Korea joins RCEP, a light but significant trade agreement
Published: 01 Feb. 2022, 00:00
Updated: 03 Feb. 2022, 12:24
![Cargo to be shipped abroad loaded on a dock in Busan on Jan. 21. The world’s biggest trade pact, with 15 countries in Asia Pacific region, went into effect starting Feb. 1 in Korea. [YONHAP]](https://koreajoongangdaily.joins.com/data/photo/2022/02/03/ebc361e4-9f18-41b3-b565-271304e4ae2f.jpg)
Cargo to be shipped abroad loaded on a dock in Busan on Jan. 21. The world’s biggest trade pact, with 15 countries in Asia Pacific region, went into effect starting Feb. 1 in Korea. [YONHAP]
The actual trade benefits of the Regional Comprehensive Economic Partnership (RCEP) will not be fully effective for decades and are not necessarily all that significant. What matters most are the geopolitical implications of the deal.
It will bring Japan and Korea together into a free trade arrangement despite the ongoing conflicts between the two. Relations, which have always been tense, broke down almost completely in 2019 when Japan restricted the export of key materials to Korea.
The RCEP is a bit of a stealth free trade agreement (FTA), allowing the two countries to quietly get closer without triggering political storms at home.
It will also help to stall or stop the slide toward protectionism that has accompanied the China-U.S. trade war. The basic terms will help ensure smooth exchange of goods and services between the signatories regardless of the larger geopolitical drama.
The RCEP took eight years of negotiation and was effective Jan. 1, with Korea formally agreeing to the deal on Feb. 1.
A total of 15 countries have signed on: Korea, China, Japan, the 10 Asean countries, Australia and New Zealand.
The underlying agreement kicks in over 20 years and will eventually end tariffs on 91.5 percent of products on average.
Asean markets have agreed to lower tariffs on between 91.9 and 94.5 percent of Korea's key export items, including automobiles, steel and petrochemical goods. The current Korea-Asean FTA reduces tariffs on 79 percent to 89 percent of products.
China will reduce tariffs on 91.1 percent of products from Korea, such as steels and machinery.
Japan, which has no previous free trade deal with Korea, has agreed to open up 83 percent of its market— 94.1 percent for manufactured goods and 49 percent for agricultural products.
Korea is to do the same for Japan.
According to the UN Conference on Trade and Development (UNCTAD), the trade deal involves countries generating a total of 30.5 percent of the world's GDP. The U.S.-Mexico-Canada USMCA agreement covers 28 percent of the world's GDP and the EU 17.9 percent.
RCEP members have 2.3 billion people, one-third of the world's population.
Intraregional trade among RCEP member countries as of 2019 was $2.3 trillion, according to an UNCTAD report.
The report notes that the newly formed alliance will increase intraregional exports by nearly 2 percent, or $42 billion.
The Asia Development Bank (ADB) forecast that the RCEP could generate global income gains nearly twice those of the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP).
ADB's report added that the trade deal will contribute to deepening regional production links and improve productivity.
Korea's economic benefit
Korea has more free trade agreements than any other country.
Since its first FTA was signed in 2004 with Chile, the country has ratified 17 bilateral and multilateral trade deals with 57 countries, including the one with China that went into effect in 2015.
A full 78 percent of Korea's trade is with countries with which it has agreements.
Despite the aggressive signing of FTAs, President Moon Jae-in stressed the need for more.
"We need to further expand our export market through free trade agreements including the RCEP, which goes into effect next month," President Moon said during a cabinet meeting on Jan. 4.
RCEP is especially important as Korea's economy is still export driven.
Last year, exports hit $644.5 billion, up 25.8 percent and a record. Imports were up 31.5 percent to $600 billion, also a record.
According to the Bank of Korea, the country's trade-to-GDP ratio in 2020 was nearly 80 percent.
Even before the trade deal went into effect, the countries included in the RCEP already took a large percentage of Korea's trade.
According to the Ministry of Trade, Industry and Energy, in 2019, Korea's trade with RCEP member countries totaled $501.9 billion, 48 percent of Korea's $1 trillion trade worldwide.
With the addition of the RCEP, 83 percent of trade will be with FTA countries.
"RCEP is a much larger economic bloc than any other including the CPTPP and the USMCA," said Chun Yoon-jong, Ministry of Trade, Industry and Energy's director general on FTA negotiation.
The Moon government has sought to become more active economically and diplomatically in Asean through its southern Asian region policies.
"Once the RCEP goes into effect, exports will improve as the opening of markets in Southeast Asia, in addition to the new southern region policies, will be expanded more than in the past," said Kang Moon-sung, a Korea University professor of international studies. "There will be much larger opportunities for automobiles, steel, machine parts and medical equipment through additional tariff lifting in Southeast Asia."
The government expects an increase of cultural exports, such as games and movies.
The Trade Ministry stressed that Korea's trade with Asean over the last 30 years has increased 30-fold, investment 40-fold and the number of visitors 40-fold.
It is projected that in the next three years, Korea's export of cultural services through the RCEP will increase 1.1 percent annually.
"It will also serve as the opportunity to diversify our trade structure, which is highly dependent on the U.S. and China," said a ministry official. "including in electronic commerce."
This is the first time e-commerce has been included in a free trade deal that Korea has signed.
The U.S. and China take 37 percent of Korea's exports.
While Korea has free trade agreements with almost all of the RCEP countries, the trade deal will offer options for Korean exporters.
In the case of steel products, the tariffs in the Korea-Vietnam FTA or the Korea-Asean FTA are 5 percent. The RCEP takes that to zero.
One of the biggest advantages of the RCEP is the common rules of origin, which are expected to enhance tariff reduction.
"Well implemented, consolidated rules, streamlined regulatory procedures, and expanded market access could have great impact on reducing non-tariff barriers in this large region, with commensurate benefits for trade, investment and economic growth," the ADB noted in its evaluation report.
Under existing FTAs, the origin process has been complicated.
In the case of the FTA with China, raw materials that are used in manufactured goods when imported are considered as non-origin, denying the benefit of the tariff cuts. Under the RCEP, those that are imported from member countries are accepted as covered.
While the RCEP is seen as an FTA-lite in terms of its requirements, it is also seen as reducing complications that make the FTAs collectively less effective than they could be and costly for companies to navigate.
It helps address the "spaghetti bowl"-effect that results from the many overlapping and less-than-transparent agreements in the region.
The economic impact of the multilateral trade deal is projected to be limited.
Korean institutions have projected that the RCEP will contribute 0.14 percent to the nation's GDP growth over the next 20 years. Over 10 years, the RCEP will add 3 trillion won to the nation's GDP.
This projection is a drop from an earlier forecast by the Korea Institute for International Economic Policy.
In 2019, the think tank projected that the mega deal will contribute between 0.41 percent and 0.62 percent of the nation's GDP. The higher estimate was based on the assumption that India would participate, which it did not.
While India's decision not to take part in the mega deal has affected projections, another factor is that the final agreement is considered to be less aggressive.
In the final agreement, several RCEP members have decided to opt out several sensitive sectors. While tariffs on agricultural products will be liberalized, labor, environmental standard and state-owned enterprise provisions are excluded.
Beyond economics
The Korean government has been emphasizing that the RCEP has more than economic benefits, noting that the multilateral free trade agreement is the first FTA with Japan.
"As it is the first FTA with Japan, we hope cooperation between the two countries will expand beyond economic cooperation including trade and investment," said the ministry's director general Chun. "We expect increases in exchange in social and cultural aspects."
There has been growing demand to improve the relationship between the two countries.
In a survey conducted by the Korea Chamber of Commerce and Industry (KCCI) of 202 exporters in November last year, nearly 93 percent said there is a need for bilateral economic cooperation between the two countries.
The poll found that a quarter wanted better diplomacy, while another 25 percent wanted government logistics support.
The KCCI noted that companies of both countries are suffering due to Covid-19 and diplomatic conflict at a time when the global value chain is reshaping.
The RCEP is also expected to offset the damage caused by the growing trade war between the U.S. and China, which started during the Donald Trump administration.
According to ADB estimates, China will be suffering a loss of $506 billion in trade while the U.S. $411 billion by 2030.
In the case of China, it will gain $234 billion through RCEP trade, nearly recovering half of its losses. In the case of Korea, it is expected to gain $65 billion through RCEP.
There is a growing consensus that the RCEP will serve as a defense against protectionism that intensified with the Trump administration, which placed pressure on its traditional trading partners.
The RCEP as an economic bloc could buffer unexpected risks as Korea does not have to deal individually with each country.
One of its strengths is that many of the countries in the RCEP, including Vietnam, play essential roles in the global value chain.
"While the RCEP is a relatively relaxed FTA, it has huge significance considering the future," said Song Young-kwan, a senior KDI researcher. "It is the first FTA that includes all three — Korea, China and Japan — and it is an FTA in which Asean, which has huge potential, is participating."
Moving on to CPTPP
Korea is not stopping its FTA expansion with the RCEP as it recently reaffirmed its decision to join another multilateral trade pact — the CPTPP.
Finance Minister Hong Nam-ki last week again stressed that the government will be submitting its application to join the CPTPP, whose key member is Japan, in April, a month before a new administration takes over.
"We will focus on creating new markets so that exports could lead our economic recovery," Hong said during a government meeting on Jan. 25, stressing that the government plans to expand the country's FTA network this year.
The Finance Minister said the goal is to increase Korea's FTA deals to 90 percent of the global GDP.
The CPTPP, which went into effect at the end of 2018, has seven members overlapping with the RCEP. The member states are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
These countries account for 13 percent of the world's GDP and 15.2 percent of global trade.
While smaller than the RCEP, it has more rigorous tariff elimination schedules.
Korea's trade with CPTPP members accounts for 23 percent of total trade.
Joining of the CPTPP is expected to further diversify Korea's exports by lowering dependency on the U.S. and China.
The Korea Development Institute in a report released in January 2021 noted that the CPTPP will help expand exports by Korean SMEs by including Korea within the global value chain of the trade pact.
The biggest obstacle to joining is Japan's leadership.
Considering the uneasy relationship, it is uncertain whether Japan will accept Korea into the trade bloc.
Japan's Chief Cabinet Secretary Hirokazu Matsuno in December raised doubts on whether Korea would meet the CPTPP's "high standard."
"What we need to do first is to see if an economy that seeks to join the pact is fully prepared to reach the high levels of the TPP 11," Chief Cabinet Secretary Matsuno told a news conference, according to Japan Times.
"We will continue to follow developments related to economies with an interest in joining the pact, and respond by taking into account our strategic standpoint and public understanding," he said.
Britain, Taiwan and China have also applied to join the CPTPP.
According to Japan Times, the Japanese government has welcomed Britain and Taiwan to the trade pact, while it remains cautious on China.
Korea's hope of joining the CPTPP has met with strong resistance from Korean farmers, as the FTA requires members to open up 95 percent of the agricultural market and 100 percent of its fisheries market.
This also includes fish caught in waters near the Fukushima nuclear power plant.
On Jan. 13, agriculture and fishery industry representatives protested in front of the Blue House demanding that the government refrain from signing the CPTPP.
The farmers and fisherman argued that local farms have already been struggling under numerous FTA agreements.
In addition to the CPTPP, the government is also currently working on a free trade deal in the Middle East that includes six countries.
BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
with the Korea JoongAng Daily
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