The Regional Comprehensive Economic Partnership (RCEP) will be formed by China, Japan, South Korea, Australia, New Zealand and the ten ASEAN member states and will be the world's largest free trade area once the agreements are ratified.
The trade agreement creates the basis for even closer integration between the economies of the member countries and will strengthen the value chains in the Asia-Pacific region.
This will create the largest car market in the world: the CAR Institute assumes that every second car could be sold in the free trade zone as early as 2040.
"Welcome to the world's largest automotive market." This could soon be the title of a brochure for the Regional Comprehensive Economic Partnership (RCEP), the free trade zone in the Asia-Pacific region which was founded in mid-November 2020. The trade agreement, which was signed in a video conference due to coronavirus, comprises more than 40 per cent of all new cars sold worldwide and will determine the future success of all players in the automotive industry purely because of its size.
China drives world's largest free trade area
The facts and figures on the FTA alone should catapult the RCEP to the top of European companies' management agendas.
Fifteen Asia-Pacific countries - China, Japan, South Korea, the ten ASEAN member states plus Australia and New Zealand - will form the world's largest free trade area once the agreements are fully ratified. For the first time, China, Indonesia, Japan and South Korea - four of the five largest economies in Asia - have signed up to a joint trade agreement. The China-driven agreement was created over eight years of negotiations and 31 rounds of talks.
RCEP member states were home to 30 per cent of the world's population (2.2 billion people) in 2019, accounting for nearly 30 per cent of global GDP ($26.2 trillion) and 29 per cent of global trade.
Trade facilitation strengthens local value chains
While European Union currently accounts for 33 per cent of world trade, more than that of the RCEP community, the strong growth of China and other member states is expected to soon shift the balance in favour of the new trading bloc. The new FTA is predicted to increase world trade by a potential 500 billion US dollars by 2030. This forecast is based on higher population growth - compared to Europe - and a sharper increase in GDP.
The primary goals of the RCEP agreement are to facilitate trade through tariff reductions and to reduce bureaucracy. However, the agreement also creates a more uniform framework for competition rules, intellectual property and investments. It contains provisions on technical standards, norms and the harmonisation of rules of origin. Matters such as labour rights and environmental standards, on the other hand, are not addressed in the treaties.
Even before November 2020, numerous bilateral and multilateral trade agreements existed in the Asia-Pacific region - for example, the average tariff on trade within the RCEP region was only 1.6 per cent (2017) according to the Ifo Institute. The agreement harmonises and consolidates many of these (still existing) treaties. This is particularly evident in the rules of origin relevant for exporters. Instead of sometimes complex and very bureaucratic specifications of "local content", the entire value added produced in the 15 member states may in future be used in the calculation of the proof of origin and corresponding quotas.
Reorganisation of the automotive market
The RCEP lays the foundation for even closer integration between the economies of the member countries. The free trade area will massively change the geo-economic map of the world and strengthen the value chains in the Asia-Pacific region. The impact of these shifts will be felt particularly in the automotive industry.
According to calculations of the CAR Institute of the University of Duisburg-Essen, around 27.6 million new cars were sold in the RCEP member states in 2020 - a global market share of almost 43 percent. In 2030, this share is predicted to rise to almost 46 percent - according to the CAR Institute's models, this would equate to 41.8 million vehicles. And by 2040, it is possible that every second car worldwide will be sold in the newly created free trade zone.
This will also boost the trend of diverging car markets. There is no longer one car market, and the RCEP will accelerate market divergence.
The reduced bureaucratic and financial hurdles brought about by the RCEP will strengthen the value-added networks that already exist within the free trade zone. South Korean and Japanese car manufacturers and suppliers, in particular, expect competitive advantages from this in China, the world's largest car market. But exports of low-priced vehicles, components and parts from China to the RCEP area will also be simplified. As a result, European companies in the automotive industry that are already active in the RCEP area will also benefit from more resilient and more efficient supply chains.
Global footprint in transition
In the medium term, strengthened production will give Asian manufacturers an additional boost, and they will play a more important role in the global market of the future. Europe as a production location, on the other hand, will lose competitiveness due to trade diversion effects, as well as the strengthened and newly emerged competitors from Asia.
However, the trade agreement also creates incentives: for example, to relocate relevant value creation that still exists outside to the RCEP area or to build it up again. Imports from Europe or the USA could be more heavily affected by tariffs, product harmonisation and export restrictions in the future, which would reduce their competitiveness. The shipping of vehicles, parts and components is increasingly being displaced by local production, and not just for reasons of sustainability. Globally oriented location strategies with specialised production and export hubs (for example for SUVs in North America) may soon be obsolete.
The sheer size and ever-growing importance of the new economic area will increase the shift of production and supply chains towards sales markets and also stimulate the emergence of the zone's own ecosystems, innovation strands and standards. Public subsidies and specifications, as well as the consideration of local consumer habits for car purchases, will more clearly determine the regional model portfolio of the original equipment manufacturers (OEMs) and force suppliers to further decentralise their innovation work.
If research and development is also shifted more to Asia, more innovations will emerge there, which could shape new standards and norms in Asia.