JAKARTA, INDONESIA — On 15 November, ASEAN member countries–alongside Australia, China, Japan, Korea and New Zealand–signed the Regional Comprehensive Economic Partnership (RCEP) on the sidelines of the annual ASEAN summit which was held virtually.
RCEP is the largest trade bloc ever accounting for 30 per cent of the global economy, 30 per cent of the world population, reaching 2.2 billion potential customers.
Some see the RCEP will expand China’s influence in the Asia-Pacific economy after the departure of the US from the Trans Pacific-Partnership (TPP) in 2017–now changed to the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP).
“The signing of the RCEP Agreement is a historic event as it underpins ASEAN’s role in leading a multilateral trade agreement of this magnitude, despite global and regional challenges and eight years of negotiations,” said ASEAN secretary-general Lim Jock Hoi, adding that the trade pact would boost business sectors hit by the COVID-19 pandemic.
TPP and RCEP: What are the differences?
Senior economist Fadhil Hasan from INDEF told TOC that the US once initiated the establishment of the TPP to counter China’s influence on global trade.
However, President Donald Trump quit the trade pact citing that it had hurt the American manufacturing sector.
One of the factors that distinguish both pacts is that RCEP does not interfere in issues such as human rights and labour protection, triggering protests from activists opposing the RCEP.
“The US may return to the TPP under Biden. However, we are still unsure, as Biden may seek to prioritise rebuilding the US economy which has been badly hit by the COVID-19,” the economist stated.
It is also feared that Biden will face opposition at home regarding the TPP, as Democrat politicians are protective over issues such as human rights, the environment, and protecting labour and small businesses.
How can the pact benefit Indonesia’s economy?
A free trade agreement like RCEP has positive sides for Indonesia as it can challenge a country to be more efficient, productive, and innovative in increasing an industry’s competitiveness level.
However, Fadhil appears to be less optimistic about the agreement’s possible effects on the manufacturing sector.
Indonesia’s manufacturing sector, he said, will be “under pressure as our manufacturing industry is not as strong as that of China or South Korea”.
Citing data from the Ministry of Trade, Fadhil highlighted that until 2032, the RCEP’s contribution to the Indonesian economy is projected to each only reach 0.05 per cent.
However, if Indonesia does not join, the GDP will shrink 0.07 per cent.
“Still, it is an empirical study. It depends on how Indonesia can boost its efficiency. RCEP means an opportunity. Can we use it? We can’t predict anything yet; we will see the evidence later,” he added.
In 2014, Indonesia’s Ministry of Trade and Industry warned that the RCEP target of tariff elimination may be up to 95 per cent, as Indonesia was not ready yet to open its market to industrial nations such as China, South Korea, and India—which does not sign the agreement.
India did not join the treaty, fearing that the RCEP would affect its particular industry. Also, the recent clash with China over the disputed region contributed to New Delhi’s decision.
The free trade pact will do more harm than good for developing countries
An analysis from Sachin Kumar Sharma of Indian Institute of Foreign Trade titled “A Quantitative Assessment of India’s Withdrawal from RCEP: Issues and Concerns” revealed that the newly-signed free trade pact will trigger ASEAN member countries’ trade deficit.
If India had joined RCEP, ASEAN trade balance would contract US$3.157 million. While without India, the deficit would widen to US$4.344 million, Sharma told Bisnis.
No natural leader in RCEP like the US in then-TPP
Despite China’s economic dominance, the RCEP has no natural leader unlike in the US-backed TPP, as the economy of the RCEP members tends to be competitive, referring to the paper written by Petri and Plummer from the Peterson Institute for International Economics (PIIE) in October 2017.
However, a trade pact without the US will contribute less than that with the US presence. Should the US have joined the TPP, the global output would grow US$492 billion in the next decade.