How many countries will join the RCEP?

The Asian free trade zone RCEP

RCEP was initiated by the ASEAN countries and includes their ten members (Brunei, Indonesia, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) as well as the People's Republic of China, Japan, South Korea, Australia and New Zealand. From 2012 onwards, these countries negotiated the terms of a regional free trade agreement. One of the main motives for the ASEAN countries was to counterbalance the Trans-Pacific Partnership (TPP). After the USA withdrew from this agreement in 2017, the subsequent implementation of a smaller, somewhat less ambitious project (Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP) was not a full replacement for RCEP because important ASEAN members, especially Indonesia and Thailand, did not participate in CPTPP.

However, RCEP does not change the trade relations between ASEAN and the People's Republic of China significantly, as trade between these eleven economies has been based on a free trade agreement since 2010. However, this is based on a proposal by the then Chinese Prime Minister Zhu Rongji and not on ASEAN.

Japan, China, South Korea

So what is noteworthy is the conclusion of an agreement that includes these states. Rather, it has so far been considered difficult to negotiate a trade agreement in which the two economic and political heavyweights in Asia, China and Japan, are involved. The fact that despite the political tensions in the region, RCEP has been successfully concluded is a success.

While the rivalry between China and Japan has been fermenting for many decades, Sino-South Korean relations rarely make the headlines. One exception was a conflict in 2017. Following an agreement between the South Korean group of companies Lotte and the Department of Defense in Seoul, which was supposed to enable the expansion of a US military base on company premises, the Chinese state media appealed to the public, the Lotte supermarkets -Boycott the corporation and all South Korean films and goods. Lotte then announced that it would cease its business in China.

But it is not only South Korea's relations with China that are strained. Japan, along with the USA, Australia and India, is part of the Quadrilateral Security Dialogue, or »Quad« for short, a loose military alliance in the Indo-Pacific region. Quad has been a very weak alliance so far, but the group's most important goal is clear: to create a military counterweight to the PRC.

Japan is on the one hand firmly in the camp of those countries that are critical of the growing determination of Chinese foreign policy, but on the other hand is interested in expanding its trade with China. At the same time, Japan's participation in RCEP can be explained by the rivalry between Tokyo and Beijing. If Japan had left the agreement, China's influence on emerging Asian economies would have grown further.

The greatest trade benefit of RCEP is that it facilitates the application of trade agreements in the Asia-Pacific region. For years, economists have complained that the economic benefits of the numerous trade treaties in the region are narrowly limited because they lead to more, not less, regulation in international trade. The lowering of tariffs in bilateral trade resulted in higher administrative costs for companies: They had to spend a lot of money to document the origin of a product, the origin of the goods. Without a valid certificate of origin, goods cannot be traded duty-free in any free trade agreement. The cost advantages of the abolition of import duties have often been neutralized by the cost of issuing such certificates of origin.

The simplification of complex regulations

The economic effects of the previous trade policy have been disappointing. According to a 2015 study by the Pacific Council for Economic Cooperation, a large majority of companies did not make use of the existing free trade agreements. Only 22 percent of Asia-Pacific trade (only trade between countries in a free trade agreement was counted) was carried out using the contractual benefits. The remaining 78 percent were cleared using the standard rules and tariffs of the World Trade Organization (WTO). In other words, the existing free trade agreements did not do much to liberalize trade in the Asia-Pacific region.

RCEP, on the other hand, will lead to a reduction in the administrative burden for companies in the trading sector. As soon as it comes into force, uniform rules of origin will apply to all participating economies. However, companies will still have to calculate whether the costs of providing evidence of the origin of goods will be lower than the customs duties that they would otherwise have to pay. However, it seems plausible to expect that the proportion of trade that is carried out on the RCEP terms will be significantly higher than in many of the previous trade agreements.

Violation of Article 24

RCEP contributes to the liberalization of trade between the participating countries. Within the free trade zone, the costs of the cross-border movement of goods and services are reduced. Nonetheless, RCEP promotes further erosion of the multilateral trading system. Every free trade agreement is an exception to the famous Article 1 of the General Agreement on Tariffs and Trade (GATT). This "most favored nation clause" - all trade liberalization measures are automatically granted to all WTO member countries - is not applicable in free trade agreements. This exception is regulated in Article 24 of the GATT. The prerequisite for this, however, is that the free trade agreement covers "the main part of the trade" (substantially all the trade). But the RCEP does not do that. Agriculture is largely excluded, as is fishing. The rules on trade in services are weak. However, these shortcomings apply to almost all free trade agreements without sanctioning illegal agreements in the WTO. The reason for this is simple: a WTO member state would have to bring an action, and since all contracting parties themselves violate the rules of Article 24, no action will be taken.

Thus, the RCEP does not represent a return to the spirit of trade liberalization of the 1980s and 1990s. It weakens rather than strengthens the multilateral trading system. It may be beneficial to the participating economies, but not to the world economy. Even for the Member States, the impact is marginal. According to a study by the Peterson Institute for International Economics (PIIE), the RCEP countries will generate additional GDP of $ 174 billion annually by 2030. Since RCEP already has a population of over 2.5 billion people, the economic benefit for the individual will hardly be measurable. According to these calculations, economic output in the RCEP zone will increase by around 70 US dollars per capita per year. Nobody will be able to describe this gain as substantial.

A flat set of rules without common standards

RCEP will not, as is often assumed, lead to a new economic bloc led by China. The regulatory content of the agreement is not very ambitious. RCEP does not contain any requirements for environmental protection and does not offer any uniform employee protection. It is even more important that the agreement does not restrict the participating economies in their future trade policies. In contrast to the European Union - a customs union that goes hand in hand with a common trade policy of the member states - RCEP still allows the participating countries to pursue their own trade policy. For example, Australia can sign a free trade agreement with the EU if it so wishes. If RCEP were a customs union, the picture would change. But in today's political climate it is difficult to imagine that countries like Australia or Japan could agree on a customs union with the People's Republic of China. The RCEP is thus an expression of the greatest possible bond with China in a narrowly limited section of foreign trade. The agreement is not the beginning of an Asia-Pacific integration process. In the two weeks after it was signed, the political tensions that were preventing far-reaching integration in the Indo-Pacific region became apparent.

Canary Australia

In no other country are the foreign policy tensions and contradictions in the region as pronounced as in Australia. Canberra has faced severe criticism from Beijing for several years. Australia's government pursues a policy of close security ties with the USA on the one hand and economic cooperation with China on the other. Their criticism of the violation of the Uyghurs' human rights in Xinjiang or the crackdown on the protests in Hong Kong and the exclusion of the Chinese tech company Huawei from setting up the Australian 5G network caused anger among the Chinese government. Now this is testing how far it can go. In Asia Pacific, Australia is the canary in the coal mine showing Beijing how far it can go.

The situation is particularly tricky for Australia. No other country has benefited as much from China's economic upswing as Australia. Since the gold rush in the 1850s, Chinese immigrants have contributed to Australia's development. Up to the corona crisis, around 180,000 Chinese were studying there. Every year 1.2 million Chinese traveled to Australia. The same number of people with Chinese roots live on the fifth continent.

China has been the country's largest trading partner since 2007. In 2018/19, the People's Republic was by far the most important destination for Australian exports with around 135 billion Australian dollars (AUD). Japan was well behind at AUD 59 billion. There are also around AUD 18 billion in service exports to China. The total of goods and services exports to China is higher than that of Australian exports of goods and services to Japan, the USA, India and South Korea. At least at first glance, Australia seems open to blackmail.

However, Australian society is increasingly skeptical about China. Half of Australians had a positive opinion of the US in 2019, despite difficulties with the US administration and President Trump. But only about a third had a positive opinion of China - although Australia's prosperity depends largely on the export of raw materials to China and on the Chinese demand for educational and tourist services. In the past few weeks, the hostile attitude of many Australians has become even stronger. A full 94 percent of Australians expressed their support for the government's policies to reduce the country's dependence on China.

Australia shows how thin the varnish of modernity is that the country has given itself. Journalist Richard McGregor called Australia a "modern multicultural country with deep xenophobic roots." After the Second World War, the programs with which Australia opened up to massive immigration of Europeans were justified with the "yellow danger". While the Australians feared Japan in the 1950s, the focus today is on China.

Not only the population, but also the government is grappling with the ambivalent perception of China. When Chancellor Merkel visited Australia in 2014 and asked then Prime Minister Tony Abbott which factors influenced Australian policy on China, Abbott replied succinctly: fear and greed. Since then, the only thing that has changed about this dichotomy in China's perception is that the feeling of threat in Australian society has increased further.

China expects Australia today to do nothing less than renounce criticism of the Chinese government, in short, a classic kowtow. RCEP will do nothing to alleviate Australian-Chinese tensions. Australia, which had previously signed a bilateral free trade agreement with China, is suing Beijing's arbitrary punitive tariffs, not as part of the dispute settlement procedure of that agreement, but has announced that it will involve the World Trade Organization (WTO). In turbulent times, the advantages of multilateral dispute settlement mechanisms are very evident.

Japan

For China's eternal rival, the conclusion of a free trade agreement with the communist state is useful. Tokyo was able to join the RCEP because it coincides with its economic interests and does not incur high political costs.

The agreement allows Japanese companies to develop production networks in the region even more strongly than before. Japanese companies have been very active in the ASEAN countries in the past. For example, you have made a major contribution to Thailand becoming an important production location. Euphoric observers have already called the country "Asia's Detroit". By simplifying the rules of origin, Japanese automakers can now increase their sourcing of components from across the region.

The exclusion of agricultural trade is extremely politically beneficial for Japan. Both in the WTO and in bilateral and minilateral free trade agreements, Japan has always found it very difficult to liberalize agricultural trade. Japanese agricultural products are expensive and cannot compete with competitive suppliers in terms of price. Opening the country to rice imports from the region, for example, would have entailed high political costs. With its likely considerable benefit for the still very efficient Japanese industry in connection with the ongoing protection for Japanese farmers, the RCEP seems almost tailor-made for the interests and preferences of Tokyo.

China

Just like Japan, China also benefits from the establishment of the free trade zone. Chinese companies will also benefit from the administrative simplifications and possibly regionalise their production networks more strongly. With China in particular, however, the question arises as to whether such internationalization is politically desirable at all. The General Secretary of the CPC, Xi Jinping, presented his new economic policy strategy in November 2020. It forms the core of the new five-year plan, which is to apply from 2021 to 2025. The focus is on the idea of ​​so-called double circulation.

It is about a partial decoupling of China from the world economy. The share of exports in Chinese GDP has already fallen from 36 percent in 2006 to 18 percent in 2019. The trade war with the USA made it clear to Beijing how dependent the domestic economy is in part on imports. Almost two thirds of all semiconductors used in China in 2019 were produced abroad. In 2015, this value was 80 percent. 16.6 percent of Chinese imports in 2019 were semiconductors and other electronic components valued at $ 350 billion.

In 2020, six companies from the USA, two from South Korea and one company each from Taiwan and Japan, but none from China, are in the list of the ten semiconductor manufacturers with the highest sales. Beijing is aiming for a 70 percent self-sufficiency rate for semiconductors by 2025, but industry experts believe that this target will not be achieved.

At present it cannot be judged what consequences the new policy of double circulation will have. Xi described the establishment of purely national value chains as a question of national security. Seen in the light, it is the new edition of the dusty self-sufficiency model that was popular in the 1930s. Should China actually decide on a new version of auto-centered development, RCEP would be a superfluous project.

However, according to the will of its leadership, China should continue to participate in the large international circulation. Because the aim of the new strategy is also to maintain the importance of the Chinese market for foreign companies. If China continues to buy overseas-made luxury cars, for example, this could deter foreign governments from criticizing the Communist Party's new trade strategy too harshly.The motive of greed cited by Tony Abbott would be used purposefully by the Chinese government to maintain dependency. German companies in particular, especially the automotive industry, are a prime example of these dependencies.

South Korea

Similar relationships apply to the industrialized country of South Korea as to Japan. South Korea got rich without having a free trade agreement with China. And like Japan, South Korea has a profound interest in protecting its agriculture.

However, both South Korea and Japan have learned some bitter lessons in 2020. This includes the fact that the automotive industry in both countries came to a standstill at the beginning of 2020 because preliminary products from the PRC were missing. For this reason, the manufacturers Hyundai and Kia had to suspend production entirely. In Japan, Honda and Nissan were forced to cut production. In 2019, 31.1 percent of all auto parts imported to South Korea and 36.9 percent of all auto parts imported to Japan came from China.

It was painfully made clear to many corporate leaders in South Korea and Japan that the procurement of components from China may be inexpensive, but requires smooth logistics. In the midst of the crisis, the supply did not work. Overall, cheap components have proven to be expensive because their failure brought entire production lines to a standstill. This experience will dampen the interest of East Asian industrial companies to increasingly source components from China or Southeast Asian countries after the entry into force of RCEP.

India's exit

The importance of RCEP would be greater if India had signed the agreement. However, India has been wrestling with its role in the global economy for years. On the one hand, the country's companies are also very active beyond the country's borders, and not only in the service sector. Major shares in the British automotive industry (Jaguar, Land Rover) today belong to the Indian company Tata. On the other hand, Indian governments have repeatedly shown themselves to be a brake on the further development of regulations for international trade. From the start of the WTO Doha Round negotiations in 2001, New Delhi has been pushing for the demands of the developing and emerging countries to be enforced. The sometimes excessive demands of this group contributed significantly to the failure of the Doha Round. The expectation that the government of Narendra Modi, in office since 2014, would be courageous enough to significantly liberalize India's trade policy has not been confirmed. India remains in a position of globalization skepticism and - like China in the new five-year plan - is primarily focusing on domestic economic development.

The country is a special case in today's international trading system because it has not concluded a free trade agreement with any of the major economic areas (East Asia, Europe, North America). Prime Minister Modi had long made it appear that he was determined to develop India into a modern economy that would face international competition. Modi repeatedly criticized the protectionist policies of US President Trump. At the beginning of 2018, he was celebrated at the Davos World Economic Forum for his appeal to accept globalization and to strengthen international institutions such as the World Trade Organization.

But even then, observers warned of the discrepancy between the Indian government's announcements and its actions. Basically, Modi himself always pursued a protectionist policy. In the index of economic freedom compiled by the American Heritage Foundation, India ranks 120th in 2020, well behind the ASEAN countries Malaysia (24), Thailand (43) and Indonesia (54).

Given the comparatively high level of economic dynamism in India in the early years of the Modi government and the premier's pro-globalization rhetoric, it had long appeared that India would participate in RCEP. With a single agreement, India could have liberalized its trade relations with dynamic economies, simplified them administratively and probably benefited greatly from them economically.

An economic opening of India is not to be expected in the foreseeable future. There are two main reasons for this: On the one hand, tensions between India and China increased significantly in 2020; they culminated in a military clash in the Himalayas. Against this background, New Delhi has readjusted its foreign policy and is now more ready than it was recently to stand up to the People's Republic together with the USA, Japan, Australia and other democratic states. It is therefore hardly conceivable at the moment that India will join a free trade agreement in which China is also a party.

The second reason is the renaissance of an economic policy that focuses on the internal market and tries to restrict foreign trade. This policy, which works towards a high degree of economic self-sufficiency, is known as "Atmanirbhar Bharat". New Delhi is now relying on a strategy that John Maynard Keynes propagated in 1933 under the designation "National Self-Sufficiency". Indian Foreign Minister Subrahmanyam Jaishankar held an anti-globalization Philippika at the end of November 2020, immediately after the signing of the RCEP treaties, claiming that India's industry had been badly damaged by previous liberalization measures.

It is therefore unlikely that the Modi government will abandon its course and return to a policy of economic opening. This retrograde role in trade policy is also surprising because the Indian population has repeatedly expressed itself very positively about the effects of globalization.

High level of support for globalization

It is noteworthy that RCEP encountered little or no political opposition in the participating economies. The main reason for this silence by civil society is that the RCEP comprises a group of countries which, in simplistic terms, could be described as a coalition of "winners of globalization". Today, societies in the Asia-Pacific region still show a high level of support for trade liberalization and a far-reaching international division of labor. While the old advocates of globalization - especially most OECD countries - are now tired and suspicious, many Asian societies articulate the desire for more openness and networking with remarkable clarity. The populations of Vietnam and the Philippines consistently have the highest levels of support for globalization in polls. The people in most of the RCEP countries do not see an increase in international trade as a threat, but as an opportunity.

In many OECD countries, the consequences of globalization are viewed much more critically today. The loss of jobs due to the relocation of production to countries with lower wages and less environmental regulations is seen as more important than the benefit of being able to fall back on cheaper imported products as a consumer. Therefore, the conclusion that has often been heard lately that the EU and the US must now take action and liberalize their own trade policies is an inaccurate and apolitical demand. Donald Trump won the election in 2016 because he emphasized the negative effects of globalization on American workers. In the meantime, support for a protectionist US trade policy is likely to have increased. President Biden did not win the 2020 election because he promised the Americans that trade policy would be liberalized. Rather, he does not find much support for a policy of free trade, neither within the Democratic Party nor among US voters.

Europeans, on the other hand, often assume that their countries are the frontrunners of free trade, but of course the EU is just as protectionist as the US. Trade in agriculture is severely restricted in the EU, as is that in some other sectors, such as the automotive industry. When the Covid-19 crisis is over, it is likely that the EU will tighten its trade policy further, for example through the introduction of tariffs that sanction the import of products that are not produced in a climate-friendly manner. Such climate tariffs can quickly become barriers for developing and emerging countries, especially if the emissions from transport are included in the calculation. Cut flowers from African countries could then disappear from European flower shops. This European protectionism is supported by many citizens. But from the point of view of poorer countries, trade restrictions based on climate policy are a threat and not a promise.

On the one hand, the RCEP agreement is a positive signal: a number of companies continue to support trade liberalization. But RCEP is not going to seriously change the future of international trade. It will bring urgently needed administrative relief to companies in the Asia-Pacific region and facilitate the movement of goods and services in the region. All the political issues that have hindered far-reaching economic and political integration in the Asia-Pacific region so far, if not impossible, still exist. This is about China's controversial territorial claims in the South China Sea, Beijing's increasingly aggressive foreign policy and the still unresolved relationship between state-subsidized Chinese state-owned companies on the one hand and those companies in China's trading partner countries that are subject to market-based processes on the other.

At the same time, it is noticeable that the two most populous states in the Indo-Pacific region want to turn away from the paradigm of an open trade policy. This will presumably lead to a weakening of the economic dynamics in both countries and, especially in India, to the fact that the consequences of the Covid-19 crisis can only be overcome slowly.

RCEP will presumably mark the high point of integration in the Asia-Pacific region and not the starting point for economic and political union in the region.

Prof. Dr. Heribert Dieter is visiting professor at the University of Hong Kong and
Scientists in the Global Issues research group.

© Science and Politics Foundation, 2020

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doi: 10.18449 / 2020A97