After eight years of complex negotiations, in November 2020, the Association of Southeast Asian Nations (ASEAN) signed what constitutes the world’s most important trade agreement: the Comprehensive Regional Economic Partnership (the RCEP), which includes China, Japan, South Korea, Australia, New Zealand and the ten ASEAN economies (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam).
The RCEP covers 29% of the world’s GDP, 30% of the world’s population, and about a third of the world’s foreign direct investment. The realization of the RCEP is a prominent sign of the shift of the economic gravitation axis from the Atlantic to the Pacific and from the Occident to the Pacific.
The agreement highlights the commitment of the signatory countries to the promotion of trade, the defense of multilateralism, and the strengthening of regional value chains as axes for the economic recovery of the region. This message drastically questions the most protectionist sentiment spreading in the Occident.
What are the implications of the RCEP?
The RCEP is very significant for ASEAN as it will contribute to the economic development of ASEAN going forward and because it secures the ASEAN centrality in East Asian economic integration (Shimizu, 2021).
The RCEP as a trade agreement is characterized by the following measures. First, in the area of trade in goods, tariff dismantling has been agreed upon over the next 20 years in more than 90% of goods exchanged between members. Second, concerning trade in services, it has been agreed to open up at least 65 % of the service sectors to the signatory parties, with three specific annexes for the progressive opening up of financial services, telecommunications services, and professional services. In addition, the agreement provides for the facilitation and simplification of customs processes. Third, the harmonization of rules of origin for the 15 countries has been one of the main successes of the agreement, which will be reflected in a significant reduction in costs and will make processes faster and more flexible for economic operators. Fourth, to facilitate investment and improve the business climate in the region, agreements have been made to simplify the processes of entry, expansion, and operations in RCEP countries. In addition, several provisions strengthen the protection of intellectual property through the proper implementation of existing legislation and the imposition of sanctions for non-compliance; promote transparency in public procurement processes among RCEP members, protect customer information and data in e-commerce and establish a dispute resolution mechanism.
The joint impact of these measures transforms into a major stimulus to intra-RCEP trade, to the deepening of the value chains anchored in Asia-Pacific, and the attraction of investments coming from the interior and outside the area. In sum, the RCEP will lower the transaction costs, discourage protectionism, strengthen the production networks, make it easier for enterprises to set up supply chains across different countries, and improve free trade across the East Asian region (Khan, 2021).
China is one of the most benefited countries from the RCEP for being the major destination of investment, end market and its importance in supporting the global supply chain. According to Peter A Petri and Michael Plummer’s work, the expected annual gains for China amount to $100 billion followed by Japan with $46 billion and South Korea with $23 billion. The RCEP is an opportunity for China to invest in communication, energy and transport sectors in East Asian countries under its Belt and Road Initiative, among other China’s projects such as the China-ASEAN Investment Cooperation Fund, the Silk Road Fund or the ‘express train’ of China’s Belt.
What about geopolitics?
Even though economic gains are very important and contribute to consolidating the economic power of China in the world, the RCEP has geopolitical implications which also explain China’s prospects for leadership in the region.
The advantage of China relies on the fact that the RCEP is the first free trade agreement between China and its regional opponents, namely, South Korea and Japan. By contrast, free trade agreements among other RCEP countries exist, such as the ASEAN Free Trade Area (AFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and several FTA’s.
Jointly, the three countries account for about 24% of the world’s economy and about 80% of GDP among the signatory countries of the RCEP. The tariff concessions and trade facilitation provided in the agreement will imply an increase in the trade between these three countries and therefore, it will strengthen its economic position. It is to be considered a geopolitical win for China as the RCEP will improve the regional economic interdependence and will integrate regional economies closer to Beijing. For instance, Eswar Prasad, former head of the International Monetary Fund’s China Division, stated “The trade pact more closely ties the economic fortunes of the signatory countries to that of China and will over time pull these countries deeper into the economic and political orbit of China.” The increasingly dominant role of China in the region will weaken the position of South Korea and Japan to confront its growing ambitions in the Asian-Pacific region.
Moreover, the RCEP constitutes a step forward in the geopolitical competition between China and the USA where the former is emerging as the new rule-maker in regional trade and economic integration (Khan, 2020).
To begin with, the RCEP brings together some of America’s most steadfast treaty allies, including South Korea, Japan, and Australia, two important US partners in the quadrilateral regional security grouping, known as the QUAD, which was ostensibly established to confront China. Despite political differences and even maritime disputes with China, these countries may well choose to benefit from a mutually beneficial economic integration like the RCEP rather than become embroiled in strategic hostility between the two competing powers.
Additionally, the withdrawal of the USA from the Trans-Pacific Partnership (renegotiated and renamed as CPTPP), a multilateral trade agreement, also helps China to strengthen its economic and political position as the agreement was originally raised to counter China. The retreat of America from multilateralism and the success of the RCEP is likely to accelerate the decoupling process of the East Asian economies from the USA. East Asian economies will become less dependent on the USA and it will be more difficult for the USA to compete with regional Asian firms they will benefit from lower costs, lower tariffs, more investment opportunities and open access to the Asian market.
Finally, the fact that India is not a part of the RCEP, although it was part of the negotiations, removes a prominent balancer and brings China to the fore in shaping the rules of this comprehensive regional arrangement that covers the most dynamic Asian market. (Khan, 2020)
While the RCEP’s economic club may not expand soon, its open architecture design suggests that the RCEP has not yet reached its full potential in terms of geographical extension. The willingness of RCEP members to accept new members through accession also represents a step in the direction of upholding the fast-dwindling spirit of free trade. (Petterd, 2020).
Conclusion
The RCEP constitutes an important free trade agreement that will foster the economic development of the signatory countries. It shows the willingness of the East Aian countries to focus on economic and regional integration instead of being a strategic playground for a geopolitical competition between the USA and China. Ultimately, the RCEP reinforces China’s leadership role in the Asian-Pacific region while puts in jeopardy the economic and political Asian dependence over the USA market.
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By Blanca Prat: The European Institute for International Law and International Relations.
