Trading up together

Member nations signed the pact separately, watched by others on Zoom

The Regional Comprehensive Economic Partnership, or RCEP, has been billed this week as the world’s biggest ever trade deal. Signed last Sunday between 15 nations in the Asia-Pacific, it needs ratification at national level before coming into effect, probably in the second half of next year. But there’s no denying its impressive scale, accounting for a third of the world’s population, across nations likely to generate more than half of global GDP within a decade.

There’s also the symbolism of the accord: not just as the first time that China, Japan and South Korea have been signatories to a single free trade deal but also in the way that the agreement has come to fruition in a period when protectionism has been much more of a theme than partnership.

“From a global perspective, the RCEP agreement, even if a little shallower than other ‘mega-deals’, signals that Asia keeps pushing ahead with trade liberalisation even as other regions have become more sceptical,” noted Fred Neumann, co-head of Asian economic research at HSBC. “As such, it may reinforce a trend that’s been already underway for decades: that the global centre of economic gravity keeps pushing relentlessly to the East.”

The background narrative is that the deal is also emblematic of how the Chinese are taking charge in the region, despite not being part of the group of nations that first discussed the RCEP as a concept. In fact, the idea came from the 10 members of ASEAN, before Australia, China, Japan, New Zealand and South Korea were added as prospective members.

The casting of the Chinese in the leadership role is more a function of their economic reach, as well as the dramatic decline in American influence since Donald Trump became president in 2017.

One of his early decisions was to drop Washington’s commitment to an alternative trade grouping called the Trans-Pacific Partnership (TPP), to which the Chinese were not expecting to receive an invitation. When Trump torpedoed the plan, the negotiating group worked on an America-lite alternative, and now that same group has done another deal to fill the vacuum, this time with China as a founding member.

The practicalities of the RCEP are that it is replacing a web of bilateral pacts with a single agreement, rather than fashioning an entirely new landscape. It isn’t delivering a major round of tariff reductions either, although it does require a wider rolling back of tariffs over the longer term. Some of its backers also hope that it could lay the foundations for a round of deeper deals between nations that don’t have bilateral pacts, including China and Japan, respectively the world’s second- and third-largest economies.

In the meantime it does deliver some important advances, such as a standardising of rules on product origin that will encourage members to source intermediate goods from other signatories. Previous rules were largely set at bilateral level, creating problems for businesses with global supply chains when their products could be shown to contain components that had been sourced from elsewhere.

The regional rules of origin should see RCEP trading nations strengthen their linkages and boost intra-bloc trading at the expense of outsiders, which could be of most benefit to the largest economies in the supply chain, such as the Chinese. Yet critics of the deal say that there is a lot left out. Compared to the early stages of negotiation on the TPP there is less coverage of environmental protections, safeguards for intellectual property and commitments to curtailing government subsidies to state-owned enterprises. Of course, it was the Americans pushing hardest for these provisions on the basis that the Chinese would have to accept them if they were to be considered for TPP membership. It is no great surprise that few of the same requirements made the cut in the agreement announced on Sunday.

All the same, the RCEP will boost business between countries that already send more than half of their exports to one another, predicted HSBC. The prospects for the pact have even prompted some commentators to sense a massive Asian trade zone in the making, similar to the EU or NAFTA (which was renegotiated recently by the Trump administration as the US-Mexico-Canada Agreement).

Yet talk of an Asia-wide bloc sounds optimistic, not least because the Indians pulled out of RCEP talks at the end of last year on fears that they would be flooded with Chinese goods if they committed to lowering their tariff barriers. Their absence is a glaring one, although the treaty has clauses allowing India to join at a later date.

Indian caution is also a pointer to some of the political realities of the region, where a litany of unresolved grievances will surely serve as obstacles to an even more integrated trade deal under China’s leadership. India and China have been clashing for months along a disputed stretch of border in the Himalayas, for example, while numerous Southeast Asian governments dispute the ownership of regional seas and islands with Beijing.

Tensions like these will rub hard against efforts to forge a unified trade zone and then there are the instances in which the Chinese have undertaken punitive actions against trading partners that displease them politically.

The challenges facing the Australians over the last few months are a case in point of how unofficial restrictions can come into play, with many of its exporters currently denied access to the Chinese market as Beijing pushes Canberra to “reflect” on a number of its policies (see WiC518).

As a single example, several tonnes of Australian lobster have failed to get through Chinese customs for days at a time this month, far longer than the six-hour time frame for perishable goods under RCEP rules, noted David Fickling at Bloomberg this week.

Despite these challenges the new trade partnership still puts the onus back on the US government to re-engage with the economies of the region. Joe Biden’s administration will have to decide whether to resurrect the TPP in some form or formulate a newer approach, although most analysts think it isn’t going to be an early priority for the new president, who will be more focused on stopping the spread of Covid and getting the American domestic economy firing again.

That will allow the RCEP more time to prove itself after the pandemic, as well as give the Chinese a chance to embed their economic leadership in Asia-Pacific.

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