Free trade agreements (FTAs) create winners and losers, and the formation of the Regional Comprehensive Economic Partnership (RCEP) is no exception. RCEP is a regional agreement to liberalize trade and investment and strengthen economic cooperation  among the Asia-Pacific economies.

There have been many rounds of negotiations since 2012, between the 10 member states of ASEAN and 6 dialogue partners, namely Australia, China, India, Japan, South Korea and New Zealand. In November 2019, India's withdrawal from the round of negotiations reduced the number of countries negotiating the RCEP from 16 to 15. However, RCEP is still the largest FTA in the world because of its huge market valued at around 24.8 trillion USD and with more than 2.3 billion people.

Signed at the end of 2020, the agreement will take effect when at least 6 ASEAN countries and 3 partner countries complete domestic ratification procedures. According to the schedule of commitments in RCEP, the tariff liberalization roadmap among member countries is to be implemented within 20 years and the tariff reduction under RCEP is likely to reduce ASEAN's exports because it will erode  ASEAN's trade preferences granted by existing FTA partners. While RCEP offers the opportunity to access a larger market size, it also has the potential to have an adverse impact on ASEAN exports.

One of the key trade policy instruments of the agreement is the elimination of tariffs on imports between members. Usually, tariff elimination is expected to increase exports. However, in the ASEAN context, tariff elimination under RCEP risks eroding trade preferences within ASEAN as the RCEP will overlap with many other ASEAN FTAs.

All ASEAN countries have existing FTAs ​​with all many major trading partners, partly because they have become members of the ASEAN Free Trade Area (AFTA), ASEAN + 1 FTAs ​​ and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Some countries also have bilateral FTAs ​​with each other such as the Japan - Singapore FTA, the Malaysia - Australia FTA, the Japan FTA – Thailand. Therefore, the importance of RCEP as an export destination for ASEAN countries is may be limited.

The erosion of ASEAN's trade preferences occurs as ASEAN countries face a decline in the competitive advantage that some exporters enjoy in other foreign markets as a result of the preferential trade treatment offered by FTAs ​​between ASEAN members and between ASEAN as a group and their dialogue partners. But ASEAN exporters will see the benefits of these FTAs ​​diminished by the expansion of incentives to include additional RCEP countries. The removal of higher tariffs under RCEP would lead to greater erosion of preferences and thus a decrease in exports within ASEAN.

Analysis of the top 5 export destinations of 10 ASEAN countries using 2018 export data from the International Trade Center (ITC) shows that ASEAN countries will experience different levels of export damage due to erosion.. Countries with relatively large export losses include Brunei Darussalam, Indonesia, Laos, Myanmar, Malaysia, Singapore and Thailand, which have some of the top five export markets in ASEAN or other partners. In contrast, Cambodia, the Philippines and Vietnam are likely to experience less damage in terms of exports as they mainly export to the US, which is not part of the RCEP.

Analysts consider two scenarios to demonstrate how preferential erosion reduces ASEAN's exports using the ASEAN-China, ASEAN-Japan and ASEAN-Korea FTAs ​​as examples. Before RCEP was formed, only ASEAN countries had preferential access to the Chinese, Japanese and Korean markets under FTAs. Exporters from ASEAN enjoy low preferential tax rates granted by these three countries, while exporters from the three countries also enjoy low preferential tax rates granted by ASEAN countries.

Meanwhile, goods exported from Japan to China or vice versa face the most favored nation (MFN) tax rate, which is usually higher than the preferential tax rate. However, China is still Japan's main export market. After the formation of the RCEP, ASEAN's preferential access to the markets of its dialogue partners will decrease as the RCEP will set the same threshold for tariff reductions on imports between the partners. In addition to ASEAN, China, Japan and Korea will have preferential access to each other's markets.

This is especially important for Japan, which has not yet formed any FTAs ​​with China and South Korea. In 2018, Japan's top export destination was China, followed by the US and South Korea. The tariff reductions under RCEP will create trade flows between Japan, China and Korea, and to some extent divert trade flows from ASEAN countries. For ASEAN countries, their preferential access to the markets of the RCEP partners will decrease as part of the market share will be occupied by the expansion of trade in the dialogue partners.

In summary, tariff reductions under RCEP are likely to erode trade preferences within ASEAN as RCEP emerges in an environment of many overlapping FTAs. Erosion of trade preferences means that ASEAN exporters are likely to face lower demand for their goods in markets granted by dialogue partners under ASEAN+ FTAs 1. Given the absence of an FTA between Japan and its main trading partners, RCEP is likely to enhance trade flows between the dialogue partners rather than stimulate more exports from ASEAN. The main implication of tariff reduction is that export-oriented enterprises in ASEAN will face stiffer competition with foreign enterprises in dialogue partners to maintain market share.

The adverse effect of tariff reductions considered here does not necessarily mean that ASEAN is no longer able to benefit from RCEP. If RCEP achieves its goals far beyond these tariff cuts, it is likely that potential export losses due to preferential erosion will be the least important impact. Addressing issues such as non-tariff barriers, intellectual property rights and e-commerce, among others, will enhance the competitiveness and stimulate innovation of ASEAN businesses, The benefits will likely outweigh the potential export losses of tariff reductions.