Looking at RCEP: There is still a long way to a free trade in Asia

This is a rather old-fashioned agreement focusing mainly on reducing customs duties and facilitating the circulation of components. However, today it is not customs duties but non-tariff barriers that are the main obstacle. The trade agreement itself can therefore be treated as a political success of China, but also of other signatories, who will maintain a relatively strong bargaining position. Of course, this agreement is a failure of the United States, which is losing control over trade regulations in Asia. Tomasz Synowiec discusses the consequences of signing of the Regional Comprehensive Economic Partnership (RCEP) for the global trade with Jakub Jakóbowski, an expert from the Centre for Eastern Studies (OSW).

The RCEP entered Polish public discourse as the largest trade agreement, involving 1/3 of the global economy and the global population. What will be its consequences?

In theory, one of the largest free trade zones will be created. However, we should not perceive it only in the context of the Chinese-American rivalry, as then we overlook the interests of many other signatories. This agreement was an initiative of the ASEAN, an association of several South-East Asia countries, which are integrating economically and try to balance their relations with large countries to achieve the greatest benefits possible.

This is particularly visible in the case of China. Around the beginning of this century, China wanted to draw the ASEAN countries into its orbit by entering into a series of agreements reaching beyond trade, concerning investments and new technologies. However, the ASEAN countries were able to “defend themselves” by developing the ASEAN+3 format of cooperation and also adding Japan and South Korea to China. This highlights the strategic logic prevailing in Asia. Smaller countries or smaller blocks of counties are looking for multilateral agreements, to feel stronger in the group when facing these larger players.

Of course, the limits of this partnership – 15 countries of Asia and the Pacific that took trade regulations into their own hands – are important politically. However, this is not a structure in which China is the sole architect and main player. On the contrary, countries in the region – the ASEAN and Australia – engage in such structures to be able to face large players. Even earlier, this region had already been bound with numerous tariff-reducing agreements, a network of dozen bilateral agreements – so complex that in the literature it was referred to as “an Asian bowl of noodles”. They made sure that the cost of customs duties in that region was relatively low. The RCEP organised those agreements by standardising so-called rules of origin, i.e. establishing in which country a given product was manufactured; thus, facilitating goods circulation in the supply chain.

Of course, the fact that a block of countries was formed in Asia where the US would not establish rules for cooperation is an advantage for China. However, this is not a partnership that would allow China to enforce rules for integration in Asia or “absorb” smaller parties into that partnership. The concluded agreement aims mainly at reducing customs duties which; however, are not the main obstacle in Asia any more. The real stumbling blocks are non-tariff regulations, such as labour law regulations, subsidies, data flow management, or e-commerce market regulations. RCEP does not govern the majority of these areas or remains very general.

Therefore, in terms of politics, it is a small victory for China; however, the structure of this agreement itself ensures a relatively strong bargaining position for the remaining countries because they can act together. They also feel the pressure and competition from China.

Will the RCEP enable China to promote its interests? More intense trade may lead to greater mutual dependencies, resulting in informal sanctions being imposed, as was the case with Australia during the signing of this agreement. This was symbolised by lobsters which should reach the table as soon as possible, but which were stranded in ports. Is it possible the RCEP will create more of this type of opportunities?

This partnership will have the longest-reaching consequences for the trade exchange between China and Japan. Previously, these two countries were not bound by any free trade agreement. The Chinese, wishing to push the partnership negotiations forward, gave way to Japan in many areas, as was the case with the quick reduction in customs duty on car parts. They already had bilateral agreements signed with other countries (New Zealand, Australia, or the ASEAN countries). Sometimes, more extensive than the ones with the RCEP.

The question as to whether China will be able to put pressure on Japan remains open; however, any economic conflict between these two countries would be an event on a global scale. We must bear in mind that Japan strives for a greater integration because it sees money in it – but at the same time, it treats China as the greatest strategic challenge and a competitor.

Let’s take a closer look at the situation between China and Australia. The already mentioned lobsters are just a tip of an iceberg. It is an open economic war. For political reasons, as they admitted themselves, China blocked a large part of import from Australia. They stopped or limited the import of coal, some metal ores, food, cereals, and wines. The question is whether this strategy is reasonable in the long run. First of all, the RCEP signatories must still ratify this agreement. Simultaneously with its signing of, critics of China’s actions have been proven right when they said that this dependency might be used for political activities.

Recently, PRC made 14 demands towards Australia, which must be met to end the dispute. They include letting Huawei in, stopping investigations into Chinese espionage in Australia and the one about the source of the pandemic in Wuhan. Such aggressive Chinese politics are unprecedented in the region on many levels.

Australia’s example is a very strong argument for not entering into a greater dependency. However, it should be kept in mind that the RCEP alone is not a platform for the promotion of “Chinese values”. The agreement also includes issues focusing on the environment and labour law, but they are so vague that they actually have an ornamental role. This is not the same agreement as, for example, the Trans-Pacific Partnership (TPP) proposed by the Americans, or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) forced through by Japan when Trump withdrew from the TPP. Very extensive agreements, removing many non-tariff barriers, regulating issues of intellectual property, investor-state relations, data flow, and many others. This is a type of trade agreement that China has never entered into because what would be required would certainly be internal reforms, and China is not ready for them.

Is there a real threat that any of these countries will not ratify the partnership? After all, it is not only Australia that has disputes with China.

This partnership must pass through the parliaments of these states, and this may be problematic for them due to the existing political conflicts with China. Then there is the South China Sea issue, claimed almost entirely by China, and this results in political and military tensions with the ASEAN countries. In some countries, the ratification may take a number of years. Everything depends on the political dynamics in Asia and on what the new US President will do. It should also be remembered that many rounds of customs duty reductions are spread over many years. Even after the ratification, this process will not be quick to start. In general, Asian countries are very active in the protection of their markets.

However, on the other hand, we must remember that the RCEP is a rather “shallow” partnership, governing mainly customs duties – and agreements of this type are relatively easily adopted due to minimal resistance of interest groups. Problems will start when somebody, for example China, tries to develop a more extensive integrating structure based on the RCEP.

Some say that the RCEP was accelerated by Donald Trump’s withdrawal from the TPP. Joe Biden, a former deputy of Barack Obama, during whose term in office these agreements were negotiated, will soon become the new US President. There are indications that Biden, as he himself said, will want to go back to these multilateral agreements. Will the RCEP hinder the return of the US to the TPP in any way, and, from another angle, will America’s return reduce the importance of the RCEP to any extent?

These agreements do not exclude each other. Especially, considering the fact that the CPTPP, mentioned above, came into force in 2018. What is crucial is whether the Americans return to this agreement and, secondly, whether the CPTPP returns to its initial assumptions. When Donald Trump withdrew the US from the TPP, Japan and other countries continued their negotiations, but they reduced the scope of the agreement. Formally, some of the TPP provisions were simply suspended to leave the door open for the US.

For the new president, it is not the RCEP or even the attitude of partners in Asia that it is the greatest problem, to a large extent they wish for the US to return to the TPP. It is the internal US policy and Biden’s ability to enter such agreements that is the problem. The TPP was a strategic act. The US were to enter and regulate trade standards in the Pacific region. It was the opening up to trade with Asia at the cost of internal production, which would affect the working class. This was one of the leading themes of Trump’s presidential campaign in 2016, as well as his main argument when he withdrew from the TPP. This subject will return again in the American debate, and it will have to be addressed, especially by Democratic party supporters.

In general, Biden has announced that the anti-China course will be maintained. However, he plans to use different methods, indicating, for example, trade agreements. How will the entrance by the US into that region affect China?

Apparently, there is a consensus in Washington. The direction of the policy implemented by Trump and the level of resources that America must use in its rivalry with China will not change. The Democrats did not criticise Trump for his direction in relations with China, but for the wrong tools used. The most important accusation was that Trump played solo, and when he talked with allies, it was from a position of power. Biden indicates a more partner-based approach, a development of a joint agenda of democratic countries to stop China. Forming an economic „cordon sanitaire” around China through great multilateral agreements. The TPP and TTIP (a similar agreement with Europe) were to create an alternate trade zone of developed economies, in which rules were to be defined excluding and in opposition to China, for example, by increasing barriers to China, which is not participating in these partnerships. The question is whether America can afford it and whether American society will agree to it.

Where does the EU stand on this? Will EU companies and the economy feel the increase in competition?

A facilitated exchange of products, which cross borders frequently at a production stage as a part of a supply chain, will influence overall Asian business models. From the European point of view, it is dangerous in that Europe operates in a very similar way. Of course, in the EU, the level of integration is higher by several orders of magnitude. From the point of view of global supply chains, after Europe, East Asia is ranking second for having very strong economic relations that enable the use of their competitive edge. This scenario leads to joint production of these items by Asian corporations, and then their export to deficit countries (with economies based on the import of goods), such as the United Kingdom, the US, and India. Europe and East Asia would compete in delivering products to these deficit markets, and in this respect, this would put pressure on Europe. Naturally, the RCEP creates an objective customs barrier for European competitors of countries from Asia and the Pacific in their markets. However, the EU obviously does not remain idle in this respect. For example, free trade agreements have already been signed with Japan, Vietnam and Singapore, and currently they are being negotiated with Australia and New Zealand.

Polish version is available here.