NZ and the world’s largest free trade zone

After eight years and 31 rounds of negotiations, the Regional Comprehensive Economic Partnership (RCEP) finally concluded in November when 15 member states signed an agreement which created the largest free trade zone in the world.

It includes the world’s second and third largest economies, covers about 30 percent of the world's population and accounts for about 29 percent of global GDP and 27 percent of the world’s total trade volume. It signals that, against the backdrop of Covid-19 and anti-globalisation, Asia-Pacific nations want to strengthen regional economic integration, support the rule-based multilateral trade system, and promote construction of an open world economy.

With a Biden administration on the way, the US is likely to rededicate itself to leading the liberal international order, so institutional competition centred on partnership and rule-making will return to the stage of international politics.

Political and economic implications of RCEP for NZ

First, RCEP strengthens the resolve of all countries in the region to defeat the pandemic and revitalise their economies. As Covid looms over the world, unilateralism and protectionism are on the rise and globalisation is facing a backlash.

The export-oriented economies of New Zealand and Australia, both trading countries with small domestic markets and strong external dependence, are facing unprecedented challenges. Self-seclusion severely damaged the economy and New Zealand is in recession for the first time in 11 years. Australia's record of sustained growth for nearly 30 years ended; unemployment plagues both governments.

But major trading partners of New Zealand and Australia are concentrated in East Asia and, despite the Covid pressure and protectionism, RCEP will boost trade and investment and create more jobs.

Second, as a developed power, New Zealand mainly focuses on resources, agriculture, and service industries, which are highly complementary to East Asia. In recent years, New Zealand and Australia have expanded markets outside China, including Japan, India, and Indonesia. RCEP covers all the Asia Pacific countries with important economic relations with New Zealand except the US. RCEP will help New Zealand to further strengthen its ties and substantial co-operation with regional economic partners. The agreement is conducive to promoting the integration of industrial, supply and value chains within the region. The openness and inclusiveness of RCEP gives New Zealand more space and more choices.

Third, the high level of economic and trade rules of RCEP will encourage New Zealand to deepen its domestic market economy reform and adapt to upgrading of new international trade rules. The country needs to accelerate its self-adjustment and attach importance to docking with international rules and regulations to generate an internal-external dual circulation and cultivate new advantages in terms of international co-operation and competition.

Lastly, New Zealand must adjust relations with China and refocus on common interests with South East Asia. Under the pandemic, and as a member of Five Eyes, New Zealand-China relations has been affected. The signing of RCEP shows that New Zealand and China share common interests in multilateral trade liberalisation. "Zero tariff" would allow New Zealand to develop more closely with other Asia-Pacific nations who will provide important hinterland underpinning during the current dilemma of tense relations between China and the US.

Whether New Zealand can transcend political allegiance and focus on its own national interests depends on whether it can move bilateral relations multilaterally and drive politics economically.

Predictions for RCEP's future

In the Asia-Pacific region, the large free trade agreements represented by RCEP and the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) provide two different paths for promoting regional economic integration, intensifying competition between different rules or models. Which of these can attract most Asian-Pacific nations to participate faster will probably become the leading free trade system in the region. Initial member states of the system will enjoy first-mover rule advantage and gain a relatively active position in the Asia-Pacific economic and trade relations.

Overall, RCEP shows Asia Pacific has paced up on high-level trade and investment liberalisation, and regional institutional competition over economy; trade has started and will become increasingly vigorous in the future.

On a larger global scale, RCEP will accelerate establishment of the "economic regionalisation +X" model and supplement the multilateral trading system. It is likely to become a new form of the evolution of globalisation. At present, CPTPP has generated certain influence and attraction in the global scope. For example, the UK intends to obtain an "entrance ticket" to join CPTPP through the economic partnership agreement signed with Japan.

When Biden's new administration takes office, the US is likely to repair its alliance strategy and get deeply involved in the development of Asia-Pacific by returning to CPTPP. So again, the model that attracts countries from outside the region may become the necessary development path. But, as a regional co-operation mechanism with a larger economic volume than CPTPP, RCEP may also generate strong institutional attraction in terms of market space and rule potential.

Although US strategy presents strong continuity, America is not in either trade agreement. RCEP is the largest trade agreement in the world and, if implemented before 2030, will increase global real income by US$285 billion a year, which will be twice as much as the CPTPP.

Both agreements encourage development of regional internal supply chain while actively opening the outside world. If the US government takes a negative attitude towards the two agreements for a long time, American enterprises may be disadvantaged. And the absence of the US also encourages member states of the two agreements to follow other leadership in the region, which will put the US at a geopolitical and economic disadvantage.

In RCEP, the common Rule of Origin may have the greatest impact on American enterprises. It allows companies in the region to ship products between RCEP members without worrying about specific origin standards in each country or in each manufacturing step. This reduces supply chain costs across Asia and encourages multinational companies exporting to RCEP countries to establish supply chains.

As RCEP members expand production networks, build interconnected systems, and establish stable supply chains of mutual trust, American enterprises may miss the opportunity of economic recovery.