One year ago, the world’s largest trade agreement, the RCEP agreement, was concluded. The trade of the EU and Austria with this region developed very dynamically in the last 20 years, with China playing the main role.
The RCEP Agreement
It has been exactly a year since another chapter of history in international trade was written and the largest trade block globally was formed. This resulted from the Regional Comprehensive Economic Partnership (RCEP) agreement implemented in January 2022, after ten years of negotiations. The RCEP gathered China, Japan, South Korea, New Zealand, Australia, and ASEAN countries into a unified trade block. This agreement assures the gradual elimination of tariffs between the RCEP members until 2040 and almost full commodity trade openness (90%). Great trade and growth implications globally are expected due to the size of this region. To demonstrate, RCEP countries together have approximately 70% higher GDP and over four times larger population than the EU. Thus, what we will likely witness in the next twenty years is a change in the gravity of the trade towards Asia-Pacific and away from the West (Quah, 2011; UNCTAD, 2021).
Strong momentum towards Asia even before the agreement …
Obviously, the dynamics whereby RCEP impacts the future of trade will mostly depend on China, RCEP’s dominant trade member. China alone takes up over half of the RCEP population and production. In addition, its role in international trade grew exponentially after its entry into World Trade Organization in 2001. Twenty years after its entry into WTO, EU trade with the RCEP members increased significantly: imports as a share of the total increased by 4.5p.p and export by 3.1p.p (see Figure 1, left). This trade boom with RCEP mostly attributes to China and at the expense of some other members like Japan whose export to the EU (as a share of the total) decreased from 2.8% to 1.2% over the corresponding period. The same narrative applies to Austria (Figures 1, right), although the RCEP 2020-2001 increase in trade share is smaller than for the EU as a whole.
… especially for high-tech products
However, the share of EU total imports from RCEP increased much more for high-tech goods (see Figure 2): from roughly 15% in 2001 to 24% in 2020. For Austria, the increase is even higher – a jump of 14p.p in the 20-year-period (Figure 2, right). Nowadays, almost 43% of total EU imports of computer, electronic and optical products, 26% of computer, electronic and optical products, and about 20% of machinery and equipment are sourced from the RCEP bloc. The export with the RCEP members also increased, although it represents lower shares of total EU and Austrian exports (see Figure 3).
This makes this sector particularly dependent and thus vulnerable given the further shift toward Asia and the potential changes in trade patterns resulting from the RCEP agreement. With this comes greater economic implications too, as the high-tech sector relies much more on R&D and innovation than traditional manufacturing. As such, high-tech sectors are an important catalyst of technological growth (Hornbeck and Moretti, 2018), especially in the times of digital and green transition. The obvious sign of risks already exists in relation to the recent semiconductor shortage, which put the production of many EU factories at a halt.
However, stagnation of trade relations in the last year
Even though only one year after the agreement implementation elapsed, we can witness a smaller decline or a stagnation of EU-RCEP trade (see Figure 1 and 2). EU export to the RCEP declined by about 1p.p, while Austrian high-tech imports from RCEP decreased by about 3p.p, the largest decline in high-tech trade with the new trade block in last 20 years. Not surprisingly, this shift is mostly driven by China alone (annual decline of 3.5p.p). This annual decline could be only a tip of the iceberg.
It is difficult to distinguish what drives this decline in the EU-RCEP trade as there are many factors at play. After the COVID-19 pandemic, new trends are on the trade horizon (i.e. nearshoring, reshoring, friend shoring) all marking the start of shorter supply chains, away from globalization. In line with this is RCEP trade bloc that is expected to contribute to the formation of the supply chain across the Asian-Pacific. On the other hand, the ‘EU’s Open Strategic Autonomy by 2040’ assumes a higher economic relationship between the EU and its neighborhood as well as its further trade positioning with respect to China. Besides this, the European Chip Act enacted in December 2022 aims to strengthen the resilience of the high-tech supply chains – precisely the EU semiconductor products for which the demand will double by 2030 according to the European Commission. All these trends should strengthen trade between geographically close countries at the expense of more distant countries. Hence, it is very reasonable to speculate that the next twenty years may bring lower trade with the RCEP due to trade distortion effects (see e.g. Stehrer and Vujanovic, 2022) resulting from the agreement, as well as further trade decoupling.
References
Hornbeck, R., & Moretti, E. (2018). Who benefits from productivity growth? Direct and indirect effects of local TFP growth on wages, rents, and inequality (No. w24661). National Bureau of Economic Research.
Quah, D. (2011). The global economy’s shifting centre of gravity. Global Policy, 2(1), 3-9.
Stehrer, R., & Vujanovic, N. (2022). The Regional Comprehensive Economic Partnership (RCEP) agreement: Economic implications for the EU27 and Austria (No. 054). FIW.
UNCTAD (2021), A new centre of gravity: The Regional Comprehensive Economic Partnership and its trade effects.
Author: Nina Vujanović, PhD (wiiw)
Nina Vujanović is an economist at wiiw, researching topics on international trade, foreign direct investment, and the Balkans. She previously worked as an advisor to the Vice Governor at the Central bank of Montenegro, as a consultant at UNCTAD (Division on Investment and Enterprise) and a research fellow at the WTO (Economic Research and Statistic Division). She published papers in the area of foreign direct investment, productivity, innovation as well as credit risk. She holds a PhD in International Economics from Staffordshire University and Msc in Economic Policy from University College London.
The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).