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While Trump Builds Tariff Walls, Asia Bets on Free Trade

It’s crunch time for the biggest trade deal you’ve never heard of.

By Keith Johnson

Indian farmers burn an effigy of Prime Minister Narendra Modi, protesting plans to join the Regional Comprehensive Economic Partnership trade pact, on Sept. 15.

November 1, 2019, 11:09 AM

This weekend’s summit of the Association of Southeast Asian Nations has been dominated by the U.S. decision to send a downgraded delegation, deepening fears among Asian allies that Washington isn’t really serious about its own Indo-Pacific strategy. But the sidelines of the meeting could see an even bigger development: the preliminary signing of the world’s most ambitious trade agreement, which would only serve to cement intra-Asian integration and underscore America’s strategic withdrawal from the region.

What is this trade deal?

The Regional Comprehensive Economic Partnership (RCEP) is a sprawling free trade agreement between 16 Asia-Pacific countries—the 10 members of ASEAN, plus China, Japan, South Korea, Australia, New Zealand, and India—that account for half the world’s population and about one-third of global GDP. In the works since late 2012, with more than two dozen contentious rounds of talks since then, the deal for a long time seemed on a fast track to nowhere, overtaken by other regional trade deals and even high-profile bilateral pacts like that between Japan and the European Union.

But in recent years, the Trump administration’s withdrawal from another Asian trade pact—the Trans-Pacific Partnership (TPP)—and its lurch toward outright protectionism have spurred the 16 RCEP countries to sort out long-standing differences and come close to finalizing what would be the biggest free trade pact on Earth. On Monday in Bangkok, representatives of the 16 RCEP nations are expected to announce a “significant conclusion” to the trade talks, which would mean that they’ve reached a broad agreement and would be able to wrap up the final details of the accord next year.

How does RCEP compare to the TPP?

The Obama administration pushed the original TPP, envisioned as a free trade agreement between the three North American countries and nine other Asia-Pacific countries. That would have been the world’s biggest trade deal, covering almost 40 percent of global GDP. The TPP, in addition to lowering tariffs on thousands of goods, also had high standards for labor and environmental protections and new rules for intellectual property rights, currency manipulation, and more.

But that original TPP died in President Donald Trump’s first week of office; its successor, the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership, went into effect late last year but naturally accounts for a much smaller share of global GDP without the United States. The expected income benefits of the new TPP are also smaller than the original plan: $147 billion compared with about $492 billion, according to the Peterson Institute for International Economics.

RCEP is both more and less ambitious than the TPP, even if there is some overlap in membership. The biggest difference is who is involved: The TPP specifically excluded China, giving the United States and many allied countries a way to push back against Chinese economic dominance. RCEP, in contrast, includes China, and potentially India, making it very much an Asian-dominated trade grouping.

On the other hand, RCEP is less ambitious than TPP, aiming mostly to lower tariffs between member nations and taking some steps to open up trade in services and updates to dispute settlements and the like. But it doesn’t include any of the stringent labor or environmental standards from the original TPP. The shallower nature of the trade agreement, even across such a huge swath of the globe, also means its expected benefits are smaller: about $286 billion, more than the watered-down TPP but less than the original.

Many potential RCEP members, such as Australia and New Zealand, were initially less than enthusiastic about the modest provisions of the 16-member pact. But as Trump’s use of tariffs and his trade war with China have sent chills through the global economy and raised questions about the very survival of the decades-old global trading order, they’ve become willing to settle for less just to help prop up that threatened order.

So what’s been the holdup?

In a word: India. For decades, India has been leery of opening its industrial and agricultural sectors to too much competition, and that’s just what joining RCEP would do; fears of a flood of cheap Chinese goods are especially intense, since India’s bilateral trade deficit with China is roughly half of its entire deficit with all RCEP members. India has also not tangibly benefitted from the handful of free trade pacts it has signed in the past, dampening enthusiasm for joining a megadeal. Sectors including steel and aluminum, textiles, dairy, and other agriculture have all warned that joining RCEP could put millions of Indians out of work.

India’s government, which just won reelection with a strong majority, is right-wing. But that doesn’t mean it embraces free trade by any stretch, said Alyssa Ayres of the Council on Foreign Relations. “Some elements in India on that far-right spectrum are saying, ‘We can’t have more open trade because we’ll be flooded with more imports from China.’ It’s a big fear and an understandable one,” she said.

But Indian Prime Minister Narendra Modi won his first election promising to boost growth and jobs. Will his big reelection mandate translate into a more open India?

That’s the big question. Modi came into office promising growth and a more competitive Indian manufacturing sector, which could point toward the country swallowing some short-term pain in exchange for the long-term benefits of joining RCEP, gaining preferential access to new markets for goods and services and boosting its own firms’ competitiveness over the long run. But Modi’s economic platform hasn’t advanced free trade but rather the opposite, raising tariffs on a wide range of goods, even in the most recent budget.

“They’ve been going backward on trade openness,” Ayres said. That’s what makes it hard to know just what India will do on Monday in Bangkok. It could decide that the costs of sitting on the sidelines while all of Asia’s other big economies ink a free trade deal outweigh the pain of more imports. (Studies suggest that India would benefit modestly from joining RCEP but would lose more by not joining.) Or Modi could decide that domestic development reforms, such as improving health care and sanitation, will deliver more benefits than taking a chance on greater trade openness.

“I’m not sure how you square the circle on this, unless you take a Modi-level decision and say, ‘We need to be a more open economy because that will be our ticket to greater prosperity,’” Ayres said.

Update: India did not square the circle, with Modi announcing Monday that the terms of the mega-trade deal did not address India’s concerns. The other 15 RCEP members will go it alone, for now–with the possibility for India to join later.

What would RCEP mean for the United States?

If the 16 prospective RCEP members do ink some sort of preliminary deal on Monday, it will deal another blow to the United States and its position in the Asia-Pacific, which already took a hit when the rest of the TPP members ratified the trade pact without Washington. Even as the Trump administration tries to decouple the U.S. and Chinese economies and force global manufacturing firms to move out of China, RCEP would further promote intra-Asian economic integration, insulating the region more from the United States both economically and strategically.

Under Trump, the United States has struggled to reach even modest new trade agreements with Mexico, Canada, South Korea, and Japan. Meanwhile, many of those countries have already forged ahead in the slimmed-down TPP and could open up more regional trade opportunities with RCEP. That would mean fewer markets for U.S. goods and even stronger Asian supply chains that could compete against U.S. manufacturers.

But there’s a strategic component to RCEP, too—much like the original vision behind the Obama administration’s embrace of the TPP. RCEP, if completed, would amount to a free trade agreement between China and some of America’s closest allies, such as Japan, South Korea, and Australia, not to mention Vietnam, Singapore, Indonesia—and India.

“Their closer economic interdependence with China could give Beijing strategic leverage over these U.S. allies,” the National Bureau of Asian Research concluded in a study.