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RCEP Trade Agreement aims to create an integrated market

At the same time, however, Japan will face difficulties keeping China’s growing influence in the region in check, particularly with the US, its ally, remaining at odds with China over human rights and other issues.

By (Mrs) Amb Narinder Chauhan

Regional Comprehensive Economic partnership (RCEP) trade agreement took effect for most of the 15 member countries on January 1, 2022. The RCEP is a Free Trade Agreement (FTA) between the 10 ASEAN members plus Australia, China, Japan, New Zealand and South Korea. The RCEP is the world’s largest FTA, as it covers 2.3bn people or nearly a third of the global population. Its member countries together contribute US$ 25.8 trillion or about 30% of global gross domestic product, and account for US$ 12.7 trillion, over a quarter of global trade in goods and services, and 31% of global FDI inflows, according to UNCTAD.

The RCEP took effect in Australia, Brunei, Cambodia, China, Japan, Laos, New Zealand, Thailand, Singapore and Vietnam on January 1. South Korea will follow on February 1, but Indonesia, Malaysia, Myanmar and the Philippines have yet to ratify the deal. Significantly, the RCEP is Japan’s first trade agreement involving both China and South Korea.

The RCEP aims to create an integrated market making it easier for products and services of each of these countries to be available across the region. The focus is on trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation.

The RCEP was pushed by China in 2012 in order to counter the US led Transpacific Partnership (TPP) that excluded China. However, in 2016, US withdrew from TPP, since then RCEP has become a major tool for China to counter the US efforts to prevent trade with Beijing.

India decided against joining the RCEP amid concerns its economy would be flooded with cheap Chinese goods and farmers could be hurt by agricultural imports from Australia and New Zealand. A section of Indian industry felt that being part of RCEP would have allowed India to tap into a huge market. Some like pharmaceuticals, cotton yarn and the services industry were confident of making substantial gains.

Among the major benefits of the RCEP is that tariffs on more than 65% of trade in goods are expected to immediately reach zero and to around 90% over 20 years. Trade is an important driver of growth for Asia, and RCEP is expected to put Asia back on its pre-Covid growth trajectory.

Another key benefit is its common ‘rules of origin’ framework, as RCEP exporters will generally only need to source at least 40% of inputs from within the bloc for their final goods to qualify for tariff preferences when exported to other members.Intra-Asian trade-already larger than Asia’s trade with North America and Europe put together-will receive a further boost with RCEP’s standardized rules of origin.

Further, RCEP hopes to make it easier for companies to use Southeast Asia as a production base and could accelerate the diversification of supply chains and the reallocation of FDI already under way in Asia. Besides tariff concessions, RCEP standardizes rules on investment, intellectual property and e-commerce, among other things, and promotes optimization of supply chains in the region. 

The RCEP could also help to streamline existing free trade agreements in Asia-Pacific and strengthen intraregional trade linkages.

Trade agreements have always been shaped more as economic weapons designed by the rich to extract advantages from the developing nations that are vulnerable to exploitation. Financial services, for instance, favor the rich countries who can target large populations of banks depositors, pensioners and insurance targets in the less developed nations. That developing countries gain from being exposed to modern financial services is a disingenuous argument, for instance, infrastructure, climate change mitigation and health spending tend to be underfinanced in advanced economies while short deployment of savings takes priority. Developing countries had stock markets virtually thrust upon them from outside instead of focusing more on bond market development that would have served their development needs better. 

All this argues in favor of a less interventionist model of economic partnership and the RCEP arguably supplies it. It is of a less ‘high level’ nature than the original TPP, but it may not be a bad thing. The irony is that just as the US was poised to capitalize on its economic agenda, Trump withdrew from the TPP.

As the world’s top trading nation and second largest economy (and because of the absence of the US), China is the dominant partner within the RCEP. China began gathering support for the pact in 2012, to counter growing US influence in the Asia Pacific region. Backing for the RCEP gained momentum in 2017, after theUS withdrew from the rivalTPP.  When the RCEP was signed in November 2019, Chinese premier Li Keqiang said it was ‘a victory of multilateralism and free trade.’ China hopes to expand exports and speed up its industrial transformation as its exporters face rising freight rates.China is ready to fulfill 701 binding obligations as new milestones in China’s opening.China will gradually lift tariffs for imports of coconut milk, pineapple products and paper products from ASEAN countries. Trade between China and other RCEP members totaled 10.96 trillion yuan (US$1.72tr) in the first 11 months of 2021, accounting for 31% of China’s total foreign trade value.

Intra-regional investment, at 30% of total, has significant room for growth. FDI, investment by multinational enterprises and global value chains emanating from the region are all likely to benefit from the RCEP.  Since the pandemic, signatories have seen a decline of 15% in FDI to a combined $310b in 2020. The Least Developed Countries-Cambodia, Laos and Myanmar-are the most likely to benefit as they typically receive more FDI from neighboring RCEP members. Investment in infrastructure and industry would also improve their participation in global trade.

Japan, another major member of the grouping, views RCEP’s impact on its economy as rosy. Japan would benefit most from RCEP tariff concessions, largely because of trade diversion effects. China’s tariffs on Japan’s auto parts and others will be reduced in steps, leading to a jump in exports of Japanese industrial goods to China to 86% from the current 8%. As for imports, Japan will abolish tariffs from 56% of farm products from China, 49% of those from South Korea and 61% from ASEAN, Australia and New Zealand. Meanwhile, Japan retained tariffs on five sensitive agricultural product categories-rice, beef, and pork, wheat, dairy and sugar-and on poultry and poultry products-to protect its domestic sector. RCEP incorporates Japan’s first economic partnership agreement with China and South Korea, the two main destinations of its exports in Asia. Japan’s annual exports are expected to rise by $20b, 5.5% increase from its 2019 exports to other RCEP members.Overall, the trade within the bloc is expected to increase by nearly $ 42b, equivalent to 2% rise from the 2019 level, driven mainly through trade diversion away from non-member nations. Japan expects to raise its GDP by 2.7% and add some 570,0000 jobs.

At the same time, however, Japan will face difficulties keeping China’s growing influence in the region in check, particularly with the US, its ally, remaining at odds with China over human rights and other issues.

Meanwhile, absence of India from RCEP is also a cause for worry as it means that the intra-RCEP trade could be lopsided in favor of China. Another priority, thus, forJapan to contribute to the regional evolution is to persuade India to join RCEP down the road, as an expanded agreement including India would also broadly dilute China’s influence within the region.

In addition, the US, in case it decides to go soft on China, there will be even more worries for Japan.

It is feared an overdependence on China is a sure recipe for disaster. China touted the signing of the RCEP as a victory for its leadership in the region, particularly since key US allies Australia and Japan are a part of the RCEP. During the pandemic, countries like Australia which depend heavily on export to China, have seen how Beijing uses the economic stick to its advantage. In addition, even a steady flow of Chinese goods into the economies of other RCEP could pose a threat since China already enjoys a favorable balance of trade with some. It could also boost its BRI, from which Japan has stayed away. Hence, China’s overwhelming presence in the RCEP could in the future allow it to dictate terms to the other RCEP members.

The TPP was an attempt by former US President Barack Obama to deepen trade links among the US and other Asian nations-in part to curtail China’s growing influence. This was broader in scope than the RCEP, but Trump pulled out saying he would pursue bilateral deals instead. If they try to push together and change China’s direction, then it would be through the lens of development and trade, infrastructure and connectivity. In May 2020 China indicated willingness to join the 11-member Comprehensive and Progressive Agreement for Transpacific Partnership (CPTTP), the successor of TPP, but is unlikely to gain traction because the high standards for regulations on e-commerce, IPR and state-owned enterprises, suggesting the amount of government intervention in the Chinese economy will not meet CPTPP requirements. Further, although not a member of the CPTPP, the US can exercise the “poison pill” within the US-Mexico-Canada agreement to prevent Canada and Mexico from voting in favour of Chinese application. The contours of CPTPP 2.0 could feature the US in the future. US presence will dilute China’s influence in the region.

The US under Biden is exploring the development of an Indo-pacific economic framework, as during the East Asia Summit in October 2021. In November the US sent USTR to Japan, India and other parts of Asia to start discussions on potential negotiations that could begin in 2023. The framework could comprise multiple agreements such as digital trade, supply chain resilience, clean energy and infrastructure, among others. The US is not a member of RCEP or the CPTPP.  China appears to be determined to build an economic network outside the US influence. China has been criticized for its stance on intellectual property and market distorting subsidies. Whether China will comply with the rules of RCEP will be key in determining the future course of things.

(The author is a former Indian ambassador and former diplomat in Tokyo, Japan, and Bangkok, Thailand. She tweets:@nchauhanifs Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).

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