National leaders from across the Asia-Pacific region met Sunday to sign the world’s largest trade agreement, the Regional Comprehensive Economic Partnership (RCEP). The pact includes Australia, China, Japan, New Zealand and South Korea, as well as 10 members of the Association of Southeast Asian Nations — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
This is a landmark agreement — its significance is not just economic but geopolitical. The Asian trade pact signals China’s increasing centrality in global trade rulemaking and growing U.S. marginalization.
What is RCEP?
RCEP will reduce tariffs on many goods; harmonize and streamline customs procedures, cutting red tape and reducing the costs of doing business in the region; and strengthen Asian supply chains, boosting their competitiveness in global markets. The pact is an important step toward deepening economic integration in the region, moving Asia closer to being a coherent trading zone along the lines of North America or the European Union.
When it comes into force after participating members ratify it, RCEP will replace the patchwork of bilateral agreements currently governing trade in the region with a common set of rules, including a unified rules-of-origin framework. Because inputs from many different countries typically make up any given product, countries use rules of origin to determine whether that product qualifies for preferential treatment under a free-trade agreement. RCEP’s unified rules of origin will make it considerably easier for products made in its member countries to access other markets in the region at low or no tariffs.
Analysts expect RCEP to boost trade and production within Asia, perhaps generating an additional $209 billion in global income annually. The majority of these gains will accrue to its three largest economies: China, Japan and Korea. The agreement will, however, divert trade away from non-participants, probably resulting in economic losses for the United States.
RCEP will pull countries closer into China’s orbit
Beijing has been a driving force behind the initiative, viewing RCEP as an important means to increase China’s influence and deepen its trading relationships with other countries in the region. The world’s economic center of gravity — once focused on the transatlantic powers of the United States and Europe — has increasingly shifted eastward to China and the Asia-Pacific region. China became the world’s largest trading nation in 2013 and has displaced the United States as the leading trade partner with an increasing number of countries. Most of the world’s economies now trade more with China than with the United States.
RCEP will further cement China’s position as the key economic partner for countries in the region. Importantly, it represents the first free-trade agreement among China, Japan and Korea — three Asian economic powerhouses whose previous efforts to foster increased economic cooperation have been limited by long-standing political tensions.
RCEP also comes at the same time that China is seeking to increase its regional influence through the Belt and Road Initiative, providing more than $1.4 billion in investments in infrastructure projects in Asia and beyond.
Shifts in U.S. trade policy fueled efforts to conclude the agreement
When the RCEP negotiations began in 2012, progress was initially slow, hampered by internal disagreements among participating nations. The negotiations gained renewed momentum, however, during the Trump administration.
The U.S. turn away from multilateralism and toward aggressive unilateral trade measures under President Trump — including arbitrary imposition of U.S. tariffs on goods from many close trading partners, at times in violation of World Trade Organization rules — prompted RCEP members to accelerate the talks. For Asia-Pacific nations, the desire to maintain an open, rules-based trading order and push back against rising protectionism from the United States probably increased the urgency to conclude RCEP.
The coronavirus crisis also provided further impetus to conclude the agreement, with participating countries looking to increased exports and foreign investment as a path toward economic recovery.
India dropped out of the agreement last year, fearing a surge of cheap Chinese imports and concerned that the agreement provided limited access for Indian services providers looking to compete in the Chinese market. But the agreement contains provisions enabling India to rejoin in the future.
How might the U.S. respond?
When negotiations began, U.S. policymakers saw RCEP as a rival to the Trans-Pacific Partnership (TPP), a mega-regional free-trade agreement championed by the Obama administration. After the Trump administration withdrew from the TPP in 2017, the 11 other participants — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam — went ahead with the agreement, which took effect in 2018, now renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
This means the United States is not a party to either of the two major trade agreements in the Asia-Pacific region. And the erratic and at times coercive trade policies of the Trump administration — and U.S. tariffs directed even toward close allies such as the European Union — have left the United States increasingly isolated on the international stage.
The successful conclusion of RCEP may create incentives for President-elect Joe Biden to rejoin the CPTPP, to bolster U.S. alliances and counter China’s growing influence in the region. Rejoining the CPTPP, some analysts argue, could provide an important means for the United States to demonstrate a renewed commitment to international cooperation on trade, as well as to strengthen its economic and political relationships with key countries in the region. With China expected to overtake the United States as the world’s largest economy within the next decade or so, a Biden administration may be more inclined to see the value of stronger U.S. trade alliances, now more than ever.
Kristen Hopewell is the Canada research chair in global policy at the University of British Columbia and the author of “Clash of Powers: US-China Rivalry in Global Trade Governance” (Cambridge University Press, 2020).