Who’s afraid of the RCEP?

4 October 2021

Given the crises and tensions facing the Indo-Pacific today, the establishment of the Regional Comprehensive Economic Partnership (RCEP) is a surprising development. The mega-regional trade agreement — comprising Australia, China, Japan, Korea, New Zealand and all ten ASEAN members — is the first integrated trade bloc in the Indo-Pacific. Once ratified, RCEP will be the most significant trade agreement in the world: larger than the EU in terms of population and GDP, and second in size only to the WTO itself. Yet an economic development that would normally be considered good news has been received with strategic anguish in some quarters. With RCEP widely perceived as a “China-led” trade agreement, its completion in adverse circumstances has invariably been invoked as an economic and strategic victory for China’s regional and global ambitions.

Reputed commentators have argued RCEP “secures economic space” for China in the region, and will “inevitably see its clout increase over the Asian economic order”. Chinese state media has crowed that it will “end US hegemony in [the] West Pacific”. Even the New York Times has suggested that “[RCEP] stands as a potent symbol of Beijing’s growing economic sway in Southeast Asia at a time of uncertainty over Washington’s economic ties with the region”. However, there is little basis for these strategic anxieties over China’s role in RCEP. The world’s largest trade bloc will certainly reshape the economic and strategic order in the Indo-Pacific, but not necessarily in China’s image. Understanding RCEP’s origins, form and likely future impacts helps bust these China-dominance myths.

The tortuous path to an Indo-Pacific trade bloc

A simple history of RCEP puts paid to the notion that it is a vehicle for China’s strategic ambitions. The agreement has an extraordinarily long vintage, first originating two decades ago following the Asian Financial Crisis. The East Asia Vision Group — a Track 2 panel of eminent persons, commissioned to explore options for strengthening regional cooperation in the wake of the crisis — first recommended establishing an integrated East Asian trade bloc in 2001. But the suggestion soon fell victim to one of the greatest challenges in Indo-Pacific regionalism: agreeing on the ‘right membership’ for regional institutions.

Two proposals were made. One, called the ‘East Asia Free Trade Area’ (EAFTA), was led by China and proposed an ASEAN+3 membership. Another, called the ‘Comprehensive Economic Partnership for East Asia’ (CEPEA) was advocated by Japan and envisaged an ASEAN+6 structure that also brought in Australia, New Zealand and India. For nearly a decade, these competing proposals languished in Track 2 study groups. Finally, it was an initiative by the US — not China — that forced regional governments to act.

There is nothing to fear in terms of RCEP becoming a vehicle for Chinese economic dominance of the Indo-Pacific. In fact, we should be more worried about the strategic implications of a RCEP failure than its success.

In 2008, the US proposed the Trans-Pacific Partnership (TPP) agreement, with formal negotiations beginning in March 2010. For Asia, the TPP was a double-edged sword: promising to give the region its long-desired trade bloc, albeit on externally imposed terms. Billed as a ‘21st-century’ trade agreement, the TPP focused on developed economy trade issues — such as intellectual property, labour standards and regulatory reform — which reflected American rather than regional interests. If Asian governments were to prove incapable of creating their own regional trade bloc, the US-led TPP would write the economic ‘rules of the road’ in the region for them.

This threat catalysed governments into action. At the very next East Asia Summit after TPP negotiations commenced, regional governments finally committed to forming their own trade bloc, and RCEP was officially born in November 2011. While presented as a merging of the competing proposals, the Japanese model had clearly won; RCEP would have an ASEAN+6 membership model and include Australia, New Zealand and India. Formal negotiations began in earnest in March 2013. RCEP offered an ASEAN-style approach to trade integration, deliberately offered as an alternative to the US-led TPP model. It would work by unifying the six ‘ASEAN Plus One’ FTAs into a single instrument. “ASEAN Centrality” and a “consensus” approach to regionalism were cemented as core principles of the agreement. It also eschewed the 21st-century elements of the TPP, favouring a conventional agenda focused on tariff reductions and regulatory streamlining in line with the interests of the developing country members.

The path to negotiating RCEP was long and fraught. Sixteen countries, of wildly varying developmental levels, needed to agree on how to harmonise six different FTAs into a single framework. Negotiations also had to deal with a variety of political headwinds, including a global turn towards protectionism, increasing diplomatic assertiveness from China, India’s decision to withdraw in 2019, and then the COVID crisis. Yet, all members signed the agreement at the Vietnam-chaired ASEAN Summit in 2020, and are now completing domestic ratification. This is likely to occur sometime in mid-2022, at which point the Indo-Pacific will finally realise its two-decade ambition for a comprehensive and integrated regional trade bloc. This raises the question: How China-dominated will this regional trade bloc really be?

Don’t believe the hype: Neither China-led nor-dominated

The view that RCEP is a China-led agreement originates, unsurprisingly, from China itself. While PRC officials never explicitly describe RCEP as ‘China-led’, they very frequently extol its virtues and exhort its speedy completion. It is routinely cited as the foundation for deeper economic ties between China and Southeast Asia, a response to the dislocations of the COVID pandemic, and a “trade counterpart” to its Belt and Road Initiative. As the People’s Daily editorialised: “China has attracted great attention for promoting openness and cooperation with sincerity throughout the RCEP negotiations”.

This messaging is clever political retail, but little more. RCEP provides China with a powerful rhetorical foil against the US, which has been economically disengaged with the region since Trump withdrew from the TPP in 2016. When Xinhua declares RCEP a “victory for multilateralism over unilateralism, and free trade over protectionism”, it is inviting the reader to make a flattering comparison with US foreign policy during the Trump era. But the rhetorical utility of these leadership claims for China does not make them accurate. Indeed, the claim that China ‘led’ the RCEP negotiations simply does not stack up. Treaty negotiations are necessarily conducted in secret and publicly issued statements on RCEP progress (such as this) are deliberately vague regarding who said and did what. But the basic structure of RCEP reveals it is clearly an ASEAN-led agreement.

RCEP is fundamentally a ‘harmonisation’ trade agreement. Negotiations started with the existing set of six ‘ASEAN Plus One’ bilateral FTAs and then tried to bundle them into a single agreement by finding consensus positions for each issue (investment, services, rules-of-origin, etc). The game, therefore, was about finding a common landing point between ASEAN’s six FTAs. While the ‘Plus One’ parties each tried to drag that landing point towards their preferred position, it was ultimately up to the ASEAN members to adjudicate how to merge together the six agreements. Thus, the official description of RCEP as affirming “ASEAN Centrality” is not an empty shibboleth, but the structural reality of the agreement.

If anything, China’s presence slowed the negotiations. Market access swap (i.e., bilateral tariff offers) between India and China became one of the most vexing issues. India was concerned about a surge in manufactured imports from China harming its own ‘Make In India’ programme and a lack of corresponding access for service sectors (including IT) where it is export competitive. China was unwilling to entertain counter-offers (for lower bilateral tariff reductions and safeguards measures) that would assuage these Indian concerns.

These differences ultimately proved irreconcilable and India withdrew entirely in November 2019, finally clearing the way for RCEP’s completion. As protectionist sentiments in India played a major role, it would be unreasonable to hold China solely responsible for these delays, or for India’s ultimate departure. But it also reveals that China was a problem to be solved, and not a leader providing solutions, during the RCEP talks. Finally, what of the claim that RCEP will be ‘China-dominated’? This argument is usually premised on the relative economic size of the members. China is certainly the largest player, accounting for 55 per cent of its combined GDP. Another 33 per cent comes from the four other ‘Plus Ones’, and only 12 per cent from ASEAN itself.

However, crude size comparisons fail to understand how multilateral trade agreements work — and indeed, they usually protect the interests of smaller players against larger ones. First, RCEP is not an international organisation like the WTO, but simply a set of common trade rules. Therefore, it does not make policy decisions which China’s size would allow it to dominate. Second, decisions regarding RCEP implementation are made by consensus by a ‘Joint Committee’ comprising all fifteen members and co-chaired by one ASEAN and one non-ASEAN member on a rotational basis. These institutional provisions protect the interests of smaller players vis-à-vis China by allowing multiple veto points.

Finally, RCEP includes a dispute settlement mechanism, modelled upon and linked to that of the WTO. This provides an impartial and rules-based forum for resolving trade disputes that reduce the impact of size asymmetries. Perhaps most importantly, RCEP binds China to a multilateral model for trade integration in the Indo-Pacific. This breaks with China’s preference for bilateralism in other economic domains (such as the Belt and Road Initiative), which allows it to leverage its size to secure asymmetric outcomes from smaller partners. This raises a final question: who are the real winners of the RCEP agreement?

Networking trade regionalism

RCEP is a unique trade bloc. Unlike most other trade agreements, its principal objective is not liberalisation — the lowering of trade barriers between countries — as this had largely been achieved by its six precursors. Rather, its objective is harmonisation, i.e., creating a single and integrated set of rules that will create network effects among the existing agreements. And networking the Indo-Pacific’s trade agreements is very important. The reason lies in regional value chains: the cross-border networks where different countries specialise in distinct stages of producing a final commodity. Value chains are critically important for the Indo-Pacific economies but are poorly served by the existing web of bilateral FTAs in the region. As they only lower trade barriers between two countries, bilaterals do little to support value chains that cross multiple economies. RCEP’s primary utility lies in its ability to unlock greater value chain opportunities for Indo-Pacific economies.

An arcane but crucial feature of trade agreements — rules-of-origin (ROOs) — helps illustrate how this works. ROOs are the system for determining where a product comes from, and every international trade shipment needs to carry a ROO certificate proving the product is “Made in China”, for example. But at present, each FTA in the region has a different system for issuing these certificates, greatly complicating the process of trading within value chains that span multiple different FTAs. RCEP’s single set of rules will help clear up the ROO mess. Businesses will be able to apply for a single “Made in RCEP” certificate, with common standards to calculate if a product qualifies. That product will then be able to flow seamlessly across regional borders. For example, an Indonesian product, made with Australian components, can be treated as “Made in RCEP” when it reaches its final destination in Japan.

Many of RCEP’s provisions create these kinds of network effects. Its investment chapter will standardise investment rules, and all fifteen members have agreed to adopt the more ambitious ‘negative list’ approach for the first time. Its services chapter includes financial, telecommunication and professional services. Its e-commerce chapter encourages paperless trading, which will greatly lower transaction costs. Importantly, these network effects are regional public goods. All RCEP economies can equally access and benefit from them, not just China or the larger members. Indeed, they promise a range of new opportunities for regional economies that can reduce their dependence on China.

Investment attractiveness is one. RCEP will make the Indo-Pacific a far more competitive location for building value chains, drawing in additional investment from global corporations. This will benefit smaller players. A potential investment in Indonesia or Vietnam, for example, can now be viewed as an investment into RCEP as a whole, given their ability to more easily network into regional value chains. Contrary to expectations, this might actually diminish the economic role of China in some instances. Given increasing US-China trade tensions, many global corporations are exploring so-called “China Plus One” strategies, where they de-risk their Chinese operations by moving some manufacturing nodes to other nearby jurisdictions. Malaysia, Thailand and Vietnam have all been popular ‘Plus One’ players. By lowering the barriers to regional value chains, RCEP will accelerate this geopolitically induced shift of production capabilities out of China and to Southeast Asia.

RCEP also unlocks new value chain opportunities that are independent of China entirely. This will be especially important for economies outside ASEAN that can exploit new trade geographies. One example would be beer (yes, beer!): Australian malting barley can be sold to Vietnamese brewers, who then export beer to the Japanese market, all under the auspices of a “Made in RCEP” origin certificate. Given Australia’s historic dependence on the Chinese barley market, from which it is currently blocked due to trade sanctions, RCEP provides it with a new avenue for creating regional value chains in which China is not a critical node.

How I learned to stop worrying and love RCEP

There is nothing to fear in terms of RCEP becoming a vehicle for Chinese economic dominance of the Indo-Pacific. In fact, we should be more worried about the strategic implications of a RCEP failure than its success. The Indo-Pacific desperately needs RCEP to help foster post-COVID recovery. Many international connections have seized up during the crisis, as border controls have added friction for trade. RCEP, therefore, is a much-needed platform for the Indo-Pacific’s post-COVID recovery. Its value chain enabling provisions are ideally configured to help restart interrupted value chains and coming at a time when the rest of the world turns towards protectionism, it will make the Indo-Pacific the most attractive location to build value chains in the world.

But it needs to be ratified first. At the time of writing, only four countries (Singapore, Thailand, China and Japan) have completed ratification, with Australia imminent. But another three ASEAN members need to do so for it to enter into force — ideally, the larger members such as Vietnam, Indonesia, and Malaysia. And as RCEP’s network effects are only as good as the size of the network, getting as many of the fifteen members to ratify is critical.

Not to mention the vexing issue of India. While its withdrawal in 2019 was driven by protectionist concerns vis-à-vis China, the collapse of China-India relations in 2020 due to a border conflict has seemingly poisoned the well for any future return to RCEP. This augurs poorly for India’s economic integration with the Indo-Pacific, which is already very low due to its less-open policy settings. Current geostrategic trends mean India is likely to remain economically isolated from RCEP, and thus the region, for some time to come. So on one issue, Chinese officials and state media are right: RCEP is good news for the Indo-Pacific. It is just not a Chinese gift to the region, nor something to fear strategically. Bring on the world’s largest regional trade bloc.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.

Author biography

Dr Jeffrey Wilson is the Research Director at the Perth USAsia Centre. Image credit: Pixabay/BellergyRC.