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World’s Largest Trade Agreement Signed: Has China Won?   

World’s Largest Trade Agreement Signed: Has China Won?  

On 15 November 2020, delegates from fifteen states gathered to sign the Regional Comprehensive Economic Partnership (RCEP). The ceremony was markedly different than that seen two years ago for the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), commonly framed as a rival agreement intended to impede China. This year there was no awkward group handshake on stage. National leaders and trade ministers stood quietly applauding, flags and green screens in the background as they concluded eight years of negotiations over a glorified Zoom call.

And what a momentous call it was, as these fifteen states signed the largest free trade agreement in history. RCEP covers one third of the world’s population and economic output and has the potential to boost world incomes by approximately £157 billion ($209 billion) per year. But compared to the CPTPP the RCEP is antiquated in its provisions. It hardly touches politically sensitive agricultural products or digital trade. Labour and environmental concerns are paid lip service at best. It is much more in the vein of a twentieth century free trade agreement than the far-reaching CPTPP. Indeed, some of its clauses will not come into effect for twenty years. If the RCEP is characterized by low ambition, as some claim, then why is it momentous?

RCEP will have economic significance beyond its sheer size. Representing ten of the RCEP signatories, The Association of Southeast Asian Nations (ASEAN) had already agreed free trade agreements with individual states in the region. However, there was no overarching framework as found in the European. Rather, there was a jumbled assemblage of agreements, like a bowl of spaghetti. This lack of coherence reduces the efficiency of intra-regional trade, important for economies dependent on regional supply networks. RCEP is intended to simplify this jumble of agreements. With unimpeded intra-regional supply chains, foreign business is likely to increase investments in the region. However, even gains through investment are likely to be incremental.

As the largest trade partner of most states in the region, China stands to benefit the most from the agreement. These gains are somewhat impeded by the ongoing US-China trade war, but RCEP will offset losses while the US loses out. Japan and South Korea also stand to make significant gains. In addition to being well-positioned within the region’s trade networks, they did not have existing free trade agreement with China. Therefore, they will enjoy an outsized portion of the economic benefits RCEP stimulates.

The moment of its signing also marks RCEP’s significance. Beyond having the potential to provide a post-Covid-19 economic boost for the region, RCEP is a step forward for trade liberalization during a period of protectionism. Examples of economic nationalism are too easy to find and as usual most of them involve the US. The US-China trade war, tariffs on European products, protectionism spurred on by the pandemic, and the continued blockage of the WTO’s dispute settlement system all point to a comparative dark age for trade liberalization. However, whatever the US and the West may be doing, it appears that Asia will continue integrating.

The RCEP’s true significance will be its political impacts. The US has withdrawn from its leadership role. Its withdrawal from the CPTPP and exclusion from RCEP means that the US has relinquished the rule-setting role in Asia. With RCEP signed, states across Asia will be drawn closer into China’s economic orbit. Between the RCEP, the Belt Road Initiative, and its involvement in multilaterals like the Asian Infrastructure Investment Bank, it is clear that Beijing is positioning itself as the rule maker for the Asia-Pacific Region. But it is inaccurate to claim that RCEP is a Chinese-led project. ASEAN is responsible for initiating and negotiating the agreement. Neither China nor Japan, the region’s traditional poles, would have had the political backing to pursue such an agreement. However, the dynamic within the agreement will be different now that India has withdrawn. While RCEP was intended to tie all the major economic powers into a consolidated FTA framework, India withdrew from negotiations under Prime Minister Narendra Modi. The reasons cited include India’s growing trade deficit with China and potential flood of agricultural products from Australia. Without India’s market to counterbalance Chinese influence, it falls on Japan to act as the counterweight. It is unclear if Japan has the necessary economic clout or regional political backing. Tokyo is acutely aware of the pressures falling on it and Prime Minister Yoshihide Suga has called for the rapid expansion of the CPTPP, very likely to present a coalition more capable of constraining China’s ascent.

President-elect Biden has already signalled his intention to rally US allies in an attempt to curb growing Chinese influence. However, what form this rallying cry takes and how successful it is remains in unknown. Under President Trump the US isolated allies and forced states in Asia to make political choices that could damage the US’s long-term influence in the region. While Biden will likely try to reassert the US as the primary power in the Asia-Pacific, he faces an uphill battle. And it is likely only to grow steeper. Where China once baulked at the prospect of joining the CPTPP, Beijing has been vocal about the possibility of acceding to that agreement as well. This is unlikely to happen immediately as China would first have to restructure parts of its economy to match the CPTPP’s provisions. While the CPTPP and RCEP are compatible economically it remains to be seen if this is true politically. The CPTPP has commonly been presented as an effort to constrain China within the region, but the US undercut this political motivation by withdrawing under Trump.

RCEP’s impact is not set in stone. It must first be ratified by the signing national governments. That is more a formality than a true obstacle. But as of now it appears China has scored another victory in its rise towards regional hegemony. It is possible that the US under Biden will be a different beast than the one seen under Trump, capable of meeting the challenge. Indeed, given what Biden has said to this point, he is acutely aware of the challenges he faces in the region. The importance of the US course of action cannot be overstated, but other states have roles to play in determining the outcome. Japan and India are foremost among them. At the moment, China is on track to become the primary economic power and rule maker in the region. A course reversal would require a rapid change of course, unlikely with the US unable to figure out what it wants. Whatever the political impact, RCEP stands to boost economies throughout the Asia-Pacific region in the post-Covid era.

Image courtesy of Tiger 7253, ©2017, some rights reserved.

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