Claude Barfield
On June 2, the 15-nation Regional Comprehensive Economic Partnership (RCEP) came fully into force after ratification earlier by the Philippines. Though RCEP is a relatively shallow liberalization agreement, it will, along with the other important “mega regional” Asian agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) substantially augment shifting trade patterns throughout East Asia. The diverse members include Australia, China, Japan, South Korea, New Zealand and most of the members of the Association of Southeast Asian Nations (ASEAN)—Brunei, Cambodia, Laos, Myanmar, the Philippines, Indonesia, Malaysia, Thailand, Vietnam, and Singapore.
The pact represents some 30 percent of world GDP, and also of world population. Given the diversity of membership, RCEP represents no immediate leap into liberalization. Only 65 percent of tariffs will go to zero immediately, with the number rising to 90 percent over twenty years. On services, seven of the members agreed to a so-called negative list, that is service sectors open unless explicitly excepted; but eight members opted for a positive list, with only those explicitly listed are liberalized. For both goods and services, a number of special exceptions are included. RCEP members also agreed to a liberal set of rules of origin, that is, rules that govern what percentage of components of a final product must be produced with RCEP to qualify for tariff concessions or other benefits. Special exemptions are also included for the least-developed nations such as Laos and Cambodia. In some key areas such as intellectual property and e-commerce there is no provision for dispute settlement.
So with all the limitations, why is RCEP potentially a significant milestone? The answer comes from the increased legal and administrative certainty assured by the agreement. Clearly defined tariff rates and flexible rules of origin allow companies—particularly small businesses—to navigate complex supply chins that span the fastest growing manufacturing region in the world. Assuming a concomitant reduction in trade friction, the World Bank estimates that trade between RCEP economies could increase by 12 percent by 2035.
Further, there is the trade-enhancing membership overlap between the 11-member CPTPP, which includes deeper trade liberalization rules—for manufacturing products, services, investment, intellectual property, labor and the environment. Japan, Australia, New Zealand, Vietnam, Malaysia, Singapore and Brunei are also members of both trade pacts. The overlap clearly provides even greater trade and investment synergies throughout the region.
Two concluding points. First, China clearly benefits both economically and strategically from its leadership in RCEP. ASEAN have made it clear that they will not agree to export controls on key technologies that target China. On the other hand, RCEP members are well aware of Beijing’s record of economic coercion even for nations such as Australia with whom it has trade pacts.
Second, to date the US has been derelict in providing meaningful economic leadership in the Asian region. The flagship initiative—the 14-member Indo-Pacific Economic Framework—is counted as a weak response, even by allies of the administration. The administration is asking Asian allies to commit to difficult concessions in areas such as labor, environment, supply chains, regulatory practices, and agricultural trade—without itself granting any market access openings in return.
In sum, all of this adds up to the Economist’s conclusion that “China is quietly winning” the race to “gain economic clout” in East Asia.
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