Foreign Policy

Breaking the hype surrounding Asia’s New Commerce Deal

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

Is the RCEP big? Yes. Does it make sense? No. Liberal internationalists might be encouraged to sign a new trade agreement – any trade agreement – in the current global climate. However, the RCEP is a straight forward tariff reduction deal at a time when base tariffs are already low, and countries have no hesitation in imposing punitive tariffs if that is in line with their foreign policy goals. The RCEP says next to nothing about economic governance, and even its trade provisions are unenforceable. It avoids difficult issues such as government subsidies, government procurement, intellectual property theft, and investor-government dispute resolution. Labor standards are not even mentioned. Agricultural trade is largely excluded. The RCEP is really a trade agreement based on the Chinese model: flat and ineffective.

Nonetheless, the RCEP has been hailed as “the world’s largest trade deal,” which supposedly creates a European Union-style trade bloc containing “a single set of European Union-style trade rules” to govern the Indo-Pacific economy. The agreement is intended to “accelerate a shift in world trade to East Asia and away from the West”. By staying away from the negotiations, the United States has clearly lost international influence and economic prosperity. The Peterson Institute for International Economics (PIIE) estimates that the RCEP will increase global GDP by $ 186 billion per year, with China, Japan and Korea adding $ 85 billion, $ 48 billion and $ 23 billion, respectively .
That’s the hype. Now the reality. The world will have to wait 10 years to see these GDP increases: The PIIE estimates refer to projections for 2030.Based on the long-term trend growth rates of the past (and without taking coronavirus effects into account), the global economy will grow by around 40 Percent expected during this period. The RCEP can add two tenths of a percentage point to this number if you find it in the rounding error. Forget about a common market, freedom of movement or even binding arbitration to settle disputes when integrating in the European Union style. Despite 469 pages on the liberalization of trade in services, China’s Internet remains closed.

Even the tariff reduction provisions of the agreement should be hit with a large grain of salt. The reduction in tariffs to zero sounds dramatic if you look at it in the abstract. Go into details and there is a lot less to get upset about. Japan’s largest export category to China, for example, is machines with over 10 billion US dollars a year. China’s highest tariffs on Japanese goods in this category are currently only 10 percent, which are slated to be reduced to zero by 2030 or 2035. In the most important machine categories – industrial robots and machines for printing integrated circuit boards – the tariffs are already zero.

Similarly, Australia’s main export to China, iron ore, is already duty-free. However, the RCEP will lift China’s 3 percent tariff on coal next year. That could help – if China allows Australian coal to be unloaded. Due to an undeclared Chinese embargo, Australia currently has 82 coal ships carrying 8.8 million tons of coal and 1,500 crew members stranded outside Chinese ports awaiting clearance for docking and unloading. Under the RCEP, China’s 14 percent tariff on imported wine will also be increased next year. Meanwhile, China has put a 200 percent levy on Australian wine – supposedly as an anti-dumping measure, but in reality as an attempt to pressure Australia to abandon its efforts to curb Chinese influence in the country.

The fact that the RCEP will do nothing to curb China’s bad behavior is likely why India pulled out of business. Indian Prime Minister Narendra Modi was alternatively criticized for protecting Indian agriculture and praised for protecting production. The criticism is absurd: the RCEP doesn’t even cover agriculture. The praise is more reasonable – participation in the RCEP would have heavily exposed India to imports from cheap Chinese and Southeast Asian small-scale producers – but protecting inefficient production is only part of the story. There does not seem to be any reason to doubt India’s Foreign Minister Subrahmanyam Jaishankar’s own account of the reasons for his country’s withdrawal: non-tariff trade barriers, government subsidies and a lack of transparency. What he didn’t say was: on the part of China.

Even before President Donald Trump won the US election in 2016, trade deals became talismanic symbols of internationalism, global cooperation and the great liberal order. Since then, liberal internationalists have embraced them even more as bulwarks against Trump-style populist nationalism, hailing the RCEP as the end of the anti-trade backlash. But not only Trump rejected globalization with his first slogan in America. Populist-progressive Democratic presidential candidate Bernie Sanders also targeted the Trans-Pacific Partnership (TPP) negotiated by the Bush and Obama administrations in his 2016 campaign. Even Democratic candidate Hillary Clinton ultimately opposed the TPP. Four years later, President-elect Joe Biden pledged to rewrite global trade rules to give preference to US suppliers in government procurement and to raise other new barriers such as a marginal tax on carbon.

The world leader who loudly proclaims its support for internationalization, an open world economy, tariff cuts, “liberalization of trade and investment” and “high-standard free trade agreements” is … Chinese President Xi Jinping. And that gets liberal internationalists in trouble. At the World Economic Forum in January 2017, they hailed him as anti-Trump, a globalist who works to maintain and expand an open international system. Four years later, all illusions in the world about the possible liberalism of Xi and China were dispelled. So they have tried to redirect their RCEP praise to ASEAN, or have simply been content to cheer for the future of Asia in general while trying to ignore the giant panda in the room.

The truth is that in Asia – or anywhere else in the world – there is little appetite for deep global governance. North America has the NAFTA successor agreement USA-Mexico-Canada and Europe, of course, the European Union. Both are real economic policy regulations, the EU far more than the USMCA. Since the failure of the TPP there has been nothing like it in Asia. The TPP’s eleven former U.S. partners signed their own rump agreement in 2018, the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP), but it is neither comprehensive (it has deleted most of the agriculture, investment, and dispute settlement provisions of the original TPP) or progressive (in the absence of US political pressure on workers’ rights, the remaining 11 countries settled for a mild statement affirming their “commitments as members of the International Labor Organization”). Like the RCEP, the CPTPP is a direct tariff reduction agreement that focuses on areas where tariffs have already been low or where trade volume has been relatively insignificant.

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

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