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Asia-Pacific Partnership Creates New Global Trade ‘Center of Gravity’

A new Asia-Pacific free trade agreement set to enter into force on Jan. 1 will create the world’s largest trading bloc by economic size, according to a United Nations Conference on Trade and Development (UNCTAD) study published on Wednesday.

The Regional Comprehensive Economic Partnership (RCEP) includes 15 East Asian and Pacific nations of different economic sizes and stages of development. They are Australia, Brunei Darussalam, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand and Vietnam.

The RCEP will become the largest trade agreement in the world as measured by the gross domestic product (GDP) of its members and nearly one-third of the world’s GDP. By comparison, other major regional trade agreements by share of global GDP are the United States-Mexico-Canada agreement at 28 percent, the European Union at 17.9 percent, Africa’s continental free trade area at 2.9 percent and the South American trade bloc Mercosur at 2.4 percent, Africa’s continental free trade area at 2.9 percent.

UNCTAD’s analysis shows that the RCEP’s impact on international trade is likely to be significant.

“The economic size of the emerging bloc and its trade dynamism will make it a center of gravity for global trade,” the report said.

Amid Covid-19, the RCEP’s entry into force can also promote trade resilience, according to the report. Recent UNCTAD research shows that trade within such agreements has been relatively more resilient against the pandemic-induced global trade downturn.

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The agreement encompasses several areas of cooperation, with tariff concessions a central principle. It will eliminate 90 percent of tariffs within the bloc, and these concessions are key in understanding the initial impacts of the RCEP on trade, both inside and outside the bloc, UNCTAD noted.

Under the RCEP framework, trade liberalization will be achieved through gradual tariff reductions. While many tariffs will be abolished immediately, others will be gradually reduced during a 20-year period.

The tariffs that remain in force will be mainly limited to specific products in strategic sectors, such as agriculture and the automotive industry, in which many of the RCEP members have opted out from trade liberalization commitments. Trade between the bloc’s 15 economies was already worth about $2.3 trillion in 2019 and UNCTAD’s analysis shows the agreement’s tariff concessions could further boost exports within the newly formed alliance nearly 2 percent or approximately $42 billion.

This would result from trade creation, as lower tariffs would stimulate trade between members by nearly $17 billion, and trade diversion–as lower tariffs within the RCEP would redirect trade valued at nearly $25 billion away from non-members to members.

The report highlights that the RCEP members are expected to benefit to varying extents from the agreement. Tariff concessions are expected to produce higher trade effects for the largest economies of the bloc, largely due to the already low tariffs between many of the other RCEP members.

UNCTAD’s analysis shows Japan would benefit the most from RCEP tariff concessions, largely because of trade diversion effects. The country’s exports are expected to rise about $20 billion, an increase equivalent to about 5.5 percent relative to its exports to RCEP members in 2019.

The report also finds substantial positive effects for the exports of most other economies, including Australia, China, South Korea and New Zealand. On the other hand, calculations show RCEP tariff concessions may end up lowering exports for Cambodia, Indonesia, the Philippines and Vietnam.

This would stem primarily from the negative trade diversion effects, the report said, as some exports of these economies are expected to be diverted to the advantage of other RCEP members due to differences in the magnitude of tariff concessions.

For example, some of the imports to China from Vietnam will be replaced by imports from Japan thanks to stronger tariff liberalization between China and Japan. The report notes, however, that the overall negative effects for some of the RCEP members don’t imply that they would have been better off by remaining outside of the RCEP agreement. Trade diversion effects would have accrued either way.

“Even without considering the other benefits of the RCEP agreement besides tariff concessions, the trade creation effects associated with participation in RCEP softens the negative trade diversion effects,” the report said.

As an example, it cites Thailand, where trade creation effects completely compensate for the negative trade diversion effects.

Overall, the report found that the entire region will benefit from RCEP’s tariff concessions, with most of these gains resulting from trade diverted away from non-members.

“As the process of integration of RCEP members goes further, these diversion effects could be magnified, a factor that should not be underestimated by non-RCEP members,” the report added.