RCEP is a good thing for global trade but will it stand the test of time? That’s doubtful

  • The important issues of non-tariff barriers, unbalanced terms of trade and the increasingly digitalised and protectionist economic environment are not addressed
  • In short, the RCEP exposes all the limitations of a traditional trade agreement

“We’ll see,” the Zen master kept saying in a revealing tale shared towards the end of the 2007 Cold War movie Charlie Wilson’s War. In the film, as Americans celebrated their victory over the Soviets in Afghanistan, a US intelligence officer soberly cautions against premature triumphalism by relating the reflections of a sage on the vicissitudes of life and, by extension, the transience of success in geopolitics.

In many ways, a similar lesson can be applied to the recently launched Regional Comprehensive Economic Partnership (RCEP), covering 15 Indo-Pacific economies and easily the biggest free trade agreement in a generation.

Excluding America, the world’s largest economy, the mega deal is expected to cement China’s role as the economic engine of Asia, if not the world. One Western media outlet went so far as to describe the RCEP as nothing less than a “coup for China”.

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The reality, however, is that the RCEP is more a reflection of the US’ declining influence than the supposed inevitability of China’s regional hegemony.

Ultimately, the RCEP is a trade-facilitation mechanism, which eschews more fundamental concerns such as new and evolving non-tariff barriers, suboptimal terms of trade for resource-exporting countries, and overall decline in the importance of physical trade in an increasingly digitalised and protectionist economic environment.

In fairness, the free trade deal is the best thing that has happened to globalisation in years, if not decades. For the past two decades, the so-called “Doha Round” of trade negotiations under the World Trade Organization has been deadlocked over food security and agricultural trade issues.

Following the 2007-08 global financial crisis, a wave of populist-protectionist nationalism has also taken hold of flagship democracies from Britain and France to the United States. Thus, former US president Donald Trump’s decision to cancel his predecessor’s Trans-Pacific Partnership agreement, a deeply unpopular initiative at home, was a reflection of a broader deglobalisation movement as well as America’s declining influence.

Today, the Biden administration is still struggling to reverse the trend, despite its open acknowledgement of the need for a “comprehensive Indo-Pacific economic framework” to counter China’s growing influence in the region. Even a US-led digital free trade deal could prove an uphill battle amid internal divisions within the Biden administration.

Against this backdrop, an ostensibly China-led RCEP would seem like a geopolitical game changer at the expense of America. After all, the trade deal covers 2.2 billion people, almost a third of the global population, and US$26 trillion in gross domestic product.

Under the RCEP, tariffs could be slashed by 90 per cent over time, further accentuating the massive increase in trade between China and its neighbours.

© Provided by South China Morning Post Employees of a garment factory in Phnom Penh, Cambodia, work at their machines on December 17. Officials and experts said Cambodia is counting on the RCEP to boost its pandemic-stricken economy. Photo: Xinhua

There are, however, three reasons to be sceptical about the actual, long-term impact of the RCEP. First, both the relevance of global trade in physical goods as well as China’s centrality to regional growth are in decline.

Until recently, China’s trade-driven ascent was the defining factor in the global economic landscape. This was especially so in East Asia, where China’s share of regional GDP grew from only 8 per cent to 51 per cent between 1990 and 2014. In the same period, China’s share of regional trade expanded from only 8 per cent to up to 39 per cent.

Thanks to the Sino-US trade war and pandemic-driven disruptions in global supply chains, plus the rapid expansion of the digital sector, China is less reliant on merchandise exports and its neighbours are less dependent on physical trade with the Asian powerhouse.

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Exports as a share of China’s GDP have fallen from over 35 per cent in the 2000s to less than 20 per cent, while revenues from the digital sector in places such as Indonesia have tripled in the past four years. China’s more internally-driven and decelerating economy may further accentuate this mini decoupling between the Asian powerhouse and its fast-growing neighbours.

Second, the RCEP doesn’t address more serious bottlenecks such as non-tariff barriers, which have undermined even existing free trade agreements. From hygiene regulations and packaging requirements to special customs formalities, many countries have used a whole host of non-tariff measures to suppress imports and protect domestic industries.

Most recently, Vietnam complained about “overkill” border trade restrictions amid China’s “zero-Covid” policy, which has hampered normally boisterous trade between the two neighbours.

© Provided by South China Morning Post Truck drivers eat lunch in a makeshift car park where Vietnamese container trucks wait to cross the Vietnam-China border in Lang Son province on January 7. Thousands of trucks carrying fruit remained stuck at the border as China has tightened its border policies. Photo: AFP

Nor will the RCEP address supply-chain disruptions brought about by the technological iron curtain between China and the West.

Finally, free trade agreements such as the RCEP also have little to say about growing concerns over terms of trade, or the absence of “fair trade”, between increasingly industrialised nations on one hand, and increasingly resource-exporting nations on the other.

In Southeast Asia, for instance, former newly industrialised countries have largely become resource-exporting nations to China, which has emerged as a major technological hub and high-end consumer market in Asia.

But as leading economists have noted, emerging markets can’t simply rely on raw material exports and services, which tend to be dominated by cronies, but need instead to move up the value chain and expand their manufacturing base to address domestic unemployment and income inequality.

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To this end, Indonesia, Southeast Asia’s largest economy, has imposed restrictions on exports of unprocessed raw materials, courted hi-tech foreign investments, and expanded joint manufacturing production with Japanese and Western conglomerates.

Across the Indo-Pacific, governments have come under growing pressure to enhance supply-chain resilience, ramp up domestic production capacity for employment generation, reduce reliance on hi-tech and precious materials imports, and nurture local unicorns and industrial champions.

Overall, the RCEP may have given globalisation a desperately-needed second wind and, accordingly, reaffirmed China’s position as a dominant trading nation in the Indo-Pacific amid a declining America. But it is also exposing the shortcomings of traditional trade agreements, which are increasingly out of step with emerging concerns over non-tariff barriers, the digitisation of economic activity, and protectionist impulses among emerging nations.

Richard Heydarian is a Manila-based academic and author of “Asia’s New Battlefield: US, China and the Struggle for Western Pacific” and the forthcoming “Duterte’s Rise”

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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.

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