[ASEAN]The "Monsoon Path": The RCEP Recovery Model in Southeast Asia

Author: Shi Youwei, Assistant Researcher, Centre for ASEAN Country Studies, Peking University

Unofficially Translated from https://mp.weixin.qq.com/s/nWE9cniLoMcIwFSwCqs_oQ

Southeast Asia's impressive economic performance in the face of many challenges, including the escalating crisis in Ukraine and climate anomalies, could not have been achieved without the Regional Comprehensive Economic Partnership Agreement (RCEP), a regional economic cooperation framework pioneered and led by ASEAN. It has not only awakened a "spring breeze" in Southeast Asia in the short term, but will also blow the "monsoon" of economic recovery from Southeast Asia to other regional economies such as China, Japan and South Korea, showing a unique path of the traditional concept of the periphery driving the recovery of the central countries in reverse.

Wind at the periphery: waking up the recovery

According to the International Monetary Fund (IMF), the global economic recovery continues to face many challenges in 2022, with economic growth in developing countries set to fall by 1.3% year-on-year and international trade volume fall by 3%. However, Southeast Asia, often seen as the 'periphery' of the regional economy, has shown a clear recovery since the second quarter of 2022, with domestic production stabilising and some countries allowing social and economic activity to shift from anti-epidemic mode to normal. The major ASEAN countries all recorded positive real gross domestic product (GDP) growth in the second quarter. Among them, Malaysia's economy grew by 5% in the first quarter and 8.9% in the second quarter compared to the same period last year, the second highest single quarterly growth rate since the epidemic, beating market expectations. Meanwhile, the country's exports grew by 23.3% year-on-year in the second quarter, with a number of figures, including total trade, reaching record highs. The lifting of restrictions on normal economic activity has been accompanied by an increase in personal consumption and a continued rebound in production in the Southeast Asian country. According to data released by HIS Markit, a leading international information services company, the average manufacturing PMI (Purchasing Managers' Index, which indicates expansion or contraction in the manufacturing sector by being above or below 50) for ASEAN countries rose to 49 in August from 46.5 in July, the fourth consecutive monthly increase. In particular, the Myanmar manufacturing PMI rose to 53.2 in August from 51.7 in July, the highest in 15 months. Indonesia's manufacturing PMI rose to 50.8 in August from 46.9 in July, indicating that the manufacturing sector ended five consecutive months of contraction and turned to expansion. Thailand's manufacturing PMI continued to rise in August, improving to 49.7 from 45.9 in July, the highest level since January 2022.

Southeast Asia's economic recovery could not have been achieved without the help of the RCEP, a stable, comprehensive and effective FTA that has contributed to Southeast Asia's economic recovery in the short term.

The RCEP has significantly enhanced the level of cooperation between Southeast Asian countries and key regional economies such as China, Japan and South Korea, creating a unified and open market and increasing interdependence among them. This is particularly important for Southeast Asia, which is more dependent and at the periphery of this structure, as the RCEP will eventually achieve zero tariffs on more than 90% of goods traded between member countries, meaning that the commitment to liberalise trade in goods between countries has been realised.

And, by enhancing the interdependence of Southeast Asian countries with other countries in the region, the RCEP will help create incremental trade and investment in Southeast Asia, further stimulating the dependence of countries on Southeast Asia. While Southeast Asian countries are highly dependent on the Asia-Pacific regional market, major economies in the region, such as China, Japan and South Korea, are equally highly dependent on Southeast Asia due to its position in global and regional value chains that are difficult to replace in a short period of time. Interdependence means that as long as Southeast Asia actively participates in the regional industrial division of labour, its economy will be able to recover. The emergence of the RCEP not only consolidates the original division of labour for Southeast Asian countries, but also gives ASEAN more of a head start in its cooperation with other economies. According to estimates by the Chinese Ministry of Commerce, ASEAN will benefit most at the macroeconomic level among the RCEP members: the cumulative GDP growth rate of ASEAN as a whole will increase by 4.47% in 2035 as a result of the RCEP coming into force. Malaysia's Ministry of Trade and Industry said that the RCEP would be a "key driver" for the country's economic recovery after the epidemic, with an increase in revenue of US$200 million from exports through the RCEP. Data from Thailand's Ministry of Commerce shows that in the first two quarters after the RCEP came into effect, Thailand's trade with RCEP members reached US$169.04 billion, up 13 per cent from the same period last year. A report by the Philippine Institute of Development Studies shows that once the country's approved RCEP comes into effect, its exports will increase by 10.47%, boosting GDP growth by 2.02%.

A stormy future: building the resilience inherent in regional economic recovery

The RCEP will not only enhance interdependence between Southeast Asia and its member countries, but will also provide institutional security for supply chain security with various innovative rules. In the aftermath of the epidemic, this will facilitate the orderly reshaping of regional production networks and enhance the intrinsic resilience of Southeast Asian economies. Thus, the RCEP will bring the "monsoon wind" from Southeast Asia to Asia and Europe, meeting with the "clouds" of other economies such as China, Japan and South Korea, bringing rain and dew to the region's economic growth and realising the "monsoon path" of economic recovery from the periphery to the centre. The "monsoon path".

However, the high degree of interdependence with the regional market and the world economy, while providing an impetus for the countries in the region to grow, also laid the roots of vulnerability; the 1997 financial crisis, which spread from Thailand and other Southeast Asian countries to the entire Asia-Pacific region, followed the 'monsoon path'. The RCEP, on the other hand, has systematically improved the orderliness of regional supply chains, providing the necessary anti-risk mechanisms for the future recovery of the countries in the region and guaranteeing a stable long-term economic recovery.

Firstly, the RCEP liberalises and facilitates trade through direct tariff reductions, rules of origin and other harmonisation measures, which restrain protectionist behaviour such as tariff barriers, reduce the likelihood of trade conflicts and effectively ensure that the economic recovery that started in Southeast Asia is extended to other countries in the region. Each member country has made a commitment to openness above the level of their respective 10+1 free trade agreements with ASEAN.

In terms of trade in goods, the RCEP adopts a bilateral approach to tariff reduction commitments, with a more diversified tariff reduction mechanism tailored to the economic conditions of the countries in the region. For example, RCEP's tariff reduction commitments include both "harmonised concessions" for all member countries and "country-specific concessions" for countries at different levels of development. At the same time, the RCEP has implemented harmonised rules of origin within the region, greatly simplifying customs procedures. For example, to reduce the time taken to clear goods through customs, RCEP allows for the advance submission of electronic information required for the import of goods prior to their arrival and requires that they be released within 48 hours where possible; for perishable goods, a more detailed clearance process is set out and requires that they be released within six hours where possible.

In terms of trade in services, the RCEP flexibly adopts a combination of negative and positive lists to formulate rules on trade access commitments according to the level of development of each country's services sector, and has included rules on new financial services, prudential measures, specific information processing and other 13 areas to enhance the level of financial services in the region. For example, the liberalisation commitments of the 15 member countries in the area of trade in services have not only significantly improved on their respective GATS commitments, but are also higher than those of the original 10+1 FTAs. With the exception of Laos, Cambodia and Myanmar, which have a low level of services, the number of committed services sectors in each country has increased to over 100.

Secondly, the RCEP countries have also innovated a number of risk-averse mechanisms to ensure a stable and orderly recovery of investment activities in the region, which has become the most powerful insurance for the current "monsoon path" of economic recovery. The most typical of these mechanisms are the "freeze mechanism" and the "ratchet mechanism". The freeze mechanism means that after entry into force, any amendments to the agreement cannot be lower than the initial commitment, i.e. no increase in restrictions on foreign investment and no return to pre-effective levels. The ratchet mechanism means that each subsequent revision of the measure by countries can only be less restrictive than the one before the revision, i.e. the measure can only be revised in a more favourable way for foreign investment and not backwards.

Once again, the RCEP rules have also been effective in enhancing local capacity building in each country, which can provide an impetus for regional economic growth in the long term. the RCEP takes into account the balance between the interests of investors and host countries: countries can accelerate the restructuring of regional industrial chains more quickly in an institutional environment that encourages local enterprises to play to their strengths and participate in the intra-regional division of labour. At the same time, Southeast Asian countries can also strengthen technical cooperation and technical assistance with China, Japan and South Korea to reduce the technology gap in the region.

Riding the waves: Helping the "Belt and Road" to set sail

In a situation where "counter-globalisation" and trade protectionism are on the rise, the RCEP not only enhances the level of regional economic integration, but also strengthens the ability of countries to participate in the high-quality construction of the "Belt and Road", helping to The Belt and Road initiative is moving forward steadily.

At the macro level, the RCEP embodies the concept of inclusiveness and openness, which coincides with the principle of BRI of mutual consultation, construction and sharing, and there are many differences in the level of development, cultural customs and social systems of the RCEP member countries, especially between the ASEAN countries and the developed economies of Japan and South Korea. However, since the RCEP came into effect, its dividends have been gradually released and amplified, as best exemplified by the economic recovery of ASEAN countries.

At the micro and meso levels, the RCEP can also complement the construction of the Belt and Road Initiative. Prior to the signing of the RCEP, there were already several ASEAN+1 FTAs in the Asia-Pacific region, but as the region's economies became more interconnected, countries were using them less effectively. the RCEP has significantly simplified the differences between trade agreements and has reduced imbalances in regional production networks and supply chains. The RCEP Maritime Trade Index Report (2022) released by China Economic Information Service shows that with the liberalisation and facilitation of commodity trade and the deepening of regional cumulative rules of origin in the RCEP, maritime trade in the region has become more open and free, and the maritime trade index has gradually improved.

In the face of exogenous shocks such as the epidemic, the escalating crisis in Ukraine and trade protectionism, the contribution of RCEP to Southeast Asia's economic recovery cannot be ignored. The interdependence between China and Southeast Asia and the endogenous resilience of the regional economy also mean that China must pay attention to the RCEP, and the natural fit between the RCEP and the Belt and Road has prompted China to work with ASEAN countries to maintain an open and orderly regional economy. As the primary initiator and key builder of the RCEP, ASEAN countries are not only interested in the RCEP as a means of economic recovery, but also as a powerful way to enhance their position in the regional economic division of labour: to become an important supplier of regional cooperation mechanisms by combining their own dominant economic cooperation frameworks with the economic development of other countries. The RCEP is therefore a "monsoon path" that will lead to the growth of regional centres such as China, Japan and South Korea in the traditional sense, guaranteeing the status and development autonomy of ASEAN countries in regional economic cooperation and changing the traditional division between the centre and the periphery, which is bound to provide more vitality and dynamism to regional economic development.