CHINA POISED FOR RCEP WINS
Korea and Japan also see big gains
About two weeks after China signed the Regional Comprehensive Economic Partnership (RCEP) megadeal with 14 other Asia Pacific economies, Premier Li Keqiang stressed the need to walk the talk.
“As a member of the RCEP, our country should actively promote the implementation of the agreement with our own actions, safeguard free trade and expand new space for win-win cooperation,” Li said in Beijing on Dec 1.
It was a familiar refrain for Chinese leaders eager to present themselves as protectors of the global trading system against protectionists like Donald Trump, despite Beijing’s own restrictions. It also underscored how, in 2021, the RCEP could move the Covid-plagued world’s economic centre of gravity toward China and Asia as a whole.
“This is accelerating the shift toward Asia,” Jeffrey Sachs, director of the Center for Sustainable Development at Columbia University in New York, told Nikkei Asia.
“So too is the superior performance of the RCEP region in addressing the pandemic. The RCEP countries have vastly outperformed their counterparts in Europe and the Americas, with better governance and more social responsibility of the public.”
Eight years in the making, the RCEP clearly raises hopes for the region’s post-pandemic economic future. At the same time, it raises scepticism about Beijing’s commitment to the ideals Li espoused, doubts about enforcement, and questions about two countries that missed the boat — the US and India.
The RCEP grouping — China, Japan, South Korea, Australia, New Zealand and the 10 members of Asean — constitutes around 30% of global GDP and population. One estimate, published by the US-based Peterson Institute for International Economics, projected the deal could add US$500 billion to world exports in 2030.
The big three East Asian countries — connected by a free trade agreement for the first time — stand to gain the most, according to the study. China’s exports are projected to rise by $248 billion, with Japan seeing an extra $128 billion and South Korea $63 billion. Trade among them should account for a significant portion of the increase.
“As trade relationships intensify in East Asia, they will build on the region’s comparative advantages in manufacturing and strengths in organising multi-country supply chains,” the Peterson Institute said.
Another study by the Japan Institute of International Affairs indicated that South Korea may see the biggest economic contribution, with the RCEP adding 6.5% to real GDP while Japan gains 5% and China 4.6%.
“China, Japan, and South Korea together form a technological powerhouse, and by joining together in the RCEP, that technological dynamism of the three countries can be greatly enhanced,” said Prof Sachs.
But he also emphasised that Asean countries and the whole region should benefit from “peaceful cooperation, more foreign investment, and faster upgrading of digital and green technologies”.
All this hinges on ratification. But an Economist Intelligence Unit report predicted the required six Asean countries and three non-Asean states will approve the deal by the third quarter of 2021. For now, signatories are weighing how to get the most out of the accord.
In December, the South Korean government hosted a meeting with steel, automobile, machinery and textile industry associations — four sectors expected to reap the sweetest rewards.
RCEP countries accounted for 53.2% of South Korea’s steel exports in 2020, up from 46.8% in 2019. The steelmaking association expects an increase of 4.3 million tonnes in Asean demand for the material in 2021, to 77.3 million.
South Korean automakers hope the RCEP will help them eat into Japanese rivals’ 74% share of a Southeast Asian market with 650 million people and 3.5 million annual car sales.
Japanese carmakers, of course, want more Asean sales themselves. And Japan’s industrial equipment makers will enjoy tariff-free access to China on 86% of products, up from 8%, while South Korea will remove tariffs on 92%, up from 19%.
As for Asean states already taking advantage of existing FTAs, reduced non-tariff barriers will lead to lower import costs and greater competitiveness, according to Kensuke Yanagida at the Japan Institute of International Affairs. He said Malaysia, the Philippines, Singapore and Thailand can expect more electronics exports, for example.
Beyond tariffs, “the RCEP harmonises rules-of-origin provisions and establishes a single set of regional content rules, effectively creating a single market for intermediate goods that will promote the creation of supply chains across the region”, the EIU report said.
The think tank added that an integrated customs regime could drive foreign investment into smaller Asean markets where regulatory uncertainty is an impediment, such as Myanmar, Laos and Cambodia.
This acceleration of Asian trade and investment would follow a sharp global deceleration. Due to the Covid pandemic, the World Trade Organization forecast in October that global merchandise trade volume would shrink 9.2% in 2020.
Other recent developments suggest China — one of the few economies set to post growth for 2020 — is determined to grab the reins of the global economy and gallop out of the Covid crisis.
Just before New Year’s, Beijing sealed an investment pact with the European Union. Days after the RCEP signing in mid-November, President Xi Jinping also expressed interest in joining another trade megadeal, the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
As things stand, Prof Sachs argued that the RCEP is a “much better idea” than the CPTPP because it already includes China. “TPP naively tried to exclude China, as if one could have a trade agreement in Asia without the largest Asian economy and the largest trading partner of the countries of the region.”
But some see complications ahead. Raj Bhala, a distinguished professor at the University of Kansas specialising in trade law, noted that the RCEP is less ambitious than the CPTPP and other major deals when it comes to “breadth of coverage” of goods and services, foreign direct investment and intellectual property.
“I think that lack of ambition is because of the very different levels of development and types of economies that you’ve got in the RCEP — from a command-based, largely non-market economy of China to very small, least-developed countries in Southeast Asia,” Bhala told Nikkei.
Alex Capri, research fellow at the Asia-based Hinrich Foundation, made a similar point.
He said the RCEP is a welcome vision of multilateralism but warned the members “have disparate capacity to enforce ‘deep’ trade standards”.
Limited ambition and uncertain implementation are not the only factors that could stop the RCEP from tipping the global balance. Both Bhala and Capri point to US President-elect Joe Biden’s desire to reassert American leadership.
Biden has not said whether he would consider joining the RCEP or reversing Trump’s decision to withdraw from what became the CPTPP. But in a Dec 28 speech, he vowed to “regain the trust and confidence of a world that has begun to find ways to work around us or without us”.
China’s own policies are also curbing enthusiasm.
“There’s the concern over what’s been going on with Alibaba and Ant, and how interventionist is the government going to be,” Bhala said. “Here you’ve got this RCEP rule regime. But what does it mean when one of the giant players in the trade agreement itself casts doubt on its adherence to the rule of law?”
Beijing’s introduction of an export control law in December, strengthening its power over trade on national security grounds, did nothing to dispel such worries. Nor has its use of trade penalties in its diplomatic spat with Australia.
Even with these caveats, Bhala called it “hugely significant” to have China, Japan and South Korea in one framework. He also rued India’s decision to opt out.
Asia’s third-largest economy withdrew from the RCEP in 2019, fearing an influx of cheap agricultural and industrial products.
“India staying out of the RCEP or CPTPP is not serving it well economically, politically or strategically,” Bhala said. “Indian companies are not going to become more competitive behind tariffs and non-tariff barrier walls.”
RCEP members did leave the door open for India to rejoin. And the nature of economic partnerships means the pact could yet become a game changer.