- Hubert Walas
Trade hub.
On January 1, 2022 - quietly, with no fireworks, and in the background of news about the threat of a new war in Europe - a new economic and geopolitical reality was born in East Asia. On the first day of this year, the RCEP Agreement - or the largest trade bloc ever formed - came into force. According to forecasts, by 2030 its members will account for half of the world's GDP. However, is this really a trade game changer of an unprecedented scale?
Trade Breakthrough?
Signed after 10 years of negotiations, the RCEP - or the Regional Comprehensive Economic Partnership - agreement entered into force at the beginning of 2022. It includes 15 countries in the Asia-Pacific region. 10 ASEAN countries - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam - plus Australia, New Zealand, South Korea, China, and Japan.
The agreement covers countries with a population of over 2.3 billion whose contribution to the global economy is a staggering $25.8 trillion or over 30% of global GDP. RCEP countries also account for 25% of global trade in goods and services and 31% of foreign direct investment in FDI.
By comparison, the European Union, which is also a customs union, accounts for just under 18% of global GDP, while the similar U.S.-Mexico-Canada agreement has a 28% share. However, the RCEP will very likely quickly overtake them. Already in 2030, RCEP signatories are expected to account for 50% of global GDP and thus become the economic gravitational center of planet Earth.
Following ASEAN’s statement: “The entry into force of the RCEP Agreement is a manifestation of the region’s resolve to keep markets open; strengthen regional economic integration; support an open, free, fair, inclusive, and rules-based multilateral trading system; and, ultimately, contribute to global post-pandemic recovery efforts.”
What does this mean in practice? Among others:
- Elimination and/or reduction of tariffs
- Standardization of customs procedures
- Introducing mechanisms for the settlement of interstate disputes
- Or simplification and removal of restrictions on ‘Rules of Origin’.
In a nutshell, RCEP creates much better conditions for international trade in the Asia-Pacific area. At the same time, it consolidates many existing bilateral or sub-regional agreements. However, is the RCEP a real game-changer? As usual, the answer is more complex than may be initially thought.
The RCEP has its limits. It does not include as many common rules and regulations as, for example, the EU or the CPTPP agreement that emerged from the aftermath of the TPP. For example, the RCEP’s provisions on digital trade are meager, while agriculture and labor issues are barely addressed. The RCEP also has little say in industrial subsidies or state-owned enterprises, which is almost certainly a nod to Beijing’s desire to safeguard its own domestic economic management tools.
Moreover, many of the tariffs that the RCEP eliminates are already eliminated through regional or bilateral agreements. For example, more than 70 percent of trade between the 10 ASEAN countries that are part of the RCEP has zero tariffs.
This makes mainly 3 countries - South Korea, Japan, and China - among the biggest beneficiaries of the new agreement. Apart from the comparative advantages that their companies will have over their competitors from poorer states, there is also another more prosaic fact. No permanent free trade agreement has yet existed between China and Japan or between Japan and South Korea. And since we are talking about the world's number 2nd, 3rd, and 10th largest economies, the effect of the new agreement will certainly be significant.
However, this does not mean that others will not benefit as well. Due to leverages in the service sector so far, companies from Australia, New Zealand, and Singapore will further increase their share in the region. Whereas countries such as Vietnam, Malaysia, and Indonesia will compete for foreign investment inflows from China, South Korea, Japan, and Australia. Their competitiveness will largely depend on the adopted economic and political reforms. The least developed countries - Cambodia, Laos, and Myanmar - due to their infrastructural or economic backwardness, may have a problem with taking full advantage of the new agreement.
Now, how do the numbers of the RCEP look? As calculated by Brookings, the RCEP is expected to add an additional $500 billion to global trade by 2030. For comparison, global trade in 2019 was $19 trillion, so that adds up to 3% at current rates, but can we actually be talking about a breakthrough?
Crouching Dragon
There may be a breakthrough, but not in a purely economic sense, rather in a broader geopolitical one. There is only one clear winner of the RCEP and that is China. This is quite a common view of analysts, especially those on the other side of the Pacific Ocean. Americans are bitter about the fact that instead of being the main creator of trade agreements in the most economically important part of the world, Washington, at its own request, was left with nothing.
Work on the RCEP began in 2012 by which time work was already underway on another major trade agreement: TPP, or the Trans-Pacific Partnership, in which the Americans played first fiddle. However, Donald Trump decided to abandon the TPP in 2017 as part of his deglobalization doctrine. The other countries working on the TPP, not wanting to throw years of negotiations in the trash, decided to continue the process in any form they could and this is how the aforementioned CPTPP, or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, came into being in 2018.
Moreover, critics of the RCEP agreement argue that China's potential has been too underestimated in the creation of the new agreement. The “Middle Kingdom” is the largest or second-largest market for all of the RCEP countries and a key supplier of imported goods. In contrast, the economic power of centrally controlled Chinese companies is incomparably greater and dominates the competition in the region. Despite this, the RCEP does not control the state subsidization of these companies in any way. In addition, the level playing field may be distorted by the non-bigoted advantages of the Chinese supply chain compared to the rest of the countries. And this is why the RCEP has one big elephant in the room - India - which did not join the RCEP. Delhi feared a flood of cheap Chinese products and, as a result, abandoned negotiations on the RCEP in 2019. India's return to the deal is not out of the question, but it would likely require limiting China's economic influence inside of the RCEP. Beijing also welcomed the fact that the RCEP brought it closer to Australia, Japan, and South Korea, countries with which China has been seeking bilateral free trade agreements for many years.
Therefore, the RCEP is considered by some to be a geopolitical victory for China, as it strengthens Beijing's ties with other countries in Asia and allows the Chinese to step into the economic vacuum created by the protectionist U.S. withdrawal from the TPP.
Nevertheless, this does not mean that Washington will not be back sooner or later and there is speculation that the US might re-join the CPTPP. Katherine Tai, a U.S. Trade Representative, did not confirm this gossip, but did not deny it either. CPTPP members would be eager to reopen their doors to the Americans in order to balance China's power in the region. Interestingly, Beijing has also applied to join the CPTPP, but the restrictive standards of the agreement make Chinese membership unlikely.
Life Beyond the Sino-American Rivalry
Yet, events in East Asia should not be viewed solely from the perspective of Sino-US rivalry. Although this is a fundamental issue affecting every RCEP country, the agreement synergizes that when it comes to trade, Asia-Pacific countries do not want to choose between the U.S. and China. This is true even for countries that stick close to Washington in security policy such as Japan, Australia, and South Korea.
In this context, it is also important to note the success of ASEAN, which together with Japan and Australia contributed most to the shape of the final agreement. Together with Canberra, Tokyo sought to include chapters on investment and services in the final version of the agreement, in contrast to Beijing, which emphasized only the liberalization of trade.
In practice, it is Japan that may prove to be the biggest winner of recent agreements signed in the region. As a leading player in the CPTPP and RCEP, with Free Trade Agreements and economic partnerships with many ASEAN countries and Australia, Japan is now at the center of Asian trade. Tokyo will seek to use this advantage to support coalitions within the RCEP and the aim of these will be to limit China's overall influence.
Still, there should be no illusion that the RCEP changes anything about regional security. AUKUS shows that resistance to Beijing continues to consolidate and distrust toward it is only growing. A recent survey in South Korea indicated that China has surpassed Japan in an infamous poll and is now the most disliked country by Koreans. As many as 58% of them rated China as "close to evil."
So is the RCEP a breakthrough? In purely economic terms - not necessarily. It is an evolution rather than a revolution. From a global perspective, the agreement, even if somewhat shallower than other major trade deals, signals that Asia is still pushing for trade liberalization at a time when other regions have become increasingly distrustful. The RCEP also signals to the Americans that if they want to be a trade stakeholder in East Asia and an architect of new trade deals, they have to return to the negotiating table.
Above all, the RCEP shows that at a time of rising protectionism, an intensifying trade war between the US and China, and growing distrust between nations, it is still possible to create new formats for large-scale trade and cooperation. And ultimately, it is trade that is the engine of human development.
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