RCEP and impacts on real incomes

Some markets, like Vietnam and Malaysia, will likely experience magnified gains of almost 5% in real income under such a productivity kick in 2035.

>> RCEP: A boost for exports

Many members have strict restrictions on foreign direct investment. According to the OECD Foreign Direct Investment Regulatory Restrictiveness Index 2020, Indonesia tops the list while China and New Zealand are in third and fourth place, respectively. The free trade agreement opens up investment opportunities intra-RCEP, and may also spur direct investment from firms based outside the region that will want to take advantage of the agreement. In principle, FDI liberalisation, whether spurred by RCEP or unilaterally, could lead to more than 15% incremental real income gains from trade in the Philippines, Malaysia and Thailand, according to IMF.

RCEP goes beyond some existing ASEAN free trade agreements in terms of investment opportunities. Prior to the agreement, China, South Korea and Japan were already top investors in some ASEAN economies. However, further opening up of ASEAN markets will attract more investment into new manufacturing technology, which could further boost labour productivity. In addition, the members have committed to review the inclusion of investor-state dispute settlements in five years’ time. All in all, FDI liberalisation could boost real incomes for all RCEP members by up to 0.53% according to Petri and Plummer (2018).

Increased trade and FDI flows are thus bound to lift productivity further. The cost of importing input materials will be lower and, thus, can promote local production. As a result, HSBC expects to see a shift in the competitiveness of different sectors. Naturally, resources and capital will be used in the most competitive sector. In addition, the elimination of barriers to foreign investment can promote better resource allocation and technology.

>> RCEP: A new trade engine to revive economies

As a result, this will cause a productivity ‘kick’ in various sectors while promoting a shift of resources away from industries that are no longer competitive. For example, Indonesia and the Philippines’ electrical equipment and machinery sectors are expected to expand by 4.1% and 6.3%, respectively by 2035, according to the World Bank. A 10% fall in tariffs could lead to a 4.8% increase in labour productivity on average.

Of course, the gains are not distributed equally amongst members and across sectors. Some markets, like Vietnam and Malaysia, will likely experience magnified gains of almost 5% in real income under such a productivity kick in 2035. More developed members like Japan should see less of a productivity boost, but still benefit from enhanced supply chain integration and support the competitiveness of local companies.

RCEP will, nevertheless, propel growth in trade within the area. RCEP members’ share of trade has increased over the years. “We expect the potential inclusion of Hong Kong to further boost real income in Asian economies. Summing up the real GDP of economies that are already on board, in 2030e, we expect the global share of GDP for RCEP markets to reach 32.9%, up from 31.7% in 2021, without taking into account the potential productivity kick induced by RCEP”, said HSBC.