The Economist: The big one
A new trade agreement covering about 30% of the global economy has been signed. The Regional Comprehensive Economic Partnership (RCEP) includes China, Japan, South Korea, New Zealand, Australia, and 10 Southeast Asian economies. It’s the world's largest in terms of the amount of gross product covered, slightly above the US-Mexico-Canada Agreement (USMCA) according to most estimates. About 2.1 billion people reside in member nations. India is not in the deal at this point but can join at a later date.
It’s been a long time in the making, with negotiations dragging on for about eight years. With the coronavirus pandemic causing economic dislocations worldwide, however, there was an even greater incentive to get it done (though member nations still have to ratify it). In addition, the agreement may help China, Japan, and South Korea reach a free trade agreement; they’ve been struggling for years to work through barriers and reach an accord.
Although clearly a landmark in terms of the proportion of the world economy which is covered, tariffs among most of these nations were already low or nonexistent. While further reductions will clearly enhance growth prospects, they will be phased in over time, and the starting points are generally not that high.
Unlike more comprehensive trade agreements which attempt to reduce a variety of barriers to free trade, the primary goal of the RCEP is to reduce tariffs. In fact, some observers note that, from China's perspective, it is particularly attractive in that it is narrowly focused on tariffs rather than other issues. The agreement touches on intellectual property, but environmental protections and labor rights are not addressed.
Free trade is good for the economy. It can help open markets, strengthen supply chains, and enhance economic growth. This basic fact of economics has been proven over centuries. The increased Chinese influence may prove to be detrimental to the ability of the US to compete in the region. This outcome was largely preordained when the US pulled out of the Trans Pacific Partnership negotiations in early 2017, but may be reversed through future policy shifts.
As an illustration of the potential magnitude of a major trade deal, we analyzed the benefits to the United States having the USMCA in place and found that it leads to an additional $64.9 billion in gross product and almost 600,900 jobs compared to trading under the terms that would otherwise be in place (including multiplier effects). While the RCEP is not as comprehensive as the USMCA, it will nonetheless yield benefits to all member nations.
As nations struggle to recover from the pandemic fallout, free trade can help by enhancing competitiveness and reducing costs. Let’s hope the US comes to the party. Stay safe!