EPSC: Why the world’s largest free trade pact matters

The Regional Comprehensive Economic Partnership (RCEP) is an extraordinary achievement amid aggressive geopolitics, self-defeating trade wars and an accelerating global pandemic. It is also a step towards a better future.

Last June, ministers from RCEP countries underscored their determination to sign the free trade agreement amid unprecedented headwinds in global trade, investment and supply chains. After nearly a decade of talks, 15 countries are set to sign the world’s largest free trade pact at the ASEAN summit.

RCEP is expected to increase trade integration between the 10 ASEAN countries, East Asian leaders (China, Japan, South Korea) and Oceania (Australia, New Zealand).

Surprisingly, India pulled out of the RCEP talks late last year, following Prime Minister Modi’s growing cooperation with the US-led Indo-Pacific Initiative. Nevertheless, India can still join the talks at a later date, if it wishes.

But even without India, the combined economic muscle of RCEP participants is almost a third of global gross domestic product (GDP). As a result, it will have significant global repercussions.

Why “shallow integration” works in tumultuous times

Over the past four years, all multilateral trade agreements have been eclipsed by unilateral “America first” thinking. In contrast, RCEP will intensify multilateral trade integration in Asia, the most dynamic region in the world.

Until recently, critics of RCEP, particularly in Washington and Brussels, have argued that the pact represents “shallow” integration since its requirements are not as stringent as, say, the old Trans-Pacific Partnership (TPP), promoted by the Obama administration. And yet, it was precisely these strict preconditions that made the TPP the target of a host of anti-globalization groups, including President Trump who buried it upon his arrival at the White House.

Ultimately, the TPP prioritized the integration needs of international capital over those of national governments. Perhaps that’s why it was negotiated in controversial secrecy and included arcane clauses based on geopolitics rather than trade. Typically, the remaining 11 TPP countries have agreed to a “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP) which is largely the same as before, but omits 20 provisions that the United States States had included in the original TPP.

Second, “shallow” integration is better aligned with integration needs in emerging Asia, where governments play a critical role in economic development, the idea of ​​national sovereignty is vital, and the legacies of Western colonialism remain important.

Third, RCEP could be more aligned with the new international landscape that is overshadowed by protectionism and tariff wars. Since the Great Recession of 2007-09, country blocs that aspire to deep integration and homogeneity, particularly the eurozone, have had to backtrack, while country blocs that were built on shallow integration and heterogeneous, including ASEAN, have retained greater strategic maneuverability amid international headwinds.

What ASEAN and high-income countries hope to gain

From ASEAN’s perspective, RCEP is key to developing progressive regional integration, especially if advanced economies opt for greater protectionism and new trade wars in the future. It can also serve as a platform for greater global economic integration.

From the perspective of its high-income participants – Japan, Australia and New Zealand – RCEP is key to participating in regional growth. One way or another, everyone is haunted by the secular stagnation that is spreading through aging and increasingly polarized advanced economies.

The pact cannot counterbalance these secular tendencies, but it can counterbalance them. Among other things, RCEP is expected to remove tariffs on 86% of Japanese exports to China, which will benefit Japanese exporters, such as auto parts suppliers.

Indeed, RCEP could eliminate 90% of tariffs on imports between its signatories within 20 years of its entry into force, which could be as soon as next year. It will also seek to establish common rules for electronic commerce, trade and intellectual property.

China supports global and regional integration

Unlike all other major nations, China’s economy has rebounded since late spring. Despite Trump’s trade wars, China’s export growth improved further in September to almost 10% on an annual basis. The rebound in import growth to over 13% after two consecutive months of contraction suggests rising confidence, as does record sales on the recent Singles Day.

Despite the trade wars between the United States and China and the rise of protectionism, China supports both global and regional integration. This is partly a natural consequence of its rapid economic development. Just as Japan’s post-war rise drove its cross-border investment in the region, China’s rise has a similar but broader impact.

RCEP is important to China, but not the only major regional venue for its huge economy. As the global outlook for international trade has dimmed, China has pushed for regional differentiation at home (the Guangdong-Hong Kong-Macao Greater Bay Area) and internationally (Belt and Road Initiative, BIS).

Nevertheless, China’s bilateral trade with ASEAN has grown steadily over the past two decades. Between January and May, it accounted for nearly 15% of China’s total trade volume, exceeding its trade with the US (11%) and EU (14%), respectively.

A sense of shared future for Asian Century

Because of its significant international market power, RCEP will also have a global impact. Together, these economies represent 2.2 billion people (30% of the global total) and a combined GDP of $26 trillion (nearly 30% of the total).

More importantly, it heralds greater optimism after four years of global emergency. “The signing of RCEP,” said Chinese Premier Li Keqiang, “will send a clear, strong and positive signal to advance regional integration and economic globalization.”

For all intents and purposes, half of RCEP’s global muscle can be attributed to China, while another half comprises ASEAN and the high-income economies of Japan, Australia and New Zealand. If the pact participants continue to prosper, the economic role of China and ASEAN will grow relatively faster over time.

Assuming peaceful and relatively stable conditions, the size of the Chinese economy will exceed that of the United States by the end of the 2020s, while the economic muscle of ASEAN would increase in parallel.

Despite the geopolitics in Asia (which the outgoing Trump administration could still shake up in the coming weeks), China and ASEAN share a long-term quest for multilateralism, regional and global cooperation. It is this strong feeling of a shared future that could mark the long-awaited Asian century.

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has worked at the Institute of India, China and America (USA), the Shanghai Institutes of International Studies (China) and the EU Center (Singapore). To learn more, see https://www.differencegroup.net

Photo: Daniel Lerps

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