Assessing the Impact of the Regional Comprehensive Economic Partnership on ASEAN Trade.

• Author: Suvannaphakdy, Sithanonxay

1. Introduction

   Free trade agreements (FTAs) create both winners and losers, and the formation of the Regional Comprehensive Economic Partnership (RCEP) is no exception. RCEP is a regional agreement that aims to liberalize trade and investment, and to strengthen economic cooperation between ASEAN and its partners. It has gone through several rounds of negotiations since 2012, between the ten ASEAN member states and six dialogue partners, namely, Australia, China, India, Japan, South Korea and New Zealand. In November 2019, India's withdrawal reduced the number of negotiating countries from sixteen to fifteen. Nonetheless, RCEP remains the largest FTA in the world, with a combined gross domestic product (GDP) (on a purchasing power parity basis) of US$24.8 trillion (1) and a population of over 2.3 billion people (2) (as of 2018).

   The economic integration of ASEAN with its dialogue partners is a major milestone in the realization of the ASEAN Economic Community (AEC) that aims to assimilate ASEAN into the global economy. RCEP covers comprehensive trade and non-trade issues that can enhance further liberalization of trade and investment in the region. It consists of twenty chapters, (3) which extend the Association's ambition beyond the limits of trade and trade policy to include novel non-trade issues. Some of these, such as rules of origin, technical barriers to trade, trade in services, electronic commerce, intellectual property and investment, have been included in the AEC Blueprint 2025."

   Another salient feature of RCEP is that ASEAN has strong economic linkages with its "+5" partners through trade and investment. In 2018, the grouping's total trade in goods--imports plus exports--stood at US$2.8 trillion, 34 per cent of which was accounted by the bilateral trade between ASEAN and its five partners while 23 per cent represented intra-ASEAN trade. Moreover, total inflow of foreign direct investment (FDI) in ASEAN was valued at US$152.8 billion in 2018, 25 per cent of which was sourced from the +5 partners and 15 per cent from ASEAN countries (ASEC 2020). Taken together, intra-RCEP trade and investment already account for 57 per cent of total trade and 40 per cent of total FDI inflow in ASEAN, respectively. The large market size of RCEP, coupled with strong trade and investment linkages between ASEAN and its dialogue partners, suggests that any small reduction in trade barriers is likely to increase gains from trade among RCEP members.

   This study explores the trade effects of RCEP on ASEAN, particularly focusing on a traditional trade policy instrument--tariffs. The trade effects of tariff reduction include trade creation, trade diversion, preference erosion and trade reversion. This study provides additional insights on the future development of ASEAN trade. First, ASEAN countries have made substantial progress in tariff reductions, but existing ASEAN+1 FTAs have not yet achieved 100 per cent tariff elimination on imports from FTA partners. Second, RCEP has emerged in an environment with numerous overlapping FTAs, and this could erode ASEAN's trade preferences granted by the current FTA partners. Third, Japan has not yet entered into any FTA with its key trading partners (China and South Korea), but RCEP will reduce tariffs on imports from the nations. As RCEP will interact with many existing ASEAN+1 FTAs and reduce tariffs on imports from the dialogue partners, it is still unclear whether ASEAN member states stand to gain from tariff reduction under the mega trade agreement.

   This study contributes to the empirical literature on RCEP in three ways. First, it analyses the trade implications of tariff reduction under RCEP for all ten ASEAN countries. Previous studies have quantified this trade impact on smaller subgroups of Southeast Asian economies, such as Cambodia, Laos and Myanmar (Petri and Plummer 2020) and Brunei and Myanmar (Itakura 2015). As these economies are relatively small and have different trading partners, tariff reduction under RCEP could result in different trade effects for all ten ASEAN countries taken together.

   Second, the paper examines four possible trade effects of RCEP for ASEAN, namely, trade creation, trade diversion, preference erosion and trade reversion. Itakura (2015) and Petri and Plummer (2020) apply a computable general equilibrium model to assess trade gains or losses based on the concept of trade creation and trade diversion introduced by Viner (1950). As RCEP overlaps with existing ASEAN+1 FTAs, two additional effects--preference erosion and trader reversion--also need to be explored (Deardorff 2014).

   Third, this study assesses the trade effects of RCEP using both aggregate and disaggregated trade flows. Disaggregated trade flows are classified into three groups based on product classification of Broad Economic Categories (BEC), namely capital goods, intermediate goods and consumption goods.(5) Intermediate goods are used to measure the degree to which production processes are fragmented across countries (Yeats 1998). An increase in trade of intermediate goods driven by tariff reductions under RCEP indicates the intensity of global value chains among its member countries.

   This paper is organized as follows. The next section presents details of tariff reductions under existing FTAs in ASEAN. The subsequent section maps these FTAs onto the ten ASEAN countries and their +5 partners. The fourth section uses FTA mapping and trade direction to derive possible trade effects of RCEP. The following section highlights the trade implications of RCEP for ASEAN, while the final section concludes the study with policy implications.

2. Tariff Reductions in ASEAN

   ASEAN countries have made substantial progress in tariff reductions, but the degree of implementation of tariff elimination (zero tariffs) varies across the member countries. To promote intra-ASEAN trade, the Association established the ASEAN Free Trade Area (AFTA) in 1992 to eliminate tariffs on imports among its members. AFTA was then replaced by the ASEAN Trade in Goods Agreement (ATIGA) in 2010. In 2019, zero tariffs on imports among member states averaged at 98.6 per cent of total tariff lines (number of products). The ASEAN-6 countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) eliminated 99.3 per cent of total tariff lines, which was 1.6 percentage point higher than the figure attained by the ASEAN-4 countries (Cambodia, Laos, Myanmar and Vietnam) (97.7 per cent of total tariff lines) (ASEC 2019).

   To promote extra-ASEAN trade, member countries have formed individual regional FTAs with their dialogue partners, but with different commitments on tariff reductions. On average, ASEAN as a group has committed to eliminate 94.9 per cent and 92.9 per cent of total tariff lines under the ASEAN-Republic of Korea Comprehensive Economic Cooperation Agreement (AKFTA) and ASEAN-Japan Comprehensive Economic Partnership (AJCEP), respectively (Figure 1). The Association's commitment on tariff reductions under the ASEAN-India FTA is even lower; but given that India is currently not part of RCEP, this should not serve as a benchmark for tariff reductions under the trade agreement.

   In addition, commitments towards tariff reductions under each ASEAN+1 FTA also vary across ASEAN countries. Under the AJCEP, for instance, Singapore, Brunei and the Philippines committed to eliminate 100 per cent, 97.7 per cent and 97.4 per cent of total tariff lines, respectively. Meanwhile, Laos, Cambodia and Myanmar committed to eliminate 86.9 per cent, 85.7 per cent, and 85.2 per cent of total tariff lines, respectively (Fukunaga and Isono 2013).

   Different levels of tariff reductions in ASEAN+1 FTAs suggest that there is room for RCEP to reduce tariffs on imports among its members. In fact, RCEP should emerge as a region-wide FTA to consolidate the existing ASEAN+1 FTAs and reduce the negative impact of complicated rules of origin on trade flows.

3. Overlapping FTAs among RCEP Partners

   RCEP has created an overarching FTA among some countries that are already part of other agreements with ASEAN or its individual economies. As a matter of fact, all ASEAN countries already have FTAs with the grouping's major trading partners, partly because of the membership in ATIGA, ASEAN+1 FTAs (e.g., ASEAN-China FTA, ASEAN-Japan FTA, ASEAN-Australia-New Zealand FTA, ASEAN-Korea FTA) and CPTPP, but also because some of them have bilateral FTAs with each other (such as Japan-Singapore FTA, Malaysia-Australia FTA, Japan-Thailand FTA, inter alia).

   To see this, Figure 2 depicts the economies in RCEP, grouped by their membership (and the lack thereof) in ASEAN. It then shows, for each pair of economies, the current memberships in FTAs (denoted by "F") as reported to the WTO. (6) FTA mapping in the figure shows each pair of economies twice and is therefore symmetric around the diagonal, where economies are paired with themselves and the cells are empty.

   FIGURE 1 Coverage of Tariff Elimination in ASEAN, +5 Partners and India under ASEAN+1 FTAs ASEAN 94 9% Korea 90.5% ASEAN 92.9% Japan 91.9% ASEAN 79.7% India 78.8% ASEAN 94.7% China 94.1% ASEAN 94.8% New Zealand 100.0% Australia 100.0% Percentage of zero tariffs in total tariff lines NOTES: AANZFGA = ASEAN-Australia and New Zealand FTA; AJCEP = ASEAN-Japan Comprehensive Economic Partnership; ACFTA = ASEAN-People's Republic of China Comprehensive Economic Cooperation Agreement; and AKFTA = ASEAN-Republic of Korea Comprehensive Economic Cooperation Agreement. Korea = South Korea; PRC = People's Republic of China. SOURCE: Author's calculation using data from Kuno (2013) cited in Fukunaga and Isono (2013). Note: Table made from bar graph. Figure 2 reveals three salient features of the existing FTAs among RCEP partners. First, the RCEP countries are already heavily linked by numerous existing FTAs. Of the 105 possible pairs of economies in the fifteen-country RCEP, 103 have FTAs. (7) The remaining...