A Trade Agreement That Will Write the Future of Asia

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

Asia’s Regional Comprehensive Economic Partnership (RCEP) -- the world’s latest and by far the largest free-trade area -- enters into force on January 1, 2022. It consists of the ten countries of the Association of Southeast Asian Nations (ASEAN) plus China, Japan, South Korea, Australia and New Zealand.

This important trade pact is the ASEAN’s brainchild, born during its summit at Bali, Indonesia in 2011. The treaty was negotiated during the next nine years, and the final agreement was reached at the time of the summit in Vietnam in November 2020.

The RCEP accounts for nearly one-third of the world population and for about 30% of the global GDP.  It is a very diversified trading area, combining countries at various stages of development, ranging from low- to high-income economies.

Remarkably, it is also the first free-trade area that includes China, Japan and South Korea -- Asia’s largest economies, fierce trade competitors and systemic rivals.

Over the next 20 years, RCEP member countries are expected to eliminate almost all trade tariffs, and to establish common rules on trade, intellectual property and e-commerce.

The agreement does not have a unified regulation on labor, environment and government subsidies. And there is no commitment to open up service sectors or particularly vulnerable economic areas.

A free-trade area open to the rest of the world

RCEP is an extension of ASEAN’s pattern of flexible and gradual trade liberalization, where intra-area trade will be less than one-third (as opposed to 70% in the EU) of the total.

Asian analysts are generally enthusiastic about this new regional arrangement, but the western hard trade deal advocates complain about a shallow deal and its weak potential for growth and internal trade creation.

That is strange. Outside observers should welcome the RCEP’s degree of openness to the rest of the world, and the fact that its relatively loose customs union will minimize the degree of trade diversion – i.e., trade losses to non-member countries, as is now the case with a hard trade bloc like the EU.

Not surprisingly, China, Japan and South Korea are seen as the main beneficiaries of that huge and increasingly unified Asian market, particularly in areas of e-commerce, steel, automobiles and a broad range of electronics.

China is already ASEAN’s largest trade partner. In the first 11 months of this year, the China-ASEAN bilateral trade reached $789.5 billion, a 30% increase from the year earlier.

Japan is far behind, but it still ran a $186.3 billion in total trade with the ASEAN during the January-October period of this year, a 5% annual increase, with Japanese exports soaring 25.3% from the same period of 2020.

RCEP will offer support to world economy

Japan is also a very active ASEAN investor. Over the last two years, Tokyo’s direct investments in major ASEAN countries have been running at an annual average of $8 billion. That means that Japan’s East Asian export markets will continue to expand, and that Japan will remain a significant contributor to regional economic growth.   

But quite apart from trade gains for particular countries or industries, RCEP is seen as a powerful growth engine that will – by its sheer size and economic output – quickly put Asia at the center of the world economy.

India is missing out on this grand Asian trade bargain, even though Delhi took an active part in its negotiations until 2019, when it suddenly decided to pull out on economic and political considerations. India, however, has a standing invitation to rejoin its Asian trade partners.

The formal reasons for India’s exit from the negotiating process were complaints about an alleged dumping of Chinese manufactured goods, as well as farm and dairy products from Australia and New Zealand. There was also a false claim that RCEP would adversely affect India’s ability to attract foreign direct investment inflows.

Perhaps perversely, but India’s real reason for living the negotiating table was its exhausting and unproductive rivalry with China.

Some influential Asian observers take that as Delhi’s big geopolitical mistake, because it left China in a dominant position to write Asia’s new trade rules.

I believe those are narrow and partial views of future trade policy trends in East Asia. Indeed, China dominates the area not by the imposition of trade rules but by the volume of merchandise and service turnover it generates, and by its vast and expanding internal markets.

And the fact is that China now is an increasingly strong economic and financial competitor.

Think of this: Just recycling China’s current $300 billion trade surplus represents a formidable presence in world economics and finance. And, thanks to large initial inputs of German technology, China’s manufacturing sector has become a highly efficient IT-driven machine. Even China’s farm products are now competing in more Asian markets as a result of free trade, and a greater connectivity with high-speed rail lines and expanding air networks.

That is a perfectly normal progression of Asia’s robust economic development. People should realize that and strive to compete, instead of whining, complaining and buying into unrealistic China containment stories.    

RCEP will take care of most of those problems. By remaining a free trade area that is still highly open to the rest of the world, RCEP’s strongly growing economies will be steady sources of support to global and regional economic output and employment.