How does the major trade agreement “Regional Comprehensive Economic Partnership” influence Latin America and what are its opportunities?

1. Regional Comprehensive Economic Partnership (RECEP)

The Regional Comprehensive Economic Association or “Regional Comprehensive Economic Partnership” (RCEP) is considered the largest trade agreement globally. This agreement is the most politically and economically solid trade bloc, signed on November 15, 2020 during the 37th ASEAN Summit (Association of Southeast Asian Nations) or the Association of Southeast Asian Nations. That is, after eight long years of negotiation, this agreement is signed by 15 countries, which make up 30% of the world's GDP, 28% of global trade and a third of the world's population, and seeks to increase trade by US$ 42,000 billion in an area that brings together the second most powerful economy in the world, China, among other countries in the Asia-Pacific region. Thanks to these characteristics, it can be said that this agreement is the most significant due to its great scope in the aforementioned aspects.

It must be remembered that while the Trans-Pacific Partnership (TPP), today the Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP), also known as the TPP 11, was a mega bloc led by the United States (US), but then after the US left, the RCEP bloc is led by China, which soon turned into a geopolitical and geostrategic competition between the US and China that was already brewing during the Obama administration, then deepened during the Trump administration, and is still ongoing during the Biden administration.

This is an agreement signed by China, Japan, Brunei, Cambodia, Laos, Singapore, Thailand, Vietnam, Australia and New Zealand, while for South Korea it will come into force on February 1, 2022 (60 days after its ratification). The rest of the signatory countries, including Malaysia, Indonesia, Myanmar and the Philippines, are expected to ratify it soon. In addition, although India was part of the negotiations, it decided not to accompany their conclusion, which occurred in parallel with a notable worsening of the relations of the Indian Ocean power with China.

Even without India, this is the largest trade agreement in the world, and one that is close to coming into force because it has already been signed by China, Japan and two ASEAN members. While talks began in 2009 under ASEAN leadership, negotiations were only launched in 2012 with strong support from China.

Furthermore, through the RCEP, the first trade agreement between China, Japan and South Korea was achieved. Regarding its impact, Latin America tends to think that it will be limited only to the benefits that Australia and New Zealand will obtain in the export of food to the RCEP members, but it is overlooked that the ASEAN members themselves, China, Japan and South Korea are also producers and exporters of food that already compete with Mercosur and other Latin American countries in that market and now will improve the export conditions. United Nations Conference on Trade and Development (UNCTAD) or the United Nations Conference on Trade and Development, expresses that the volume of trade within global production chains has increased dramatically between 2000 and 2018. In the last decade, the least developed members of the RCEP increased their share of world production by an average of 15 percentage points, with most companies in these global production networks providing inputs for further production in other countries, often intraregionally. In this sense, the diversification of supply chains and Foreign Direct Investment will accelerate as companies find it easier to use ASEAN countries as a production base given the lower trade costs. For example, the production of electronic components for almost 70% of world production is concentrated in this region, with the main suppliers and producers being Samsung or Apple (ASEAN Investment Report, 2021).

For countries such as China and Japan, more than 85% of merchandise exports are manufactured goods, but less developed parts such as Cambodia, Laos, Myanmar and Vietnam have rapidly increased their manufacturing output, mainly in low-tech manufacturing production. Despite the global trend of stagnating Foreign Direct Investment (FDI) over the past decade, RCEP member countries experienced an increase in FDI. The region, particularly ASEAN and China, is attractive for new investment projects and export-oriented investments (ASEAN investment Report, 2021).

Now, in the following image you can see the conformations of the RCEP blocks. (Regional Comprehensive Economic Partnership) and CPTPP (Comprehensive and Progressive Agreement on Trans-Pacific Partnership).

2. Benefits for RCEP members

The treaty provides for tariff reductions on manufactured goods with at least 40% of parts from the RCEP region, which currently account for 65% of goods traded between the signatory countries. About 20 years into the treaty, this proportion is expected to reach 90% of products.

According to Joachin Von Amsberg, vice president of the Asian Infrastructure Investment Bank (AIIB), the reduction in state revenues from tariffs should not affect the provision of public services such as health or social spending, which are generally financed by direct taxes, such as income tax. In other words, in 2020, this reduction was 1,5% and according to forecasts from the Asian Development Bank, the year that ended should have recovered by 7%, but a new slowdown of 5,3% is expected in 2022. For this reason, the AIIB official believes that the RCEP agreement should allow member countries to facilitate, simplify and reduce the cost of trade between them, specifically among the tariffs still in force (Xinhuanet, 2020).

By allowing more countries to trade with each other in goods and services, RCEP shows that it has the potential to generate even greater benefits, such as lifting millions and millions of people out of poverty and into prosperity. Furthermore, as the world's largest trade pact, it provides a very hopeful signal at a time when some doubt the benefits of trade, which is unjustified and beneficial to those who are part of this bloc.

Furthermore, this agreement allows small and medium-sized enterprises to access and participate in digital markets, trade and services. Also important is the reduction of tariffs for large companies that trade in basic products or industrial goods.

At the same time, the great potential of free trade agreements such as RCEP is highlighted to provide more opportunities to SMEs that offer cross-border services and participate in the trade of goods through digital platforms.

The next step in regional integration is seen as involving e-commerce platforms becoming regional backbones to further generate and facilitate cross-border trade, and opening up even more opportunities for small businesses to benefit from business they can conduct in neighboring countries. Therefore, free trade areas are seen as providing a highly important foundation (Xinhuanet, 2020).

Finally, many countries in this agreement are committed to implementing the Paris Agreement to achieve a carbon-neutral economy, which requires huge investments in energy and transportation systems.

3. The content of the RCEP

The RCEP contains a total of 20 chapters containing obligations for trade in goods, most of which follow World Trade Organization commitments. However, the RCEP has left out many non-trade aspects such as environmental and labor rights and standards. Furthermore, the legal documents of the RCEP countries will reflect a substantial scope for implementing national security and public health policies that each country can implement.

Another important aspect is the "rules of origin"For RCEP exporters to enjoy tariff benefits when exporting to other member countries, they would have to comply with their common framework of rules of origin, which means obtaining at least 40% of inputs within the RCEP bloc.

On average, more than one-third of all exports from an RCEP member are imported by another RCEP party. For investment, the RCEP offers no improvements compared to existing investment agreements between member countries. The RCEP encourages members to adhere to Intellectual Property (IP) Conventions and reaffirms flexibilities related to the World Trade Organization (WTO) Doha Declaration on Trade-Related Aspects of IP Rights and Public Health. For e-commerce, the RCEP is less ambitious than other similar agreements on issues such as data localization.

4. The regional framework of Latin America

COVID-19 arrived in Latin America (LATAM) in the middle of the first months of 2020, in March of that year. This pandemic generated great impacts on global trade, generating a drop of up to approximately 10,5%.

During the first quarter of 2021, global trade registered a 5,3% drop, which was reflected in foreign trade activities in several countries. To date, there are new variants of COVID-19, such as omicron, deltacron, among others, that would affect foreign trade and generate great uncertainties in supply chains (Maritime World (2021).

According to the  Economic Commission for Latin America and the Caribbean (ECLAC) (2021), Alicia Bárcena Ibarra, Executive Secretary, indicates that the countries of the LATAM region will present an asymmetric and heterogeneous recovery, as a result of the great uncertainty caused by the crisis derived from the COVID-19 pandemic.

In addition, the ECLAC official estimates that the global economy will grow by around 6% this year, and by 2022% in 4,5. On the other hand, the growth projected for Latin America in 2021 and for this year 2022 is lower than that projected in developed economies. In addition, there was low productivity and high informality, unemployment, inequality and poverty, which were further exacerbated by the pandemic, which is why ECLAC urges governments to continue providing basic income to assist with the emergency, with amounts and coverage similar to those in 2020 and 2021.

On the other hand, 2021 was a year of recovery and record exports of various products, services and finances for the countries of the region, where central banks have responded with interest rate hikes to contain inflation. The RCEP agreement would be a good block to be able to boost and generate greater growth for the LATAM countries interested in joining, given that trade exchange with the 15 countries of said agreement will be very rewarding for everyone.

5. Impacts and opportunities of the RCEP agreement for Latin America and the Caribbean

Lijima Cruz, H. (2021), mentions that Latin American and Caribbean (LAC) countries have made efforts, individually, to access the Asian market through bilateral agreements. In a scenario where trade and investment in Southeast Asia is constantly increasing, the most important is the relationship with China, an increasingly important trading partner for South America.

On the other hand, China is the second largest supplier for many countries, LAC exports to ASEAN countries increased at an average annual rate of 11.8% for the same period, while for China it was 20.4%.

The Pacific Alliance (PA) is one of the agreements between LAC and Asia that has had the greatest impact on the global economy, and which includes Mexico, Colombia, Peru and Chile. The previous agreement, the Trans-Pacific Partnership, was intended to be the United States' gateway to the Asian market and to be China's hegemonic commercial rival on the American continent. The withdrawal of that country during the Trump administration left China with an open field that it has taken advantage of to organize and sign the RCEP. The United States has bilateral trade agreements with all LAC countries, except MERCOSUR, aimed at the growth of US exports rather than the development of a complex Latin American export apparatus. The most obvious demonstration is the division between the countries of the Caribbean Basin, the System for Central American Integration (SICA) and the Treaty between Mexico, the United States and Canada (T-MEC) and those of South America, where the former export cheap labor in the form of a maquiladora industry and the latter basically grains and minerals. On the contrary, the United States exports refined gasoline to all countries in the hemisphere, which is its main product sold abroad. Ecuador is the most recent example of US interference in the internal politics of countries in the region.

The articulation of Latin American and Caribbean markets with the Asian countries of the RCEP is a way to strengthen relations in the global south to face the new world that emerges after the definitive change of economic axis from the Atlantic to the Pacific Ocean in 2022.

With the recent formalization of the Regional Comprehensive Economic Partnership (RCEP), Latin America and the Caribbean (LAC) has the opportunity to access the largest economic bloc in the world, which accounts for 30% of global GDP. LAC countries have made efforts, individually, to access the Asian market through bilateral agreements. Alliances such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or TPP-11 and the Pacific Alliance (PA), have not managed to establish treaties at the interregional level. The RCEP is an opportunity and an alternative for LAC blocs to coordinate and use this new market as a catapult for recovery from the crisis derived from COVID-19.

Therefore, it is stated that bilateral trade between Asia and Latin America has grown continuously in recent decades, but integration between the two regions has much room for improvement. According to Cynthia Arnson, an expert at the Wilson Center, since the rise of trade between Latin America and China increased and exploded in the 2000s, led almost exclusively by the rapid growth of China, and its need for raw materials, countries in the region have sought greater integration with Asia in general, not only with China but in particular with Japan, South Korea and India. Therefore, it will be a magnificent opportunity for LAC countries to be able to offer their raw materials to this large trading bloc. (Arnson Cynthia, 2020)

On the other hand, an important question arises for the countries of Latin America and the Caribbean: whether they pursue integration with Asia individually or jointly, such as through the Pacific Alliance or Mercosur, added the Wilson Center expert.

Unless the Biden administration returns to the TPP, Latin American countries will be drawn to the larger market share in Asia that is now represented by the RCEP. In other words, there is a possibility that a possible scenario like the one mentioned above will emerge, given that in every trade agreement of this type, the rules of the game are also affirmed in the geopolitical and commercial framework.

Nicolás Albertoni, professor at the Catholic University of Uruguay and associate researcher at the Laboratory of International Policy and Security at the University of Southern California, considers that it is a disadvantage for countries that are not part of this type of mega agreements; therefore, he recommends making a decision and joining the commercial bloc of their choice (Albertoni Nicolás, 2020). Finally, in the midst of a struggle for world hegemony between the dragon (China) and the eagle (the United States), where the former seems to take advantage by being part of this great commercial agreement, for many internationalists "China leads the RCEP commercial bloc" after the withdrawal of India and the United States from the CPTPP. In addition, it can be said that many countries could be more interested in joining this agreement due to the better opportunities it provides in terms of the progressive reduction and elimination of tariffs, and the various opportunity markets that exist. An additional fact about this agreement is that there is a better opportunity for access to technological transfer, an issue that China has been working on to demonstrate its strategy to strengthen geopolitical and commercial ties with all member parties, with the aim of promoting and creating greater regional development.

Mayron W. Ponce de Leon Sierra is a Data Analyst at the Directorate of the Origin Unit in the Ministry of Foreign Trade and Tourism of Peru. PhD candidate in Global Business Administration at Ricardo Palma University.

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Highlighted

• Arnson Cynthia (2020). The keys to RCEP, the largest free trade agreement in the world (and how it affects Latin America). Available in https://www.bbc.com/mundo/noticias-internacional-54937458
• ECLAC (2021). Trade in the region will see a significant increase in 2021, but recovery will be asymmetric and heterogeneous in a context of uncertainty. Available in https://www.cepal.org/es/comunicados/comercio-la-region-tendra-importante-alza-2021-pero-recuperacion-sera-asimetrica
• ASEAN Investment Report (2021). An Assessment of the Regional Comprehensive Economic Partnership (RCPE) Tariff Concessions, UNCTAC, December 2021. Available at https://unctad.org/system/files/official-document/ser-rp-2021d16_en.pdf
• Hiromi Lijima Cruz (2021). RCEP: An Alternative for Latin America and the Caribbean. Available in http://www.obela.org/nota/la-rcep-una-alternativa-para-america%20-latina-y-el-caribe
• Albertoni Nicolas (2020). How does RCEP affect Latin America?. Available in https://www.bbc.com/mundo/noticias-internacional-54937458

• Maritime World (2021). Omicron variant threatens the nascent recovery of global trade. Available in https://www.mundomaritimo.cl/noticias/variante-omicron-amenaza-la-incipiente-recuperacion-del-comercio-mundial
• Xinhuanet (2020). INTERVIEW: RCEP expresses benefits of free trade, expansion of regional integration, says AIIB vice president. Available at http://spanish.xinhuanet.com/2020-12/01/c_139555426.htm