by Takashi Terada
Takashi Terada (Doshisha University) examines recent progress toward concluding the Regional Comprehensive Economic Partnership (RCEP) and considers how the agreement could affect the United States in the context of its ongoing trade war with China.
Amid the ongoing trade war between China and the United States, the world’s two largest economies, there has been a quiet but growing effort to establish the world’s largest economic trade sphere in Asia. The Regional Comprehensive Economic Partnership (RCEP) agreement, which is a free trade agreement (FTA) involving sixteen countries—the ten members of the Association of Southeast Asian Nations (ASEAN), China, Japan, South Korea, India, Australia, and New Zealand—has emerged as another mega FTA alongside the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), also known as the TPP-11, which is set to become effective on December 30, 2018. RCEP represents 50% of the world’s population and 32% of the global GDP. Mutual trade among current members accounts for 28% of world trade.
The significance of RCEP is primarily economic. The agreement has the potential to harmonize rules and facilitate business transactions across the multiple and overlapping FTAs in East Asia, thereby serving as a building block for the multilateral trading system. However, the strategic aspects of RCEP are also important, particularly for the increasingly inward-looking United States, as it has the potential to create a new paradigm. This commentary provides an overview of RCEP and considers the potential implications of the partnership for both regional countries and the United States.
Establishing the World’s Largest Trade Deal
RCEP has received less attention than the CPTPP, primarily because the goals of the agreement, which is based on the five existing ASEAN +1 FTAs, are ASEAN-oriented and lower quality. Through this framework, RCEP members are negotiating rules for market access, services, investment and intellectual property, and so forth. Because ASEAN would be the structural hub, the framework includes a number of least-developed countries, such as Cambodia, Laos, and Myanmar. As a result, the speed and scope of RCEP are much less ambitious than the CPTPP. Article 4 in the guiding principles and objectives for negotiations states that RCEP will admit forms of flexibility, including provisions for “special and different treatment” to take into consideration the varying levels of development among member states. Whereas the CPTPP seeks to promote high-level labor and environment standards and addresses issues with state-owned enterprises, RCEP does not even have a working group to discuss these issues in the negotiations. Furthermore, participants of RCEP already have a series of bilateral and subregional FTAs, which could reduce the overall impact of the partnership on trade. Why, then, are member states rushing to conclude negotiations?
At the 5th RCEP Ministerial Meeting in Singapore in August 2018, the ministers set a package of deliverables to achieve by the end of the year. A number of reasons explain the sudden momentum for wrapping up negotiations. As Norazman Ayob, the Malaysian deputy secretary-general in charge of trade has pointed out, the ongoing trade dispute between China and the United States is one important reason. There is “renewed momentum” to substantially conclude the negotiations chiefly because RCEP—which does not include the United States—would present huge trade and investment opportunities amid the trade conflict between Washington and Beijing. In this context, the conclusion of RCEP could also send a strong message from East Asia against protectionism. In fact, the acceleration of long-stalled negotiations is partly motivated by trepidation about the Trump administration’s protectionist policies. Singaporean trade and industry minister Chan Chun Sing has stated that “the substantial conclusion of RCEP by the end of 2018 will reaffirm our region’s continued support for free trade against the backdrop of rising protectionist sentiments.”
Second, the prospect for realizing early entry into force of the CPTPP has facilitated the conclusion of RCEP. While Japan’s role in salvaging the TPP framework was significant after the Trump administration’s decision to withdraw from the original deal, the potential economic impact from the scaled-back CPTPP is much smaller. As a result, it makes sense to pursue high-standard trade rules through the CPTPP while also seeking economic gains from concluding the RCEP negotiations. The impact of the CPTPP and RCEP would be complementary, especially for nations with dual membership such as Japan and Australia.
While RCEP could harmonize the complex set of barriers and procedures in regional trade, its impact would be shallow. It would merely represent a consensus on the lowest common denominator in standards for goods, services, investment, and intellectual property rights rather than aiming for high standards across a number of sectors. If these shallow rules become the norm in East Asia, the downgraded RCEP standards would further differentiate the higher level of trade rules in the CPTPP, which is still regarded as the gold standard. In fact, seven out of sixteen members of RCEP are in the CPTPP, and they are encouraged to forge a coalition to promote higher-order rulemaking in RCEP negotiations.
Finally, a closer relationship between the two largest economies in the trade group, namely China and Japan, could help mitigate the impact of China’s growing tension with the United States, which is outside both agreements. China and Japan have had a number of political difficulties despite their economic interdependence. In RCEP negotiations, Japan seeks a high-standard trade deal, whereas China seems reluctant to upgrade the level of trade liberalization and standards. These different approaches have often hampered the negotiations.
For instance, at the ministerial meeting in Manila in November 2017, China sought a rapid conclusion of the negotiations with a focus only on lowering tariffs for trade in goods, while allowing numerous exceptions for contested provisions such as intellectual property rights. On the other hand, Japan sought a comprehensive and high-quality deal covering services and investment rather than just lowering tariffs for traded goods. Japanese trade minister Hiroshige Seko cautioned during the meeting that “discussions on rulemaking were insufficient compared with those on tariffs” and that “the talks were not balanced.” This position was supported by Australia, but not by some ASEAN members who backed China’s position and wished to complete the negotiations in 2017, ASEAN’s 50th anniversary.
In practical terms, however, concluding RCEP means establishing a de facto China-Japan FTA, which will further strengthen the economic ties between the two largest Asian markets through the combination of cheaper labor and high-tech know-how. Indeed, Japan curiously became prepared to make compromises to realize an earlier conclusion to RCEP, with its altered stance toward RCEP representing an offer of assistance to China in its efforts to cope with Trump’s trade policy. Although Japan has retained its cautious and critical views toward China’s global and regional economic initiatives, Trump’s radical protectionism with increased tariffs on key products such as automobiles has led Japan to consider the possibility of working with China to build a regional economic order as a way of reducing negative impacts of U.S. protectionism on its trade and investment. This strategic and economic calculation paved the way for Prime Minister Shinzo Abe’s visit to Beijing in November 2018, putting relations on the right track and trumpeting the possibility of a new era of cooperation rather than competition in the Sino-Japanese relationship. It should be noted, however, that although the two countries have worked to improve their ties, Japan has continued to be cautious about the Belt and Road Initiative and articulated its position to adhere to long-standing infrastructure standards embedded within the World Bank and the Asian Development Bank and shared by the United States.
On November 12, economic ministers gathered in Singapore with the aim to achieve a “substantial conclusion” of RCEP negotiations for the leaders’ meeting. Most RCEP members were trying to include the words “substantial conclusion” in the joint declaration of the summit because these words would have a legal connotation that paves the way for the pact to be easily passed in their respective parliaments. However, only seven of the eighteen “chapters,” or major negotiation topics, were agreed upon during the ministerial meeting. Eventually, RCEP ministers decided to postpone the conclusion of the negotiations. Their decision was partly motivated by India’s request to wait until after its general election is held in mid-2019, given that the Modi administration needs to maintain its massive support from India’s farming sector. As a result, the ministers inserted the phrase “substantial progress” into the joint statement and abandoned the initial goal of reaching a basic agreement in 2018.
Policy Implications
As an original designer of the ASEAN +6 FTA scheme, Japan would greatly benefit from RCEP, particularly the provision about rules of origin, which could help regionalize the sophisticated production networks that support Japanese business activities in East Asia. Although Japan has bilateral FTAs with most of the members of RCEP, the multilateral aspect of the partnership could harmonize the different rules and regulations of the individual trade deals. In 2014, intraregional trade among RCEP members accounted for 42% of trade, according to the OECD. If the agreement goes into effect, this number will increase, thanks to a reduction of complex structural barriers and the implementation of streamlined rules and procedures related to customs and trade-related infrastructure.
An important question that will be raised by attempts to conclude RCEP is whether the partnership disadvantages the United States—and ultimately whether it will be a wake-up call to hasten a possible U.S. return to the TPP. RCEP would cover all of East Asia, where major manufacturing companies have widely established their supply-chain networks. Deepened intraregional trade would enable China to accumulate more cost-competitive exporting power to the United States as the agreement would eliminate or greatly lower the tariffs imposed on the manufacturing components, such as auto parts, exported throughout the region, including China. According to the International Monetary Fund, China has established itself as the largest trading partner for fourteen of the fifteen RCEP members, with Laos being the one exception. This heavier economic reliance on China, which would become the regional economic epicenter, would negatively affect the United States in two ways.
First, it would reduce Asian dependence on the U.S. market. U.S. products and businesses would be discriminated against in the East Asian market due to the higher tariffs imposed on exports from the United States, thus negatively affecting U.S. economic growth. According to Kawasaki, the simulated economic impacts on GDP growth would suppress the U.S. economy by 0.16% if RCEP materializes. Second, RCEP includes key U.S. allies, such as Japan, South Korea, and Australia, as well as strategic partners such as India, Indonesia, Singapore, and Vietnam. Their closer economic interdependence with China could give Beijing strategic leverage over these U.S. allies.
The failure of the official launch of RCEP has motivated China to consider the ultimate option of CPTPP participation. So far China has not publicly expressed any interest in joining the CPTPP, and it did not apply for membership in the original agreement. However, Beijing is quietly shifting its attitude. Chinese officials are exploring the possibility of, and seeking advice on, joining this higher-standard trade pact due to the fear of being economically isolated by the United States. Although still a long way off, membership in the agreement would be a powerful weapon that China could use against the Trump administration’s unilateral imposition of tariffs.
Conclusion
In 2019, the Indo-Pacific could have three mega FTAs (the CPTPP and RCEP, as well as the EU-Japan Economic Partnership Agreement), each with a different level of quality but all without the United States. China has actively endeavored to improve its ties with major countries in the region, such as Japan and India, in a bid to dominate the regional rulemaking process for trade, investment, and infrastructure, and thus will try its best to conclude RCEP. It is surprising that the Trump administration has emphasized bilateralism and downplayed the strengths and advantages of multilateralism at the same time that it is seeking to strengthen its position toward China. The United States’ return to the TPP would bring the country back to the table in the regional rule-setting process and would help prevent Japan and other regional states from shifting their economic interests toward China.
Tariffs are not an appropriate answer to trade problems in today’s globalized manufacturing system with well-established supply-chain networks. The Unites States’ imposition of tariffs on China threatens to raise prices not only for American consumers but also for American manufacturers such as Apple that export their products from China to the United States. Such an approach could eventually put America “last” in the regional trade order rather than “first.”
Takashi Terada is a Professor of International Relations at Doshisha University. The author appreciates the assistance of Yuma Osaki in data collection.
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