2 December 2020

RCEP trade deal: a geopolitical win for China

Robert Ward

The Regional Comprehensive Economic Partnership agreement (RCEP), which was signed virtually in Hanoi after eight years of negotiations on 15 November, is a landmark deal. Once ratified by its 15 members, it will form the world’s largest trade bloc. Even without India, which declined to join out of concern for the deal’s negative impact on its weak industrial base, RCEP will cover 30% of global trade, represent a similar percentage of global output and include 2.3 billion people. It is also China’s first multilateral trade deal and the first trade agreement between China, Japan and South Korea. 

Against a background of a fracturing of the international order and rising trade protectionism, the successful conclusion of a plurilateral deal stands out. There is much to welcome in the deal, not least the trimming of red tape across the bloc – for example, the harmonising of rules of origin to qualify for lower tariffs will reduce business transaction costs and ease supply-chain management across the region. Reduced bureaucracy will also benefit the region’s smaller companies. But the economic impact of the deal on the region is likely to be incremental rather than game changing. 


A behemoth trade deal in a well-integrated region

RCEP launches in a region that is already well integrated economically and threaded with existing trade deals. China is the largest or second-largest market for all countries in the region, as well as a key import supplier. The overall benefits from additional liberalisation may not be spread evenly across the bloc. China, Japan and South Korea may gain most by virtue of the new economic links between them created by the agreement, rather than, say, ASEAN, which is already well connected by trade agreements with the northeast Asia trio.

RCEP’s provisions are also necessarily loose given the wide range of development levels among its members. It is thus quite different from the more prescriptive Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which came into force at the end of 2018. Unlike the CPTPP, for example, its digital trade provisions are thin. Agriculture and labour issues are also barely addressed. RCEP also has little substantive to say on industrial subsidies or state-owned enterprises, almost certainly a nod to Beijing’s desire to safeguard its own domestic economic management tools. Unlike the CPTPP, RCEP will trigger few growth-boosting structural reforms over the longer term. 

Boost to China’s role as a rule shaper

RCEP is a significant geopolitical win for China. The deal reinforces the economic interdependence of Asia. Tighter integration will thus bring the region closer into China’s economic orbit. Beijing will use its economic heft as by far the region’s largest economy to exert influence on regulations and standards setting within the bloc, as it is already explicitly trying to do in the countries included in its Belt and Road Initiative. Supply-chain efficiencies arising from the deal, meanwhile, may increase the region’s attractiveness to outside investment, thus bolstering China’s resilience to trade tensions and ‘decoupling’. 

Against this background, RCEP also throws fresh light on Japan’s importance as a balancer to China in the region. As a leading player in the CPTPP and enjoying free-trade and economic partnership arrangements with a number of ASEAN countries and Australia, Japan sits at the centre of Asia’s spaghetti bowl of trade deals. Tokyo will seek to use this leverage to buttress coalitions within RCEP to moderate China’s influence. Tokyo’s fears that RCEP will drain the momentum from the CPTPP were reflected in Japanese Prime Minister Suga Yoshihide’s renewed call at the Asia-Pacific Economic Cooperation (APEC) forum on 20 November to expand the CPTPP. 

For Japan and like-minded countries, RCEP raises the strategic urgency of the US rejoining the CPTPP – President Donald Trump withdrew the US from its forerunner, the TPP, in 2017. But in the short term this looks unlikely. The incoming president, Joe Biden, will have neither the political appetite nor the bandwidth to open up fresh trade negotiations on this front. The CPTPP countries will also be reluctant to risk the existing deal and to renegotiate to accommodate the US. India’s political tensions with China, meanwhile, augur ill for an early volte face on its RCEP membership. This will disappoint Tokyo, which had been counting on India to offset Chinese influence in RCEP. 

Beijing eyes further deals

That China views RCEP as part of a broader programme of trade deals was evident at November’s APEC forum – for the first time, China’s President Xi Jinping signalled Beijing’s openness to joining the CPTPP. The hurdles to China joining the CPTPP are, for the moment, high in terms of conditions that need to be met. But it was also an important signal of political intent by Xi to continue to fill the ground left vacant by the US in what will, despite the ravages of the COVID-19 pandemic, remain the world’s fastest-growing region. In the longer term, the geopolitical impact of RCEP is thus likely to be at least as large as its economic importance. 

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