Trans-Pacific trade

Credit: Oliver

 

Opinion by Jayant Menon, Niels Graham, and Einer Tangen

A new year and a new trade agreement. The world's largest free trading bloc has opened for business in Asia, accounting for one-third of global economic output. Who will benefit and why did India withdraw from the agreement at the last minute?

After 10 years of operation, the world's largest free trade zone is opening for business on January 1, 2022. The Regional Comprehensive Economic Partnership covers 15 countries in the Asia-Pacific region and promises to improve business for 2.2 billion people. RCEP was conceived in 2011 and ratified in November 2020. This will be the first free trade agreement between China, South Korea, and Japan. The United States is not a party to the agreement, although it is in the Asia-Pacific region, and India withdrew at the last minute. China, the bloc's largest economy to date, says the trade deal will help boost the country's development as the region struggles to recover from pandemic. With the enactment of the RCEP, more than 90% of merchandise between members will be subject to zero tariffs. As of January 1, 2022, more than 65% of China's trade with ASEAN, Australia, and New Zealand is expected to receive an immediate zero tariff. Overall, RCEP member countries have pledged to open more than 100 service trade sectors for finance, telecommunications, transport, tourism, research, and development. RCEP consists of 10 Southeast Asian countries, as well as South Korea, China, Japan, Australia, and New Zealand. The agreement will provide a simple trade framework which means that businesses will not have to go through different requirements to export to different countries. About 90% of tariffs within the bloc will eventually be eliminated. It will cover about 30% of world economic output and one-third of the world's population. India decided not to join the trade bloc in 2019, fearing that it would be flooded with cheap imports from China.

Benefits of the RCEP agreement: Who is to gain more: the large countries or the smaller ones?

Every country benefits, both large and small, but new ASEAN members and smaller countries such as Cambodia, Myanmar, Laos, Vietnam have the greatest potential to benefit the most. This is because they have to undergo the biggest change in terms of reforms that RCEP gives them the opportunity to do, but the important point about this agreement is that it is designed in such a way that it's up to the members to take advantage. These countries may be the biggest beneficiaries, but they have to harness the advantage of this opportunity. Many believe that China will be the main beneficiary and is driving the process but China is already a major player. The incremental gains are unlikely to be that big. Cambodia and Myanmar have tangible advantages as they have labor dividends. As wages are rising in the US and inflation elsewhere is raising its other ugly head, companies are trying to cut costs. There is a high possibility that they will start seeing these countries because they are in a recognizable trade zone. (Tangen, E.)

Gain of China in the absence of the US and India: Will China dictate?

RCEP rules are very simple. It's all about cooperation. People have to agree that this is not something where one country can rule. It is not the World Bank or the IMF or anything like that where special rights are reserved for certain members that can control.

Though it has given China greater importance to the future of Asian trade and economic principles, I would say that a really important part of the RCEP is that this is a future agenda and the fact that the negotiators want to create a platform to discuss the rules of the future within Asian trade and economy. The United States and India are not at the table where China is. We can, therefore, see that East Asia reaches a consensus on issues such as state-owned enterprises, digital trade, which may be against US interests as a whole. (Menon, J)

Do China’s increasing role and growing influence suggest the US influence wanes?

This trade agreement is a message to those outside the tent especially the US that East Asia and Southeast Asia are ready to move forward with trade with or without US support. It is important for the United States to reconsider its position on the Asian economy and trade policy, generally speaking. (Graham, N)

Read more: US-China Rivalry: Who will lead the world

RCEP deal and TPP: What makes difference?

The TPP is no longer what it used to be. It is now the CPTPP, a significantly watered-down version of what the United States initially proposed, which is still in use after its pulling out. But still, even in this watered-down form, It is a more ambitious agreement than the RCEP. RCEP membership is very diverse. There are very rich countries like Singapore and very poor countries like Laos and Cambodia as well as populist nations. You have to account for this diversity by allowing flexibility. This is the key difference between the level of ambition and the level of depth. Countries can go as far as they can or want, but the minimum bar set is too small to accommodate this huge diversity. (Menon, J)

Impacting global trade?

In the short term, it will not have much of an impact on world trade. This agreement is based on existing trade agreements between member countries. So about 82% of the trade flow that is covered by RCEP is actually covered by pre-existing agreements. The most immediate effect you will see is in Northeast Asia. The RCEP is the first trade agreement to cover bilateral trade relations between China and Japan and South Korea and Japan. These are the most astonishing and important trade relations in East Asia that have so far failed to be met by any trade arrangement. Hence, this is where you'll see the most immediate impact, but overall it's a trade deal with a 20-year time horizon. Over time it will definitely make a sizable impact on the global economy, but immediately we'll not see large changes. (Graham, N)

Benefit potential of the deal:

It will have some immediate benefits, I.e if it becomes effective from tomorrow, there will be some goods able to get duty-free access. But it is a long-term plan with a duration of 20 years. In fact, there are major reforms within the agreement that address difficult and challenging issues. There is now a growing trend of protectionist sentiment. Therefore, many of these effects will not be as severe as in the short term but in long term, any prophecy will be too early.

One of the biggest immediate effects of RCEP will be on changes to non-tariff barriers. One thing that is very important is that it unifies Asia into a single trade bloc. RCEP is built on five existing trading deals. In Asian countries, to qualify for any particular agreement, everyone had to qualify for each individual trade arrangement for their goods. What RCEP does is that it combines them all into a single agreement. For example, they are now united across Asia, making it much easier for companies to see Asia as a single trading bloc rather than five different agreements. (Menon, J)

Concerns of the US about strategic interests relevant to East Asian economies:

The United States is still struggling to figure out its Asian economic policy since it withdrew from the TPP at the beginning of the Trump administration. It does not really have a coherent Asian economic policy. The first and foremost thing is that it is important for the United States to know how its vision is being taken forward and how to implement it in Asia. A very simple way to do this is to rejoin CPTPP, although it's not politically viable in the United States. So, it should start paying more attention to the setting of more rules within the sunrise industries as well as in the international trade space. (Graham, N.)

The United States has no political choice. It cannot join RCEP as it would be capitulating to china. It cannot join the CPTPP because it will not get the 23 provisions that were stuck down and that were in favor of the US and especially the big corporations. Where they should be looking at is the WTO. The United States has the keys there. This is a great place for America. In fact, it will have the support of the rest of the world because not all countries are signing all these regional trade. (Tangen, E.)

Geopolitical tensions and the future of RCEP:

The short answer is that they need to use this as a vehicle to deal with the problems that they have with each other and to move forward to resolve these issues or to prevent such non-commercial issues. That way, in the long run, we can work harder to deal with these problems, but we know that trade can happen even when relationships are not good. It has a long history. RCEP is a way in which perhaps some of these concerns can be resolved. It can actually help deal with the underlying source of friction because trade is actually a way to deal with it. Using trade policy to deal with these non-trade issues does not work and in fact, it punishes both countries. The US-China trade war is a prime example. (Menon, J.) What you have is that you have an open door, a platform. Trade is always good. Hopefully, this is mutually beneficial. It will be the basis on which countries can come to terms. Right now, in the international media and elsewhere, there is a lot of desecration of different countries based on different ideologies. You have to start somewhere and obviously looking at political ideologies is not the way to go. (Tangen, E.)

Read more: New powerful bloc tilts more towards China

Why did India pull out of RCEP?

There were fears of flooding of Chinese goods in the Indian market. But in general, the present Modi administration is not yet fully convinced of the benefits of liberalization. Every free trade agreement in India tends to be decided on bilateral surplus or deficit. This is a very old mercantilist theory of trade policy and India is still based on this idea. Unfortunately, the Modi administration is beginning to reverse some of the good things that have been done in the last two decades to move India towards a more free and open economy. There are fears about China, but it is also part of the broader distrust of liberalization. In India, every free trade agreement has to pass the test. If it adds to a trade surplus, it is good and if it does not, it is bad. It is also something that needs to be overcome. It is the basis of the current reluctance to engage in such mega-regions. (Menon, J.)

RCEP and a role and question of resolving the US-China trade war?

RCEP will play a direct role in easing strains. However, RCEP does not solve any of the basic problems that have arisen from the US-China trade wars. Again, it's really up to the United States to figure out what it's East Asian trade policy looks like. More generally, what does its Chinese economic policy look like. Before the United States can figure out these things, it can't really help solve any of these fundamental problems. (Graham, N.)

Read more: Why China is more powerful compared to the Soviet Union

RCEP and current trade issues:

Of course, the core of RCEP is the promotion and collaboration for the supply chains. Of course, the problems we are now seeing with the supply chains will come to an end once we have had to go through this unevenness of demand response after a long period of lockdowns and adjustments. RCEP is about strengthening supply chains in the region, increasing their resilience, and facilitating an environment where more digitization can take place. The fact that it took so long also shows that it needed to address the various concerns of different countries. The agenda was to adapt to the changing circumstances in which we find ourselves. The question now is whether countries will take advantage of this flexibility to advance the reform agenda or use it to shy away from making some real changes. (Menon, J)

The question is how it is implemented and who is going to do it. These are the sovereign nations that have agreed to join this entity. There are procedures in place, but it will be very difficult to do so. This must be really a situation where if you don't follow these rules, peers will be pressured by the rest of the group. But in the end, it's about peer to peer. This is not a corporate where 51% of you make rules. It is really up to the countries to come together and agree on where they want to go. There should be an effective mechanism for the enforcement of RCEP. (Tangen, E.)

 

Jayant Menon, a visiting senior fellow at the ISEAS-Yusof ishak institute

Einar Tangen, a Chinese Political and Economic Analyst

Niels graham, An Assistant Director with the Atlantic Council’s Geo-Economic Center

 

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