Europe will have to pay close attention to the consequences of the huge trade deal struck between 15 Asia-Pacific nations this week, covering a third of the world’s population and gross domestic product.
Almost a decade in the making, the Regional Comprehensive Economic Partnership (RCEP) will eliminate tariffs on a wide range of products for its member countries and establish common rules for e-commerce, trade and intellectual property.
The 15 member countries are China, South Korea, Japan, Australia and New Zealand, along with the 10 nations of the ASEAN regional grouping of Southeast Asia (Indonesia, Myanmar, Brunei, Vietnam, Thailand, Singapore, Malaysia, Laos, Cambodia and the Philippines).
For China, the deal is a geopolitical victory as well as an economic one, as it seeks to become the region’s prime trade mover after the U.S. pulled out of the more ambitious Trans-Pacific Partnership in 2017.
Here are five things to know about the mammoth agreement and its impact on the EU:
This could swing the pendulum toward manufacturing in Asia
Analysts said the deal’s signatories would likely shift their supply chains away from Europe once the agreement comes into effect, which could be as early as next year.
The agreement will “make it easier for countries like Japan to diversify their global supply chains with Asia,” said Max Zenglein, chief economist at the Mercator Institute for China Studies, since it harmonizes rules of origin among the partner countries.
Rules of origin are supposed to ensure that the value of a product you buy under the terms of a trade deal is really created in the country that exports it. If you are buying televisions under a trade arrangement, for example, the rules should ensure that a high level of the components and labor costs for the TVs come from the exporting country, and that the televisions aren't effectively re-exports from cheaper countries with lower standards.
“European rules of origin are seen as overly complex in Asia,” said Hosuk Lee-Makiyama, director of European Centre for International Political Economy. Under RCEP, members “can trade within all 15 countries under one certificate … If you have simple rules of origin that you can understand, why would you trade with the EU?”
Europe's ambitions as a standard-setter took a hit
As well as making Europe less competitive in one of the world’s fastest-growing markets, RCEP could also dampen European ambitions to be a rule-maker in the global digital economy, said Deborah Elms, executive director of the Asian Trade Centre.
“As RCEP integration continues, the region might start to craft arrangements and standards that are purely Asian, with less attempt to align to European rules or standards,” she said. “It’s not just about China. All of RCEP will likely be included in creating new pathways and economic frameworks for trade in future.”
Europe looks more isolated on ethical trade deals
Despite the RCEP deal’s size, it has been criticized for a lack of ambition because it contains no chapters on sustainability or workers’ rights — an area that the EU views as an increasingly important dimension of trade policy.
Bernd Lange, chair of the European Parliament's trade committee, wrote in tweet that the RCEP deal needed to "improve" because of its lack of labor and environmental provisions.
Still, from a legal perspective, RCEP should not pose any problems for current or future trade agreements between the EU (with its ethical clauses) and countries involved in the Asian mega-deal.
“Countries such as Japan, South Korea, Vietnam, Australia and New Zealand accept that the inclusion of [trade and sustainable development] chapters is an essential condition for concluding a free trade agreement with the EU,” said Isabelle Van Damme, a trade lawyer at Van Bael & Bellis. “However, there are also limits to whether EU trading partners are willing to accept the EU’s standards of social and environmental protection.”
Pressure will grow for Europe and US to regroup on China
First and foremost, China is a winner. “It’s a giant diplomatic success for China,” said Zenglein. After the U.S. pulled out of the Trans-Pacific Partnership, China “used the moment to manifest its position within the Pacific region.”
As China’s first multilateral trade deal, RCEP also allows it to trade more easily with countries such as Japan and South Korea, where concluding a bilateral deal would be too politically sensitive, said Lee-Makiyama.
Manfred Weber, group leader of the European People’s Party in the European Parliament, however, said RCEP should prompt Europe and the U.S. to "join forces" against China's growing influence.
“We need a reunification of the so-called Western world, now with Joe Biden as a constructive partner, to face this challenge of China. It’s the key question for the upcoming decade,” he told the South China Morning Post. Weber also warned that Beijing could face more restrictive measures if it didn't sign an investment deal with the EU by the end of the year.
Rather than being a threat, Lange said he saw the deal as “more of a wake-up call for Europe to re-invigorate its engagement” with the Asia-Pacific region.
India is still out there as the (difficult) anti-China ally
In November last year, Prime Minister Narendra Modi announced India was withdrawing from the deal. That was a huge setback for negotiators, as India is now the world’s fifth-largest economy, and its market is growing rapidly.
A huge concern for India was that it would be flooded with cheap goods from China and elsewhere. India already runs a large trade deficit with RCEP countries and wanted specific protections for its industry and farmers. It worried that low tariffs could hurt local producers.
To an extent, this means that there is momentum to try to get EU-India trade rapprochement back on the agenda. This has always been a big challenge for Brussels, however, thanks to long-running EU complaints about New Delhi's protections for agriculture and intellectual property in sectors such as pharmaceuticals.This article is part of POLITICO’s premium policy service Pro Trade. From transatlantic trade wars to the U.K.’s future trading relationship with the EU and rest of the world, Pro Trade gives you the insight you need to plan your next move. Email pro@politico.eu for a complimentary trial.
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