are the automobile and steel sectors. Tariffs of trucks and passenger cars will be gradually reduced from more than 40% and 30% to zero in the ASEAN market. Auto parts such as seat belts and air bags will also receive lower tariffs. Likewise, Korea’s steel products will be more competitive to the region following the elimination of 20% tariffs in the Japanese market.
Furthermore, RCEP marks the first trade agreement between South Korea and Japan, the only country in the agreement with whom South Korea does not have an FTA. It will be a positive development for both countries as their bilateral economic relationship has soured in the recent past due to a trade dispute stemming from a historical issue. Similarly, the regional partnership could lead to a more substantial China-South Korea Free Trade Agreement, which is currently shallow. Lastly, the trade pact could propel the consummation of the trilateral FTA among South Korea, Japan, and China to address issues not covered in RCEP.
However, the deal is not without its limitations. Without more ambitious rules on labor, competition, environment, and other areas, South Korean companies may not enjoy sufficient legal protections to ensure a level playing field with their competitors. This is especially true with regard to the lack of a chapter covering state-owned enterprises and Beijing’s propensity to empower these firms. All of these issues are more directly addressed in the CPTPP, which South Korea has expressed interest in joining but has not yet done so.
This is all the more concerning when considering RCEP can help to promote trade integration with China without enough protections against Beijing’s economic coercion. Chinese retaliation against the South Korean economy starting in 2016 over the deployment of the Terminal High Altitude Area Defense (THAAD) missile defense battery by some estimates have resulted in at least $24 billion in losses and has left an indelible impact on the South Korean psyche. Moreover, as demonstrated by the ongoing dispute with Australia, these tactics are not going away. Without strong legal protections, including a dispute settlement mechanism—in this regard RCEP is mainly focused on expropriation which would not apply to these Chinese measures—South Korean firms could again fall prey to the whims of Beijing. With the WTO Appellate Body hindered by the U.S., there are even less avenues for recourse now.
Despite these concerns, RCEP still represents a great opportunity for South Korean companies, especially at a time of global recession. It is a positive step, but should be the first of more to come in the way of tackling more difficult, yet more fruitful challenges.
Kyle Ferrier is a Fellow and Director of Academic Affairs at the Korea Economic Institute of America (KEI). Sophie Joo is an intern with the KEI and a recent M.A. graduate with a concentration in International Political Economy at Johns Hopkins University School of Advanced International Studies. The views expressed here are the authors’ alone.
Photo from the ASEAN Secretariat’s photostream on flickr Creative Commons.