The Regional Comprehensive Economic Pact (RCEP), which comprises of 15 countries in the Asia-Pacific, has become the world’s largest free trading agreement. In signing on to this agreement, what are some of the most significant provisions that its signatories have committed to?
Let me begin by saying that what is most significant about this free trade agreement is its geopolitical impact. These are 15 countries spanning all of East Asia. They are part of a process that began in 1961 with the formation of the Association of Southeast Asian Nations (ASEAN) and now includes northeast Asia and also Australia and New Zealand. So, it has grown from five initial countries in ASEAN to 15. Together, they account for almost a third of the world’s GDP. More importantly, China, Japan, and South Korea have for the first time come together in a free trade agreement by lowering barriers relative to each other, an accomplishment that because of their challenging political situations would have been very difficult to imagine occurring in any other way. So, it is a big story not so much for the economic ground it breaks but because of the geopolitical changes that it has created. Now within the agreement itself you find some relatively interesting instances of progress on digital cooperation, digital trade, and access to the services markets of all member countries. You also find pretty good reductions in tariffs – not huge – but nevertheless significant.
The real technical advance is to create excellent rules of origin that then strengthen supply chains in the region. Rules of origin create a framework within a trade agreement that allows countries to trade with each other at low, preferential tariff rates. They determine the conditions by which products are eligible for low tariffs. The rules that RCEP will apply are much more producer friendly than in virtually all other free trade agreements. For example, in RCEP there is a single certificate of origin. Wherever you produce the product or ship it to, there is a single piece of paper to certify that this product is produced within the bloc and therefore eligible for tariff reductions. In order to earn this accreditation, for most products 40% of the production value has to come from within the block. It can come from any of the 15 countries. It is an easy-to-fulfil condition and so supply chains become much cheaper and much easier to manage.
If you read between the lines, this is not so good for countries that are not in the region. The United States in particular is looking at it from the outside.
How does this agreement compare with the Trans-Pacific Partnership (TTP) or its successor, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)? What are the most important differences?
The difference between the TPP and RCEP is a question of depth versus breadth. The CPTPP or the earlier TPP are state-of-the-art agreements that go far beyond tariff reductions and reach deep into the regulatory space. For example, the government agencies that set regulations for certain kinds of equipment in the US would have cooperated with the same regulators in Japan so as to facilitate trade. They have good rules on services, good rules on investment, and virtually zero tariffs. The TPP had world-leading rules on communications and digital trade, so it was far and away the most advanced free trade agreement we’ve seen. Subsequent agreements have borrowed from it. The USMCA, for example, has rules that were originally written for the TPP.
But without the United States, the CPTPP is ultimately a small agreement. Its largest member is now Japan. The two largest players in the region, namely the US and China, are missing. Some additional countries may join, but it will ultimately remain a small agreement. At the same time, it has to remain small because many countries would not be able to agree to all of its terms. The terms require very sophisticated regulatory systems and economies, so it is a forward-looking model for relatively advanced economies.
But RCEP is wide agreement where many kinds of countries can belong. RCEP, by the way, is an ASEAN agreement. And like all ASEAN agreements, it is likely to improve over time. Even though it is not as ambitious as the CPTPP now, it may become more ambitious in later stages. Obviously, the great news would be if the US and China could be in an agreement together with Japan and Korea and Southeast Asia. There was such a vision for the Free Trade Agreement of the Asia Pacific (FTAAP), but that remains a vision and is further away now than when people were talking about it a few years ago.
India withdrew from RCEP in 2019 due to concerns that its domestic industry would be overrun by Chinese imports. How did India’s withdrawal impact the economic potential of the deal?
First of all, this was a very bad mistake for India, just as it was for the US to withdraw from the TPP. Given its talent, technology, labor force, and potential to manufacture at low cost, India’s role in world trade is not anywhere near where it should be. One way to get there is to be part of global supply chains that link up to China, Japan, and Southeast Asia. RCEP would have given them an excellent framework in which to do that. As you say, they were afraid of Chinese competition. Even though they got various concessions from the Chinese and the group as a whole they decided they didn’t want to be a part of it. It will be quite costly for India.
For everyone else, it actually doesn’t matter as much. India is not going to be a huge competitor by itself and India’s withdrawal actually makes the agreement a little more attractive for some members. The other low wage manufacturing nations don’t need to worry about competing against India. Some of my economic modeling has shown that there would be slight losses for most RCEP members, except for China, from having India join. But of course, India’s gains would have made up for that so global GDP would have been enhanced. Nevertheless, I think that members of the group are not affected much one way or the other by India’s decision.
China is often viewed as the main winner from this trade agreement. What was Beijing’s strategy during the negotiation process and would you characterize China as the primary beneficiary of the deal? Besides China, what other countries will significantly benefit from the deal?
That’s correct, China is the big winner. It benefits economically because it has a lot of trade with members of the group and now that trade will become more intense. The value chains will also be more valuable and sophisticated, so China is the largest winner with Japan and Korea being the second and third largest winners. The interesting thing about these three countries is that they have no prior free trade agreements with each other. Perhaps the largest effect of RCEP will be that it has connected these three countries and East Asia as a whole.
Ironically, RCEP actually doesn’t contribute as much to the ASEAN countries in the agreement because they already have a free trade agreement with each other. Not only that, but in order to have been a member of RCEP you had to be a country that already had a free trade agreement with the ASEAN bloc as a whole. So China, Japan, Korea, Australia, and New Zealand already had prior agreements with ASEAN, but not always with each other. That’s where the real incremental benefits come. For the ASEAN countries RCEP merely duplicates agreements they’ve already had with one another. It will of course still benefit ASEAN, which will participate in the long run in this stronger East Asian economic region.
China’s strategy was interesting in this. You often see in the press that this is a China-led agreement. It wasn’t. As we know, this was really an ASEAN-led agreement. China negotiated quite patiently within the ethos of the ASEAN negotiation process, which is slow and consensus-oriented. I think that does not come naturally to the Chinese, but nevertheless they participated in an extremely patient way. Had they tried to dominate the process and work too quickly, the agreement would have fallen apart.
The real question is how China will implement the agreement. Will it let the agreement take force, expand, and be revised in the future in a way that benefits the whole region’s interests? Many question whether they will do that, but so far there is no evidence that China will go in a more selfish direction. This will be an important test of how China will interact, at least economically, with its neighborhood and the world.
Global value chains have been under deep duress from the Trump Administration’s trade wars and the Covid-19 pandemic. Will RCEP have a significant influence on remaking supply chains in the post-pandemic world?
I am not entirely sure yet what the pandemic’s effect on supply chains will be. Some people have argued that the pandemic itself will tend to make supply chains shorter as countries will want to buy components closer to them geographically and closer to them ideologically. This would then tend to disrupt or dampen the growth of global supply chains. But it’s not clear, however, that a country is better off depending on a neighbor than depending on 20 countries all across the world. From a risk viewpoint you may be better off buying facemasks from everyone in the world rather than depending on one ally or, worse yet, on a few suppliers located, say, in Detroit, Michigan. There is value to diversification of supply and it’s not clear to me that the kind of conservatism we see about trade and supply chains will continue into more normal times.
Having said that, it is increasingly clear that RCEP, the CPTPP, and also the US trade war have forced China to strengthen its linkages with its neighbors. These developments are all making supply chains more integrated economically within East Asia. That’s one reason why you see the EU signing free trade agreements with Korea and Japan and now a new investment treaty with China. The EU is seeing the development of a very powerful regional economy in East Asia. This is not great news for the US, or South America, or even Africa in some ways. East Asia is likely to be one of the key centers of the world economy and it is becoming more internally rather than globally integrated.
How will RCEP affect America’s trading relations with Asia in the longer term? Will RCEP prompt the US to re-engage with free trade in Asia?
Well of course I hope that it will, but history has largely moved on and we cannot recapture the moment that might have been four years ago. I think there will be some changes that will help to establish more normal relations between the United States and Asia, but some of what has happened over the last four years is irreversible. Again, three major shifts are involved. There are two new East Asian trade agreements that exclude the United States, and the US is still engaged in a trade conflict with China. That forced China to build strong linkages with neighbors, invest more in independence, and weaken linkages across the Pacific.
This is what Former Secretary of State James Baker, one of the founders of the Asia-Pacific Economic Cooperation, used to call “drawing a line down the middle of the Pacific.” He thought that would be really terrible thing. He wanted to make sure we set up institutions to prevent that because there is so much economic dynamism and promise on both sides of the Pacific and especially between the US and China. Unfortunately, we have started to draw this line, so it will be up to not only President Biden and his Chinese counterparts, but also one or two of their successors to see if that line can be softened or potentially erased in the long run.
One thing I’m pretty sure of is that Joe Biden will pay a lot of attention to Asia. He will go to Southeast Asia. He will go to ASEAN meetings. He will travel across the region once he is able to travel. But the problem is that he has so much to do and so many priorities that I don’t think trade issues with distant countries will emerge as a priority. Trade issues won’t really come up until after the midterm elections or under a second term. There will certainly be closer political relations with Southeast Asia and better political relations with Japan, South Korea, SE Asia, and perhaps even with China. But the pace of economic integration that we had seen in years before Trump will be slower.
In the meantime, Asian integration is going to move ahead. It’s not going to wait for us. In an economic sense, America’s presence may have peaked. America is well regarded in much of that part of the world. As you know, people like to see the US there. US culture and values and security presence have a strong influence and Biden will go a long way in at least addressing some of those issues. However, the economic relationship that was so important over the last few decades will be hard to restore to its former dynamism.