Last month, fifteen countries signed what could be the biggest trade deal in history. The Regional Comprehensive Economic Partnership (RCEP) covers a third of the world's population and a corresponding third of the global economy. The RCEP is historic in many ways: it’s the first trade deal between China and Japan; the first trade deal between China and South Korea; the first major regional trade partnership in Southeast Asia; and the formation of the world's largest trading bloc.
For many, the RCEP portends a shift in the global center of economic power and signals America's waning influence in the world economy.
Even if it had wanted to, the USA wouldn't even have been permitted to join; nor would Canada, Mexico, Chile, and any of the American countries bordering the Pacific. The RCEP is a "regional" agreement among south and southeast Asian nations and a few of their invited neighbors. All ten members of the Association of Southeast Asian Nations (ASEAN: Vietnam, Malaysia, Philippines, Singapore, Brunei, Indonesia, Laos, Myanmar, Cambodia, Thailand) plus China, Japan, and South Korea form the core of the RCEP. Australia and New Zealand were also invited, as was India.
The names not on the list are perhaps just as noteworthy. Taiwan was excluded as a precondition for China's participation. North Korea isn’t a current trading partner with most of the RCEP member-nations and was therefore unable to meet the basic requirements for entry. In part out of concern for cheap foreign competition in its agricultural, manufacturing and electronics sectors, India actually pulled out of RCEP negotiations in late 2019 although, as Nikkei Asia reports, they have an open path to return without penalty. Although they both trade with most of the ASEAN, the other two major regional economic powers, Russia and Pakistan, don’t have actual Free Trade Agreements with any of the member nations and weren’t invited to join.
For many, the RCEP portends a shift in the global center of economic power and signals America's waning influence in the world economy. “The trade pact more closely ties the economic fortunes of the signatory countries to that of China and will over time pull these countries deeper into the economic and political orbit of China,” writes Eswar Prasad, professor of economics and trade policy at Cornell University.
Because of the RCEP, “[T]he U.S. risks falling behind in the world’s most economically promising region.” according to Michael G. Plummer of Johns Hopkins University’s School of Advanced International Studies
Jennifer Hillman, senior fellow for trade and international political economy at the Council on Foreign Relations, notes: “While the United States is currently focused on domestic concerns, including the need to fight the pandemic and rebuild its economy and infrastructure, I’m not sure the rest of the world is going to wait until America gets its house in order.”
In a press release released last month, the United States Chamber of Commerce similarly remarked:
“The U.S. Chamber welcomes the trade-liberalizing benefits of the newly signed Regional Comprehensive Partnership Agreement but is concerned that the United States is being left behind as economic integration accelerates across the vital Asia-Pacific region. China has become the most important trading partner for most of the Asia-Pacific, and its central role in the RCEP will only cement this position.”
These worries, however, are overblown; the largest trade deal in history is not actually a threat to the U.S. economy or its position in the world—all it does is make American customers and suppliers wealthier.
[caption id="attachment_184443" align="aligncenter" width="1920"] Trans Pacific Partnership protests.[/caption]
WITHDRAWAL FROM THE TPP MAY HAVE BEEN SHORTSIGHTED
America's absence from the RCEP is not merely conspicuous, it highlights what many observers call the shortsightedness of U.S. withdrawal from the Trans Pacific Partnership (TPP), and further feeds a narrative that China is not merely ascendant; she is stepping into a role that the U.S. has willingly abrogated. Eleven countries signed onto the TPP in February 2016—a literal Pacific circle around China. It was a multilateral trade deal that, The Detroit News editorial board argued in 2018, “promised to create a muscular trading alliance to counter China’s Asia Pacific influence.” The TPP would have opened multiple emerging markets to American exporters, established American-style business practices and guidelines, and been an unmistakable signal to the Chinese and those wary of Chinese influence, that America is leading the region into the 21st century, not them. As the Detroit News headline says: “Want to hurt China? Rejoin the TPP.”
“Want to hurt China? Rejoin the TPP.”
To be fair, the TPP was not without significant flaws, and President Trump’s rejection of it was not unpopular. It was not, as then-Secretary of State Hillary Clinton described it, “the gold standard in trade agreements.” A bipartisan, multipronged coalition of civil rights activists, farmers, labor unions, tech companies, environmentalists, libertarians, and musicians loudly opposed the agreement. By the end of the 2016 campaign, both Hillary Clinton and Donald Trump were denouncing the deal. The U.S.’s exit from the Trans Pacific Partnership (TPP) in 2017, and subsequent refusal to engage in anything but bilateral trade agreements was noticed by everyone, and America's role in the world is harmed by it.
Meanwhile, China's Belt and Road Initiative (BRI) has already funneled hundreds of billions in investment dollars into dozens of developing nations and many hundreds of priceless, visible, acts of goodwill and economic engagement have graced headlines in all of those countries. David Dollar, an economist with Brookings, says bluntly that "the combination of BRI and RCEP is pretty powerful as far as spurring growth and progress in Southeast Asia."
In no small measure, the RCEP is a Chinese slap in America's face, just as the TPP was designed in large part to keep China penned in. The Obama Administration may have, as Industry Week described it in 2016, "sought to play down any overt anti-China rhetoric," but the TPP was understood by everyone as a way to "to counter the rising power of China." The Financial Times’ David Pilling was even more explicit, calling the TPP the “anybody but China club.” President Obama himself was fairly blunt: “if we don't pass this agreement—if America doesn't write those rules—then countries like China will.”
[caption id="attachment_184445" align="aligncenter" width="1920"] Chinese workers.[/caption]
3-D CHESS MOVE BY CHINA
The RCEP is not an ideological trading agreement; literal capital-C Communist countries have signed onto a free-ish trade agreement, alongside monarchies and democracies. This is not another wealthy-countries-making-each-other-wealthy treaty (trade deals are often inherently unfair to poorer countries, explains the World Bank, for instance). Half the countries involved are still struggling with development and were actually given much better (or at least, more lenient) terms than the larger nations. U Than Aung Kyaw, a director of the Myanmar Ministry of Investment, told regional news outlet The Irrawaddy that his country “will liberalize only 30% of our market, while the others have to liberalize 65%. We have more privileges than the other countries."
Amid COVID-19 restrictions and disruptions, expanding and sustaining supply chains is becoming increasingly important—a fact recognized by the Chinese.
China is, of course, one of the central players behind the RCEP, but it would be a mistake to think of it as a "Chinese trade deal." Something like the RCEP has been planned or proposed by multiple regional actors over the years; this was inevitable. As a matter of fact, says the World Politics Review, "China notably did not monopolize negotiations, instead letting ASEAN take the lead." This was a harsh contrast with repeated reports of the Obama Administration's "bullying" tactics during TPP negotiations.
The RCEP, as G Zero explains, isn't as detailed and doesn’t encompass as wide a scope as the TPP, but this is not necessarily a deficit. In fact, the RCEP’s strong environmental, labor, and intellectual property protections is a kind of 3-D chess move by China, one designed to put the U.S. into a difficult place. Environmental, labor, and IP protections were all-important negotiating positions for the Americans for the TPP. Weakening such protections, combined with the country-of-origin and lower tariff provisions in the RCEP, will put American regulators into a tough bind.
In a world in which two thirds of American consumers prefer producers to provide them with environmentally or labor-friendly products, the RCEP makes it harder for them to know the conditions under which their products are manufactured. The lax “country-of-origin” terms allow any of the 15 RCEP member nations to sell a product as domestically produced if at least 40% of said product was manufactured in any of the member nations—that is, even if 40% of a Vietnamese widget was made in another member state, it could still be labeled as “Made in Vietnam.” In a trend accelerated by the U.S.-China trade war, and President Trump's related China tariffs, much of China's assembly line production has already been moved out of China and into ASEAN nations like Vietnam and Cambodia, according to Brandeis economist Peter Petri. The RCEP allows China to do a much more full-throated run-around any current or future U.S. tariffs.
Amid COVID-19 restrictions and disruptions, expanding and sustaining supply chains is becoming increasingly important—a fact recognized by the Chinese. “Due to the rising protectionism and mounting downward pressure on the global economy from the COVID-19 outbreak,” reported state-media China Daily on the RCEP, “China needs a safe external environment to boost its domestic market.” Chinese firms are increasingly outsourcing to their ASEAN neighbors, and RCEP will only accelerate what consulting firm BCI Global calls “Leaving China without completely leaving China.”
There is little that any future U.S. administration could do to stymie China's economic expansion through the RCEP. Most of the countries party to the RCEP are, ostensibly, U.S. allies (like Australia and Japan), or preferred trading partners (like Vietnam or Singapore). While the U.S. has shown an unfortunate propensity for unilateral actions at the cost of their allies or partners, it will now face an East and Southeast Asia more than capable of immediately filling in any gaps created by American politicians and regulators. The already-constrained ability of U.S. regulators and China-hawks to prevent or delay Chinese-origin goods from entering the American market will be further handcuffed by the RCEP.
The RCEP affects the livelihoods of over two billion people. Thousands of companies will have access to markets and products and services that they didn’t before. Trillions of dollars will be generated. And none of that is necessarily a bad thing for the United States. The U.S. loses nothing when other countries engage in free trade. That U.S. regulators could be frustrated by the new rules in no way means that the U.S. economy would be hurt by this deal.
What it does mean, however, is that the United States shouldn’t shirk its responsibility as a world leader, and should embrace the next opportunity to improve its economic relationship with a quarter of the world’s population.
[caption id="attachment_184448" align="aligncenter" width="1920"] Chinese stock market.[/caption]
CHINA HAS A LOT TO OVERCOME BEFORE IT CAN TRANSLATE ECONOMIC GAINS TO POLITICAL ONES
To a limited extent, then, the RCEP will permit Chinese firms to skirt American and European regulators and consumers; country of origin rules will allow Chinese products to sneak in while the lax labor and environmental rules will make it harder to trace who made what, where, and how. The deal does strengthen economic ties between America's chief global rival and a region that the last two American presidents explicitly said they wanted closer ties with, but have in many ways failed to accomplish. Though the RCEP is emboldening China to make even more ambitious deals, it shouldn’t be taken as a signal that America has been permanently supplanted in the Asia-Pacific.
As China-hawk and former Australian Prime Minister Malcolm Turnbull remarked, “I mean RCEP is a really low ambition trade deal. We shouldn't kid ourselves."
It seems obvious that China will try to parlay the success of the RCEP into further gains. To underscore that point, a week before the signing of the RCEP, Chinese President Xi Jinping delivered a speech at a Shanghai Trade Expo saying that China will "speed up negotiations on a China-EU investment treaty and a China-Japan-ROK free trade agreement." (The China-EU treaty would greatly improve Chinese investments opportunities in Europe; the China-Japan-Republic of Korea agreement would continue RCEP negotiations between the three nations, as described in state-media China Daily.)
But there is zero indication that the RCEP will translate economic relationships into political ones. The limited effects are immediately obvious with a glance at the current tensions between China and Australia, exacerbated recently by a series of cartoons published by the China state media the Global Times depicting Australian soldiers as war criminals. The relations between the two nations have been souring for years, even before this most recent row. Australia and China may now share a new economic relationship, but that isn't likely to curb what the Chinese see as anti-China rhetoric from Australian politicians, or what many around the world see as Chinese bellicosity. As China-hawk and former Australian Prime Minister Malcolm Turnbull remarked, “I mean RCEP is a really low ambition trade deal. We shouldn't kid ourselves."
It’s also important to remember that Southeast Asia might now be home to the world's biggest trade agreement, but it is also home to China's infamous 9-dash line, a rather bold claim to ocean territory extending almost 2000 miles from its mainland, alternately frightening and infuriating countries like Vietnam, Malaysia, and the Philippines. The RCEP isn't going to affect Filipino, North Korean, Vietnamese, and Indonesian fishermen, who report aggressive and predatory practices by Chinese fleets, backed by the Chinese Navy.
Yes, even if President-elect Biden wants to continue his predecessor's tough stance on China, he will find it more difficult in a post-RCEP world. But China-boosters and America-lamenters are overselling what the deal can deliver for China; there is no evidence that making it easier for her regional partners to do business with China will translate into warmer relationships with those partners.
The RCEP is the new world in which Americans have to do business, but it won't actually make it harder for them to do so. This trade deal literally has nothing to do with the U.S.: it doesn’t conflict with any American laws, and was voluntarily entered into. The RCEP is an opportunity for some of the most lucrative emerging markets in the world to trade more with each other and make each other wealthier—this is only good for American exporters and investors looking for customers and opportunities. It may force some head-scratching by U.S. regulators, but most American consumers and companies will have greater choices and more chances to make and spend money. The RCEP will make China richer, but it will not make America poorer. Uncle Sam's friends aren't ditching him for China.
But the RCEP is a very stark demonstration of how far China is willing to go to engage with the developing world in a fair way: investing hundreds of billions in investment through Belt and Road, allowing smaller nations to take the lead in the RCEP, and appearing content that those smaller nations may actually benefit more than China from the deal.
Joe Biden and American politicians on all sides should take note.