October 12, 2020

Asia

ASIA: RCEP trade pact is not a game changer for regional balance of power

BY Gabriel Wildau, Bob Herrera-Lim, Tobias Harris

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  • The new Regional Comprehensive Economic Partnership trade pact will cover one third of global GDP but is less ambitious on reducing tariffs and non-tariff barriers than the Obama-era Trans-Pacific Partnership.
  • Despite perceptions of RCEP as a “China-led” trade deal, the agreement’s impact on the US-China power balance in Asia is modest.
  • Even as Japan and Australia enter RCEP, they will pursue parallel efforts to strengthen economic and security relationships with the US and India under the “Quad” framework.

A group of 15 East Asian countries are on track to sign a new regional trade agreement, the Regional Comprehensive Economic Partnership (RCEP), by November, after nine years of negotiation. Vietnam, which holds the rotating chair of the Association of Southeast Asian Nations (ASEAN) for 2020, will host the virtual signing ceremony.

The deal would cover about one third of global GDP, even if, as expected, India cannot be brought on board. Once signed, it could take until 2022 before the agreement is in force, as more than half of the group’s members – at least six ASEAN and four non-ASEAN – will have to secure some form of domestic ratification.

US-China competition

RCEP is commonly viewed through the lens of US-China competition. When the Obama administration was leading talks on the Trans-Pacific Partnership (TPP), TPP and RCEP were counterpoised as competing sets of rules for Asia-Pacific trade and economic governance. Proponents of the TPP viewed it as a mechanism for promoting free-market principles as an alternative to China’s state-heavy economic model.

Some envisioned that Beijing would eventually be forced to embrace TPP – and enact corresponding domestic reforms – to gain the benefits of membership. Compared to RCEP, TPP was more ambitious on reducing both tariff and non-tariff barriers. TPP also called for new rules on investment, state-owned enterprises, e-commerce, and labor and environmental standards. Accordingly, when the US withdrew from TPP in 2017, the consensus was that the “China-led” RCEP had won the contest.

But the overall impact of RCEP on the regional balance of power should not be overstated. RCEP would increase intra-group trade links at the margin, thereby boosting China’s relative economic importance for other members of the bloc. But the size of this impact is modest: RCEP will increase real income by around USD 187bn annually in the participating countries by 2030, equal to only 0.4% of the bloc’s total annual income, according to estimates from the Peterson Institute. Meanwhile, US companies with existing Asian operations also stand to benefit, despite the US government’s withdrawal. Moreover, the US will remain a crucial economic and security partner to RCEP members, most of whom will continue to seek a middle ground in political disputes between the two regional powers.

RCEP vs (CP)TPP

After the US withdrawal, Japan successfully promoted an updated version of the TPP, renamed the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), which took effect in 2019. While US withdrawal diminished the economic impact of the agreement, CPTPP retained most of the original bloc, and the group remains attractive to potential members, regardless of whether the US eventually returns.

While the CPTPP countries are courting new members, RCEP lost a key member when India announced in late 2019 that it would not participate. New Delhi’s decision was the result of public and business concerns about a flood of cheap manufactured imports from China; agricultural goods from Australia and New Zealand; and inadequate liberalization in services, where India has an advantage. While India’s withdrawal dismayed Tokyo – which viewed India as a counterweight to China within the bloc – and diminishes the overall impact of RCEP, the exit did not lead others to opt out. Increasing India’s ties to East Asia will remain a long-term priority for several RCEP countries, achieving this goal would require a shift in New Delhi’s political calculations.

The TPP and the CPTPP focused on crafting rules to govern trade and investment among the region’s wealthiest economies, while integrating them more closely with rising middle-income economies like Vietnam and Malaysia. By contrast, RCEP focuses more on untangling the “noodle bowl” of existing Asian free trade agreements (FTAs), rather than advancing a new vision that would encourage significant domestic reforms. RCEP’s main achievement would be establishing unified rules of origin, replacing the competing standards of the region’s numerous FTAs and allowing exporters to sell within the bloc without complying with different national standards for defining origin.

While RCEP contains substantial provisions on intellectual property, provisions on services and investment are more limited, and the agreement does not cover labor and environmental standards. Provisions intended to reduce barriers to cross-border e-commerce were also scaled back after parties failed to agree on more ambitious reforms.

Intra-RCEP politics

Within the bloc, near-term benefits trade may accrue more to the Northeast Asian economies, since many ASEAN countries already operate under reduced tariffs to Northeast Asia through bilateral FTAs, ASEAN + 1 FTAs, the CPTPP, and the ASEAN Free Trade Area. Such trade diversion from Southeast to Northeast Asia could disadvantage Thailand, Indonesia, and Singapore more than the Philippines and Vietnam, since the latter group exports a higher share of their goods to the US and will lose less from export competition with Japan or Korea. To further bolster RCEP’s economic importance to Southeast Asia, China may gradually offer additional market access benefits to ASEAN.

Meanwhile, despite the participation of Japan and Australia – two of the four “Quad” members – in the agreement, RCEP will not fundamentally shift the terms of geopolitical competition in the region. Progress towards the deal is occurring alongside the sharp deterioration of relations between China and Australia. With the WTO’s dispute mechanism paralyzed, RCEP could serve as an alternative mechanism to address Sino-Australian trade disputes, but the deal will do little to ease broader bilateral tensions.

Japan has similarly remained committed to RCEP despite its own tensions with China and its dismay over India’s decision to leave the negotiations. Tokyo saw India as a counterweight to China within the bloc and saw RCEP in part as a vehicle for promoting greater integration with India. However, perhaps because of India’s withdrawal, both Japan and India are committed to finding new areas for cooperation, including a trilateral supply chain resilience initiative launched with Australia in September. Overall, RCEP should be understood as only one piece of the puzzle of Asia’s economic and political relationships, not a decisive shift in the landscape.

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