ifo Institute Recommends EU Free Trade with Asia

The RCEP free trade agreement between 14 Asia-Pacific countries and China is putting the EU and the US under pressure to act. “The EU should strengthen its trade relations with Asian partners,” write ifo authors Feodora Teti and Hannah-Maria Hildenbrand in an article for ifo Schnelldienst. “While the EU has already concluded trade agreements with Japan, South Korea, and Singapore, its negotiations with Australia and New Zealand, and with the ten ASEAN countries, are progressing slowly. The EU and China also reached an agreement in principle on a comprehensive investment deal at the end of 2020, but a trade agreement is currently a distant wish.” China is currently discussing its new five-year plan.

For EU28 members, trade with RCEP countries does not play such a large role, Teti and Hildenbrand write. To date it has comprised only 9 percent of EU exports and 13 percent of imports. However, more stable supply chains and more favorable production in the RCEP area represent an opportunity for companies operating there as well as for consumers.

In contrast, RCEP countries account for 25 percent of US exports and 37 percent of US imports. The RCEP agreement will create trade, Teti and Hildenbrand continue. “We expect India and the US to be the hardest hit by trade diversion.”

For the new US President Joe Biden, it ought to be easy to revive the former Trans-Pacific Partnership (TPP), since the negotiations had already been concluded; the US Senate recently confirmed Biden’s commerce secretary appointee, Gina Raimondo. The agreement was overturned in 2017 by then US President Donald Trump. China then sought the RCEP agreement – without the US, Canada, Mexico, Chile, and Peru, but with Japan, South Korea, Australia, New Zealand, and the nations of Southeast Asia. Completed in the fall of 2020, RCEP encompasses 28 percent of the world’s economic output, 28 percent of global trade, and 29 percent of the world’s population; it is the largest free trade agreement on earth.

Trade relations in the Asia-Pacific region are already very strong, and most trade barriers were largely removed even before RCEP: in addition to moderate tariff reductions, the new deal’s harmonization of rules of origin, which until now have presented exporters with considerable bureaucracy, will lead to an increase in trade among the countries party to the agreement.