CLASH OF AMBITIONS

"After eight years of negotiations with blood, sweat and tears, we have finally come to this significant point." This common opinion was expressed by the Minister of Trade of Malaysia Mohamed Azmin Ali on November 15 at the ceremony of signing the Regional Comprehensive Economic Partnership (RCEP) agreement.

The document was signed by 10 members of the Association of Southeast Asian Nations (ASEAN), including China, Japan, South Korea, Australia and New Zealand. India withdrew from the negotiation process last year.

A new economic bloc with a combined GDP of $25.8 trillion, which is more than the US-Mexico-Canada alliance (USMCA, successor to NAFTA) with $24.37 trillion and the European Union with $18.85 trillion, RCEP will account for 30% of the world economy and an aggregate market of 2.2 billion potential consumers (30% of the world's population).

This is the first free trade agreement between the largest economies in Asia (China, Japan and South Korea). In 2019, these three countries together created $5.3 trillion value added in manufacturing, up $1 trillion more than the US and the EU combined.

Innovative rules

The main difference between RCEP and other free trade agreements (FTAs) is its innovative rules on the origin of goods.

Companies with global supply chains may face tariffs even under the existing FTAs, as their products contain components made in other countries. For example, a product made in Indonesia but containing Australian parts could face tariffs in other ASEAN countries. The same is true in the EU, USMCA, etc.

According to the RCEP rules, the member states will not tax each other's export goods with components produced in other countries.

The agreement also contains most of the usual sections typical for FTAs regulating trade in goods, investments, e-commerce, telecommunications, intellectual property, government procurement, etc. In addition, RCEP takes into account the interests of both large and rich countries and the poor ones. The latter are made concessions to introduce the necessary legislative and other changes. For example, Cambodia and Laos have three to five years to update customs procedures.

Unlike the European Union, RCEP also does not establish uniform labour and environmental standards and does not oblige countries to open up access to service sectors and other vulnerable areas of their economies. But it sets the rules for trade that will encourage investment and other businesses in the region.

According to analysts, RCEP is moving Asia closer to becoming an agreed trade area like the EU or North America, even if it is not expected to result in significant overall tariff cuts.

Spirit of competitiveness

It is believed that RCEP is a product of China, which it has been promoting since 2012 in opposition to the Trans-Pacific Partnership (TPP) actively supported by Barack Obama. The metaphor about "blood, tears and sweat" apparently refers to the time when the countries of the region were torn between two competing agreements prepared in parallel. TPP was ready first, in 2016, but the following year, Donald Trump pulled the United States out of it. TPP has been transformed into an indistinct CPTPP (Comprehensive and Progressive Trans-Pacific Partnership), which was a golden opportunity for China. Despite the withdrawal of India (possibly temporary), Beijing was able to consolidate the countries of the region into a new bloc in a short time. Moreover, 7 of the 15 members of RCEP are also members of the CPTPP.

Australia, New Zealand, South Korea and Japan are allies of the US and are deeply concerned about China's growing influence in the region. However, by joining RCEP, they signal that they do not want and cannot break their economic ties with China.

Moreover, Japan initially announced that it would not sign the agreement without India because then China would become too dominant in RCEP. But then it had to admit that there was no other choice. Australia has even more serious problems in relations with China, although it is its main economic partner. There are currently serious political differences between the member states, and China occasionally boycotts imports of some Australian goods.

Despite mutual distrust, China's neighbours can hardly ignore the fact that China's manufacturing sector today is nearly double that of the US, and is growing almost twice as fast.

China made concessions

For China, membership in the alliance with many partners of the US is a windfall, largely a result of Trump's foreign policies, including the US withdrawal from the TPP.

Beijing has long been unwilling to sign multilateral free trade agreements or engage in rule-making in areas such as intellectual property and data transmission. But as the tensions with the US grew, Beijing had to urgently find ways to reduce its dependence on foreign markets and Western technologies.

This is most likely one of the reasons that China not only initiated the free trade agreement, but also made significant concessions to the US allies - Japan, Australia and South Korea. For example, tariffs on 86% (currently 8%) of Japanese goods exported to China will be cancelled.

China has decided to promote trade with its Asian neighbours through RCEP, even if tariff cuts or eliminations would increase imports, damaging domestic industries. But it seems that no tempting offers have been made to India. Indians complained that during the discussions on the terms of RCEP, their voice was not heard.

Will India lose?

In November 2019, Indian Prime Minister Narendra Modi announced that India was withdrawing from RCEP, as it did not take into account concerns about the country's flooding with goods from China, a trade deficit ($53 billion with China alone) and the need to protect its agricultural and dairy sectors. In addition, India's relations with China have recently been marred by a series of military conflicts.

The decision to join RCEP has split the Indian economic community. The Confederation of All India Traders representing about 7 million companies has demanded that steel and related services and dairy products be excluded from the scope of the agreement. And the Farmers' Coordination Committee has even called for an all-India protest against the annexation.

At the same time, the Confederation of Indian Industries, one of the largest industry organisations in India, said RCEP has a number of advantages. The country will become part of a much larger supply chain and will be able to increase its exports. Withdrawal from the agreement will lead to the loss of competitiveness of Indian goods.

Many analysts believe that India’s withdrawal from the agreement will be a major loss for the country. According to Peterson Institute for International Economics, as part of the RCEP, India could increase real GDP by 1.1% by 2030.

But the situation still looks promising. While the other countries wishing to join RCEP are given a period of 18 months after the agreement comes into force, then India, as one of the initial negotiating partners, can join at any time.

Biden's problems

TPP was once part of the Obama administration's strategy aimed at Asia to counter China's rise by expanding cooperation with the US allies in the region. TPP included many laws on the environment, human rights, intellectual property and labour, which were supposed to eventually accustom China to the new requirements.

President-elect Biden has pledged to be tough on China, but it is not clear what that means or what form his Asian strategy will take. The new president is unlikely to continue Trump's outspoken confrontation with China on all fronts. A break with China is also incompatible with Biden's intention to get involved in such global problems as climate degradation, as well as the desire to restore the US position in international organisations.

In addition, analysts are sceptical about Joe Biden returning to the TPP issue in the near future. He has to deal with other issues, such as the fight against COVID-19, economic problems, social unrest and political instability within the country.

Europe is nervous

Europe also shows interest in joining efforts against the growing influence of China. “We need a reunification of the so-called Western world. Now with Joe Biden as a constructive partner, we can oppose the challenge of China. This is a key issue for the next decade,” German MEP Manfred Weber said.

Deborah Elms, director of the Asian Trade Center in Singapore, was more open about the reasons for Europe's concern. In addition to reducing the competitiveness of Europe in one of the fastest growing markets in the world, she said RCEP could weaken European ambitions to become a rule-maker in the global digital economy. Thanks to RCEP, the region can begin to develop agreements and standards that are purely Asian, with fewer attempts to align with European rules or standards.

Sceptics to lose

It seems that the concerns of the US and Europe that they are losing their role as decision-makers of the modern global trade are not unfounded. The World Bank projects GDP growth in the Asia-Pacific region two to three times faster than in Europe and the US over the next ten years. According to the HSBC report, even without India, the economic growth of the 15 member states of RCEP by 2030 will be 50% of the global production volume.

“From a global perspective, RCEP signals that Asia continues to push ahead with trade liberalisation, while other regions have become more sceptical,” HSBC economists said. And this could reinforce a trend that has been observed for several decades: the world centre of economic gravity continues to shift to the East. North America and Europe may well become the outsiders.