ASEAN Centrality in RCEP: Emerging Key Player in the Global Economy

Written by: Fransisca Fleicia Paschaline, Deputy Director of External Affairs UGM ASEAN Society

ASEAN Becoming a Key Player in the Global Economy

ASEAN is a region with immense economic potential, as evidenced by its position as a significant global manufacturing and trade hub with a fast-growing consumer market (HV et al., 2014). This growth in the consumer market is supported by Southeast Asia’s position as the third-largest population in the world, reaching more than 680 million people (Ferguson & Keat, 2021; Worldometer, 2022). This rapid population growth contributes to ASEAN’s combined GDP comprising 3.4 percent of the world’s GDP. At current growth rates, the region has the potential to become the world’s fourth-largest economy by 2030 (Australian Government, 2017). Supported by abundant natural resources, an increasingly well-educated workforce, and a beneficial geographic location as a major trade route, ASEAN has the potential to become a major economic force in Asia and a key player in global economic growth (UMY, 2020).

ASEAN Centrality in RCEP

ASEAN must maintain its commitment to integrating into the global economy to become a key player in the global economy. One of the pillars of the ASEAN Economic Community (AEC) 2025 has a similar vision: to establish ASEAN as a “Highly Integrated and Cohesive Economy” region. ASEAN’s policy that aligns with the vision and mission of AEC is the Regional Comprehensive Economic Partnership (RCEP). RCEP is a free trade agreement initiated by the ASEAN that significantly strengthens ASEAN’s global economic integration by collaborating with regional partners, namely China, Japan, South Korea, Australia, and New Zealand (Xijun, 2020). RCEP advances ASEAN global economic integration because RCEP enhances the ASEAN Centrality agenda that places ASEAN at the center of regional architecture alongside other major or salient economic powers in the world (Teh, 2022). ASEAN economic integration is an economic integration used as a development strategy (Ishikawa, 2021). ASEAN must participate actively in the global supply chain to achieve this goal by creating an integrated ASEAN market that initiates and concludes FTA with countries outside the region (Ishikawa, 2021). RCEP as a comprehensive trade agreement that concludes major economic countries’ joint effort with ASEAN Member States (AMS) will incentivize regional supply chains (Petri & Plummer, 2020). Therefore, the RCEP, which situates ASEAN in a central position as the initiator of these comprehensive agreements that incentivize supply chain with major economic countries, will encourage ASEAN’s economic integration goal.

Two main reasons explain why RCEP contributes fundamentally to the ASEAN Centrality agenda. First, RCEP is the largest free trade agreement (FTA) in the world, with a combined GDP of US$26.2 trillion (about 30 percent of global GDP) and nearly 28 percent of global trade (Xijun, 2020). This huge economic competitiveness will significantly impact the global economy and trade (Xijun, 2020). Hence, the impact of the global economy dynamics will advance the ASEAN Centrality agenda that ASEAN needs to integrate into the global economy.

Second, RCEP is an international trade agreement consisting of countries with various stages of development, namely developed, developing, and less developed countries. The fact that ASEAN countries with diverse levels of economic development can unite and achieve a pact becomes a formidable appeal for free trade and win-win cooperation that is important for the enhancement of the ASEAN Centrality agenda in the global economy (Xijun, 2020). This diversity of economic development is maintained through flexibility in RCEP, including provision for special and differential treatment and additional flexibility to the least-developed ASEAN Member States, consistent with the existing ASEAN+1 FTAs (ASEAN, 2012; Menon, 2014). This flexibility also aligns with the ASEAN’s inclusive “ASEAN Minus X” formula that provides opportunities for LDCs of ASEAN to develop their economies gradually according to their development capabilities. Thus, the author believes that the RCEP, which has been in effect since January 1, 2022, can help the development of the ASEAN Centrality needed in the process of economic integration in order to become a key player in the global economy (Shimizu, 2021).

ASEAN Economic Integration through RCEP

Aside from ASEAN Centrality, there are several indicators that AMS must fulfil in order to achieve ASEAN economic integration, such as (1) free trade in goods, (2) free trade in services, (3) a supportive investment environment, (4) integration, inclusion, and financial stability, (5) adequate movement of labour and business people, and (6) active participation in global value chains (Hill & Menon, 2014; Menon & Mendelez, 2016; Shimizu, 2021). For example, Chapter 2 of the RCEP — trade in goods — explicitly aims to expand market access for trade in goods through preferential tariffs or to set lower tariffs on imports from certain countries based on international agreements. RCEP also simplifies the Rules of Origin (criteria for determining the origin of a product in international trade) to overcome the “Noodle Bowl Effect” or the negative effect of overlapping free trade agreements between countries (Mavenda, 2019; Samuel, 2020). Furthermore, Chapter 8 of the RCEP — trade in services — covers provisions regarding market access services, equal treatment for all members, and a list of positive and negative services expected to make up at least 65% of the AMS services sector. The aforementioned services sector is also expected to achieve a significant increase of foreign shareholding in professional services, telecommunications, financial services, distribution and logistics services, and other services (Francois & Elsig, 2021).

Aligning with indicator number three, one of the RCEP objectives aims to achieve homogenization of the cross-border business environment and liberalization that will support the formation of a supportive investment environment (Nguyen & Thung, 2021). Chapter 10 in the RCEP agreement also covers the area of ​​investment protection which is attractive to investors because it provides certainty and guarantees the safety of the investment. Furthermore, regarding financial inclusion as indicator number four, RCEP regulates financial services and eliminates restrictions that discriminate against providers in terms of market access (Nguyen & Thung, 2021). The regulations and elimination of discrimination will significantly promote AMS’ financial inclusion. Furthermore, RCEP has met indicator number five by regulating the movement of labor and business actors related to trade, services, and investment under Chapter 9 of RCEP. Lastly, the Economist Intelligence Unit (2021) suggests that RCEP will help integrate regional supply chains more effectively and reduce risks associated with the US-China trade war. Therefore, it can be concluded that the RCEP has completed the six parameters required for ASEAN economic integration.

ASEAN’s “New-Normal” Economic Integration within RCEP

Apart from meeting the six indicators mentioned above, RCEP is also a pathway for “new-normal” economic integration in ASEAN. Armstrong & Westland (2018) state that free trade agreements that only focus on economic growth (GDP) are conventional agreements that may have reached their limits in some countries. Thus, they offer a “new-normal” economic integration that focuses on the Fourth Industrial Revolution with the presence of digital technology and an e-commerce platform that goes beyond regular trade routes with internet access that can reach the wider community. For that, Chapter 12 of the RCEP provides a framework for the future liberalization of e-commerce, ranging from commitments not to impose customs duties on electronic transmissions to obligations to protect personal information (Francois & Elsig, 2021). Moreover, with the structural transformation that occurs through digitalization, RCEP is expected to encourage innovation in various professional services through e-commerce, which will consequently accelerate the integration of the ASEAN economy into global value chains (Kimura et al., 2022).

RCEP Limitation

Aside from the potential to boost ASEAN’s economic growth, the RCEP has a detrimental impact on human lives and the environment. RCEP does not consider environmental standards as a benchmark for international trade agreements (Fryatt, 2020). Currently, there are not any provisions in RCEP that explicitly address its concerns to the environment (Fryatt, 2020). Although eliminating tariffs will quantitatively increase economic growth, Tian et al. (2022) found that RCEP will increase the number of annual carbon emissions by 3.1%, double the previous. Therefore, RCEP still has limitations in the setting of environmental standards.

Conclusion

RCEP is one of the multilateral trade agreements with overflowing potential and prospects for achieving ASEAN economic integration. Although it has limitations in the environmental aspect, there is increasing discussion on the sustainable development agenda through the ASEAN forum, G20, COP26, and other contemporary international forums. Thus, the author believes that policymakers in RCEP will do their best to minimize the environmental impact. Furthermore, the successful economic and institutional reforms of the RCEP will also enhance ASEAN’s Centrality in international cooperation. This centrality supports the fulfillment of six indicators and the “new-normal integration” indicator in the RCEP to maintain and support ASEAN economic integration. Therefore, ASEAN economic integration through RCEP can encourage ASEAN’s active participation in becoming a key player in the global economy.

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