As Trans-Pacific View author Mercy A. Kuo writes, “RCEP is literally a big deal… RCEP consists of diverse countries—rich and poor, vast and tiny, highly advanced and those just beginning to industrialize”. The signing of the Regional Comprehensive Economic Partnership (RCEP) by the 10 ASEAN nations, China, Japan, South Korea, New Zealand, and Australia on 15th November 2020 does mark a historical moment. One cannot emphasize enough the geopolitical and economic impact this free trade agreement (FTA) would have towards the global economy.
To get started, here are some RCEP facts at the time this was written:
While China has existing bilateral trade agreement, RCEP represents their first regional multilateral trade deal.
RCEP was eight years in the making.
The trade deal covers 15 countries with a population of 2.2 billion people with a combined GDP of $26.2 trillion or 30% of global GDP.
An analysis by the Peterson Institute suggests RCEP would boost global trade by $500 billion in the next ten years (a 1% boost to trade flow?)
World income is promised to increase $209 billion annually (or $27 for each of the 7.8 billion people)
India opted out but are still welcome to join should the South Asian country change its mind.
Regional Comprehensive Economic Partnership is not as comprehensive as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Source: Heijmans and Nguyen (2020)
Economic significance
RCEP covers 30% of the world’s economic output (GDP), making it the largest free trade area. The signing of RCEP amid a Covid-19 pandemic is not a coincidence or a stroke of luck—the deal was concluded after eight long years of negotiations, a feat considering that the coronavirus has laid waste to economies both local and global.
While the pandemic is expected to result in nations become more inward-looking in their policies, the fruition of RCEP is testament to the contrary. Cross-border investment, intellectual property, goods and services, government procurement, financial services, and e-commerce are just some of the areas that the FTA covers. Specifically, according to Bloomberg, RCEP is meant to eliminate tariffs on imported goods, strengthen the value supply chain with common rules of origin and codify new e-commerce rules (but tariffs are already low).
Furthermore, the US-China trade war has made RCEP indispensable. The tit-for-tat tariff banter between the two superpowers have threatened to upend the value supply chain in the international economy. RCEP is thus a means for East Asian economies to be interdependent among one another without relying on a developed economy like the US, signifying a world order where the US plays a less significant role.
The withdrawal of the US from TPP further suggests that the country at that time had no intentions of forming an FTA with East Asian economies, with the Trump administration adopting a protectionist approach when it comes to foreign economic policies. It is worth noting, however, that the overall sentiment of the US towards China has always been underlined with suspicion, even before Donald Trump became President; this suspicion towards Beijing was merely heightened under the Trump administration and is unlikely to disappear anytime soon. The question now is: will President-elect Joe Biden come to the same decision regarding the RCEP and reconsider joining CPTPP, or will he remain on the fence?
A JP Morgan report identifies sectors that would benefit from RCEP:
manufacturing
electronics
industrial machinery
autos
China’s Dual Circulation Strategy
Interestingly, RCEP complements China’s overall economic strategy. As the name suggests, the country’s dual circulation strategy is a two-part plan in effort to become self-sufficient in a time full of economic uncertainty. The strategy is part of China’s 14th five-year plan (2021-2025), with an emphasis on the internal circulation, i.e. stimulating the domestic market, without abandoning the external circulation, i.e. export-oriented development strategy.
It is in the external circulation bit that RCEP complements China’s economic strategy. While developing its domestic market to boost self-sufficiency, China would open the country to more trade relations with other nations. The signing of RCEP laid the foundation as China’s first multilateral FTA. It would simply a matter of time before China would consider joining other more advanced FTAs, such as CPTPP.
Why is there RCEP when CPTPP exists?
Source: Loh (2020)
TPP was signed under the Obama administration in early February 2016 with a particular goal in mind: to foster economic and geopolitical cooperation among the nations that house the Asia-Pacific region (but it was announced by Hilary Clinton in the Department of State, so that is seen as geopolitical). TPP member countries consisted of the 11 Asia-Pacific nations of CPTPP with the inclusion of the US. However, the following year saw the Trump administration withdrawing the US from the FTA. Following this, TPP reformed itself into CPTPP, with most of the free trade terms still intact.
To reiterate, CPTPP is one of the largest free trade agreements, comprising 13.5% of global GDP centered on Asia-Pacific economic cooperation. Then there is the RCEP, which is arguably the largest FTA, covering 2.2 billion people with a combined GDP of $26.2 trillion.
Concurrently, there are two FTAs that are centered around the economies in the Asia-Pacific region. The questions that arise are: (1) why are there two FTAs; and (2) what separates them apart? To answer the latter, one includes China and the other does not, although that may soon change. However, a more notable contrast between the two agreements is simply that RCEP is not as comprehensive as the CPTPP when it comes to the terms of trade. CPTPP outlines provisions regarding sustainable practices of the environment, labour, human rights, and the need for transparency and freedom of information, which are missing from RCEP.
The fact that there are two FTAs centered around the same region insinuates geopolitics in play by means of who stands to benefit from a multilateral economic expansion and who stands to lose. This would explain some of countries stance on RCEP, particularly the US and India, who may be of the opinion that signing the FTA is not entirely favourable to them.
Geopolitical significance
The narrative spun by western news outlets would have us believe that RCEP is a China-led initiative, with the sensational headlines such as “Why is China Creating a New Asia-Pacific Trade Pact” circulating the media, creating a misunderstanding especially if the rest of the write-up goes unread. It is worth reiterating here that RCEP is an ASEAN-led initiative and, had it been spearheaded by China, the likeliness of RCEP coming to fruition would be slim.
Nevertheless, China does stand to be the biggest beneficiary of the RCEP, allowing the Asian giant to expand its economic influence over Asia-Pacific. The FTA provides China with the opportunity to create new value supply chains amongst REP member countries, establishing itself as a possible hegemon in a time where US influence is diminishing (although suggesting that the US is no longer the global economic hegemon is a highly contested argument itself).
Interestingly, while RCEP was presented as a step towards multilateralism, sceptics believe otherwise. There is underlying pattern of countries being more confrontational towards China, stemming from the US-China trade war—trade tensions between Australia and China is a notable example. The worry amongst political and economic stakeholders is that countries will become more vocal in expressing their dissatisfaction against China in matters of world affairs, creating tension among RCEP member countries and potentially compromising the FTA.
The future of RCEP?
Now that RCEP is signed, the implementation of the FTA shall only take place once it is ratified by each participating country, a process that may take years. There are still uncertainties regarding the agreement and the effect it will have in the Asia-Pacific region and its Western allies. The uncertainties stem from the future of trade amidst the backdrop of an ongoing pandemic and how RCEP will evolve to cater to unforeseeable changes, including the likelihood of India re-joining, the US position in this new global economic order, and future of trade multilateralism as a whole.
As with any multilateral trade agreement, there will be winners and losers, so the real question here is: are the countries ready to shoulder the burden of the losers? Only with the unravelling of time would we see these questions being answered.
By Cyrene PERERA, Segi Enam intern, 14 Jan 2021 | LinkedIn
Edited by KHOR Yu Leng and Nadirah SHARIF