Expert Speak Young Voices
Published on Apr 27, 2021
China-led RCEP to change global order?

While multilateral frameworks have made considerable progress since 1945, there has been a need to adapt to the changes in the world economy, a major change being the rise of China. With Western-led multilateralism struggling to keep up with the new world order, the way has been paved for a China-led approach to multilateral institutions.

Apart from the Trade Facilitation Agreement in 2017, the World Trade Organization (WTO) has been unsuccessful in reaching any major pacts since 1995. The unsuccessful Doha talks, not being able to conclude any notable trade-negotiation round of global trade talks in the last few years has added to the WTO’s list of issues. The inability of the WTO to strengthen its Asia policies further gives teeth to China’s institutions.

Further, the Trump administrations’ ‘America first’ protectionist policies, which led to the US withdrawing from the Paris climate convention, the Iran nuclear deal, and the Trans-Pacific Partnership and various other international treaties and agreements, giving up its traditional role of hegemon in the liberal international order has not helped the multilateralism cause either.  While President Biden was quick to re-join the WHO and the Paris Agreement, the Biden administration has indicated that their focus is on domestic issues like the COVID-19 pandemic and the revival of American industries.

With multilateralism on the downslide—its advantageous for China. With its Regional Comprehensive Economic Partnership (RCEP), China is flexing the emergence of a new, Asia centric geoeconomic world order characterized by the use of economic tools to attain strategic goals. The RCEP is a landmark trade deal that will increase China’s influence in the Asia Pacific region. After eight years of negotiations, China and 14 other countries in the Asia Pacific region signed the pact on 15th November 2020.  Considered the biggest free trade deals in history, RCEP includes 2.2 billion people and 30 percent of the world’s economic output. India decided to opt out of this trade agreement; at the Bangkok summit in 2019, PM Modi stated that, “The present form of the RCEP Agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not address satisfactorily India’s outstanding issues and concerns”.  These issues primarily refer to the elimination of tariffs that would lead to a flood of imports in the Indian market and ‘hidden subsidies’ or the non-transparent way in China gives subsidies to other countries. China, being an export-driven economy has many joint ventures with American, Japanese, Taiwanese companies that give it cost advantages. Giving China unlimited access would result in a balance of payments crisis for India. While India does have some deep and comprehensive Free Trade Agreements (FTA) with ASEAN, Japan, and Korea, from which India does benefit immensely; for deeper trade integration, India will need to stop playing protectionist politics. With India not being part of the RCEP or TPP, the administration has left itself no alternatives, failing to deliver on any trade liberalisation success. India’s stand on the RCEP indicates that a “decoupling” of the economic and the geopolitical relations is not on the agenda. Had India chosen to remain in the RCEP, it would have fastened the process of entering global manufacturing supply chains and improved domestic industries.

China, Japan, and South Korea are the biggest beneficiaries of RCEP by way of new economic links; ASEAN already has significant trade pacts with the 3 countries. Much of the RCEP builds on existing ASEAN unilateral treaties with all trading partners, forming a single large bloc for increased trade interaction. RCEP members will combine their strengths in technology, manufacturing, agriculture, and natural resources, emerging as a competitive economic bloc globally. The RCEP is perceived as a Chinese soft power victory with China trying to portray itself as a country that is more cooperative and collaborative than the US in the region. The US was not a negotiating member of RCEP because an FTA with ASEAN was a requirement to be a part of the agreement. President Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP) in 2017 also majorly changed the geopolitical narrative in Asia. The TPP was seen as a U.S.-led effort to counter China’s growing influence in East Asia by strengthening economic ties among 12 Pacific Rim countries, most of which are longstanding U.S. allies. President Obama’s strategic pivot to Asia, the TPP would have been the world’s largest free trade deal, covering 40 percent of the global economy.  However, with the US pulling out of TPP and India withdrawing from RCEP, China has got the advantage in geopolitics. To balance China’s influence in the East Asian region, Biden will have to develop sustainable relations with China, resume its engagement in East Asian dialogues and economic networks, and create a security position that stabilizes rather than disrupts the region.

The Peterson Institute for International Economics (PIIE) estimates for 2030 show that the RCEP will increase global GDP by US $186 billion a year, with China, Japan, and Korea gaining US $85 billion, US $48 billion, and US $23 billion, respectively. RCEP will increase the economic interdependence of Asia, while increasing China’s economic influence in the Asia-Pacific region. This, in turn, will allow China to determine trade rules and regulations. Supply-chain efficiencies might increase outside investments in the region, strengthening China against trade tensions and decoupling.

However, while RCEP aims for unification and a standardized system like the EU, China’s internet will still be censored. The country’s tariffs on the most important categories of goods like machinery from Japan, iron ore from Australia are already zero.  China’s 14 percent tariff on imported wine will also be removed next year; however, it has placed a 200 percent tariff on Australian wine, calling it an ‘anti-dumping’ measure, but is seen as a retaliatory measure in response to Australia’s efforts to reduce Chinese influence in the country. While China has been trying to portray itself as the new guardian of the rules based international order through RCEP, international supply chains have shifted away from China toward more rules-abiding countries such as Vietnam, Bangladesh, and India.

However, the RCEP also highlights Japan’s important role in the region, acting as a counterweight to China. Japan is an important member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and has a number of free-trade and economic partnerships with ASEAN countries and Australia. It will use this advantage to support coalitions within RCEP to balance China’s influence. Japan and like-minded countries would have liked for the US to be a part of the CPTPP; however, it will be difficult for the US to re-join the trade deal now. CPTPP countries will also be unwilling to risk the existing deal to include the US. Therefore, the US now finds itself outside Asia’s sphere of influence, unable to be a part of the major decisions and structures being built in the region. Additionally, with India sitting out of the RCEP, it can no longer be seen as the counterbalance to China in the Asia Pacific region.

The economic shift toward Asia has prompted the EU to sign bilateral agreements with countries in the region like South Korea, Singapore, Japan, Vietnam and initiate other negotiations, with Australia, New Zealand, and Indonesia. While Europe is still competitive for high value-added goods, it would be quickly be degraded to a second-tier economic power, if China captures the consumer appetite of an exploding middle class in the Indo-Pacific.  It would benefit the EU’s strategic interests to form a close bilateral network with ASEAN members apart from Singapore and Vietnam.

According to Asian Development Bank estimates, about 60 percent of Asian trade is within Asia, compared with 40 percent in North America, and similar to the 65 percent in the EU's single market (based on 2018 IMF data).  Environmental or labour protections were a major part of the US's ascension to TPP during the Obama administration.  If the US or the UK were to join the TPP, at least the seven countries that are part of both trade deals would face a competitive disadvantage within the RCEP bloc because of the higher environmental and labour standards the TPP demands. Two-thirds of China's trade with RCEP members is with US-allied countries and are likely to have undercurrents of US-China rivalry, therefore, diplomatic disputes between these countries could become economic disputes. Many of these countries also have a history of territorial disputes with China, so sporadic political opposition to China's dominant position within the RCEP is likely.

While South East Asian countries are in favour of the US being the dominant military power to counter China’s rising influence and military capabilities, they are aware that any dispute that would arise as a result of this push back would be a matter of grave concern for them. China is South-East Asia’s largest trading partner and second-biggest investor, after Japan. Despite these worries, South East nations will do well to remember that ASEAN was formed in 1967 during similar turbulent times as a collective response to regional instability. This was at the peak of the Cold War, the Indo-China conflict, and increasing communist insurgencies in other countries.

The US–China relationship is extremely complex as there is high level of interdependence along with a low level of trust and decoupling is extremely difficult. As far as India is concerned, while the country has been invited to RCEP meetings as an observer, there is a need for the Modi government to act upon the Make in India initiative, boost local manufacturing, and focus on strengthening domestic value chains since the decision to not be a part of the RCEP has been made. India should also focus on strengthening ties with Australia, given PM Scott Morrison’s stance on China. The Australian PM is looking for ways to block China’s influence in Australia by scrapping agreements that state governments reach with foreign powers. A 2019 Pew Research Center Poll found that citizens of Japan, Korea, Australia, and the Philippines have majority negative views of China, measured at 85 percent, 63 percent, 57 percent, and 54 percent, respectively, while negative views in the United States and Canada were at 60 and 67 percent, respectively. These results might impact the way RCEP initiatives take shape in partner countries. What is clear is that the world will change with the RCEP and there will be geopolitical consequences for everyone involved.

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