Voice

Cutting Through the Hype on Asia’s New Trade Deal

The RCEP truly is a China-style trade agreement: platitudinous and ineffective.

By , an adjunct scholar at the Centre for Independent Studies in Sydney.
Indian Prime Minister Narendra Modi and Chinese Premier Li Keqiang during the Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok on Nov. 4, 2019.
Indian Prime Minister Narendra Modi and Chinese Premier Li Keqiang during the Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok on Nov. 4, 2019. MANAN VATSYAYANA/AFP via Getty Images

Last month, 15 countries signed the Regional Comprehensive Economic Partnership (RCEP), a landmark Indo-Pacific trade deal designed to “create new employment opportunities, raise living standards, and improve the general welfare of their peoples.” The original impetus for negotiations came from the Association of Southeast Asian Nations (ASEAN), which contributes 10 of the partnership’s members. But around 80 percent of the new bloc’s combined $25 trillion GDP comes from just two countries: China and Japan. Another $3 trillion comes from ASEAN, and the remainder from South Korea, Australia, and New Zealand.

Is the RCEP big? Yes. Is it meaningful? No. Liberal internationalists may take encouragement from the signing of a new trade deal—any trade deal—in the current global climate. But the RCEP is a straight tariff-reduction agreement at a time when base tariffs are already low, and countries don’t hesitate to impose punitive tariffs whenever it suits their foreign-policy objectives. The RCEP says virtually nothing about economic governance, and even its trade provisions are unenforceable. It avoids difficult issues like government subsidies, government procurement, theft of intellectual property, and investor-state dispute settlement. Labor standards aren’t even mentioned. Agricultural trade is largely exempt. The RCEP truly is a China-style trade agreement: platitudinous and ineffective.

Last month, 15 countries signed the Regional Comprehensive Economic Partnership (RCEP), a landmark Indo-Pacific trade deal designed to “create new employment opportunities, raise living standards, and improve the general welfare of their peoples.” The original impetus for negotiations came from the Association of Southeast Asian Nations (ASEAN), which contributes 10 of the partnership’s members. But around 80 percent of the new bloc’s combined $25 trillion GDP comes from just two countries: China and Japan. Another $3 trillion comes from ASEAN, and the remainder from South Korea, Australia, and New Zealand.

Is the RCEP big? Yes. Is it meaningful? No. Liberal internationalists may take encouragement from the signing of a new trade deal—any trade deal—in the current global climate. But the RCEP is a straight tariff-reduction agreement at a time when base tariffs are already low, and countries don’t hesitate to impose punitive tariffs whenever it suits their foreign-policy objectives. The RCEP says virtually nothing about economic governance, and even its trade provisions are unenforceable. It avoids difficult issues like government subsidies, government procurement, theft of intellectual property, and investor-state dispute settlement. Labor standards aren’t even mentioned. Agricultural trade is largely exempt. The RCEP truly is a China-style trade agreement: platitudinous and ineffective.

Nonetheless, the RCEP has been lauded as “the world’s largest trade agreement,” supposedly creating a European Union-style trade bloc that provides “a European Union-style single set of trade rules” to govern the Indo-Pacific economy. The deal is “expected to accelerate a shift in global trade toward East Asia and away from the West.” By remaining aloof from the negotiations, the United States has clearly lost out” in terms of international influence and economic prosperity. The Peterson Institute for International Economics (PIIE) estimates that the RCEP will boost global GDP by $186 billion a year, with China, Japan, and Korea gaining $85 billion, $48 billion, and $23 billion, respectively.
The fact that the RCEP will do nothing to rein in China’s bad behavior is probably the reason why India pulled out of the deal.
That’s the hype. Now the reality. The world will have to wait 10 years to see those GDP gains: The PIIE’s estimates pertain to forecasts for 2030. Based on past long-term trend growth rates (and ignoring coronavirus effects), the world’s economy would be expected to grow around 40 percent over that period. The RCEP may add two-tenths of a percentage point to that figure, if you can find it in the rounding error. As for European Union-style integration, forget about a common market, freedom of movement, or even binding arbitration for dispute settlement. Despite 469 pages covering the liberalization of trade in services, China’s internet will remain closed.

Even the deal’s tariff reduction provisions should be taken with a large grain of salt. Reducing tariffs to zero sounds dramatic when considered in the abstract. Get down to details, and there’s much less to get excited about. For example, Japan’s single largest category of exports to China is machinery, at over $10 billion a year. China’s highest tariffs on Japanese goods in this category are currently just 10 percent, scheduled to reduce to zero by 2030 or 2035. But in the most important categories of machinery—industrial robots and machines used to print integrated circuit boards—the tariffs are already zero.

Similarly, Australia’s main export to China, iron ore, is already tariff-free. The RCEP will, however, eliminate China’s 3 percent tariff on coal next year. That might help—if China allows any of Australia’s coal to unload. Reflecting an undeclared Chinese embargo, Australia currently has 82 coal vessels carrying 8.8 million metric tons of coal and 1500 crew stranded outside Chinese ports, where they await clearances to dock and unload. Under the RCEP, China’s 14 percent tariff on imported wine will also be lifted next year, but in the meantime China has slapped a 200 percent levy on Australian wine—ostensibly as an anti-dumping measure, but in reality as an attempt to exert pressure on Australia to abandon its efforts to stem Chinese influence in the country.

The fact that the RCEP will do nothing to rein in China’s bad behavior is probably the reason why India pulled out of the deal. Indian Prime Minister Narendra Modi has been alternatively criticized for protecting Indian agriculture and praised for protecting manufacturing. The criticism is absurd: The RCEP doesn’t even cover agriculture. The praise is more reasonable—participation in the RCEP would have left India highly exposed to imports of cheap Chinese and Southeast Asian small manufactures—but the protection of inefficient manufacturing is only part of the story. There seems no reason to doubt Indian Minister of External Affairs Subrahmanyam Jaishankar’s own account of the reasons for his country’s withdrawal: non-tariff barriers, state subsidies, and a lack of transparency. What he didn’t say was: on the part of China.
China may score propaganda points by posing as the guardian of the international system, but the system itself is increasingly bypassing China.

Even before the 2016 U.S. elections were won by President Donald Trump, trade agreements became talismanic symbols of internationalism, global cooperation, and the liberal order writ large. Since then, liberal internationalists have embraced them even more strongly as bulwarks against Trump-style populist nationalism, and have celebrated the RCEP as marking the end of the anti-trade backlash. Yet it wasn’t only Trump who rubbished globalization with his America-first slogan. The populist-progressive Democratic presidential candidate Bernie Sanders also made the Trans-Pacific Partnership (TPP), negotiated by the Bush and Obama administrations, a target of his 2016 campaign. Even the Democratic candidate, Hillary Clinton, ultimately came out against the TPP. Four years later, President-elect Joe Biden has pledged to rewrite global trade rules to allow him to prefer U.S. suppliers in government procurement, and to erect other new barriers such as a border tax on carbon.

The global leader most loudly proclaiming his support for internationalization, an open global economy, tariff cuts, the “liberalization of trade and investment,” and “high-standard free-trade agreements” is … Chinese President Xi Jinping. And that puts liberal internationalists in a bind. At the January 2017 World Economic Forum, they cheered him as the anti-Trump, a globalist committed to maintaining and expanding an open international system. Four years later, any illusions the world may have had about the potential liberalism of Xi and China have been laid to rest. Thus they have sought to redirect their RCEP plaudits toward ASEAN or simply contented themselves with cheering the future of Asia in general, while attempting to ignore the giant panda in the room.

The truth is that there’s little appetite for deep global governance in Asia—or anywhere else in the world. North America has the NAFTA-successor United States-Mexico-Canada Agreement, and Europe of course has the European Union. Both are true economic governance arrangements, the EU far more so than the USMCA. Since the failure of the TPP, there has been nothing comparable in Asia. The 11 erstwhile U.S. partners in the TPP did sign their own rump agreement in 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but it is neither comprehensive (it stripped out most of the agriculture, investment, and dispute settlement provisions of the original TPP) nor progressive (in the absence of U.S. political pressure on workers’ rights, the remaining 11 countries settled for a bland statement reaffirming their “obligations as members of the International Labour Organization”). The CPTPP, like the RCEP, is a straight tariff-reduction agreement focused on areas where tariffs were already low or trade volumes relatively insignificant.

Liberal internationalists may crow that “the RCEP and the CPTPP are powerful counterexamples to the global decline in rules-based trade,” but that is wishful thinking—and unjustified pessimism at the same time. Tariff reduction agreements like the RCEP and the CPTPP are largely harmless, but hardly transformative. That said, the stress test posed by the coronavirus pandemic has proven the extraordinary robustness of global production networks. International supply chains have rapidly shifted away from China toward more rules-abiding countries such as Vietnam, Bangladesh, and India. With its participation in the CPTPP as with Xi’s ode to trade in Davos, China may score propaganda points by posing as the guardian of the rules-based international system, but the system itself is increasingly bypassing China. That may be bad news for global trade negotiators, but it can only be good for global trade.

Salvatore Babones is an adjunct scholar at the Centre for Independent Studies in Sydney. Twitter: @sbabones