• Milton Friedman Society

The RCEP free trade agreement

By René Robens



While the world was concentrating on the pandemics and the US elections, on November 15th, 2020 15 countries signed a free trade agreement, called RCEP. However, this free trade agreement is not a usual one, since it is the largest in the world. All the 15 members together – among them China, Japan, South Korea and Singapore – account for a GDP of $26.2 trillion. So, it should be worth a look.


One important question regarding this huge project is the question of fairness. Is it fair for all members or only for a few like China and Japan? Why did India, for example, abandon the RCEP last year? Obviously the Indian government opted-out of the agreement in order to protect their own industry, the main cause of their concern being the fear of China, and the possibility that the Indian economy, already struggling, would be overwhelmed with cheap Chinese goods (the trade deficit with China is already $50 billion). Anyways, there would always be the risk of remaining isolated in the area.


The Indian case is just an example of how already strong-exporting countries will profit from the RCEP, meaning that the clear winners will be China, South Korea and Japan, in contrast to the ASEAN countries of the south-east, already well connected economically through the ASEAN Agreement.


But will this agreement lead to a structural change? To answer this question, it would be good to use a comparison with the CPTPP: the RCEP, contrarily to the CPTPP, barely addresses digital, agricultural and labor issues. Moreover, it has a feature which is redound to the benefit of China: there are no requirements against state-owned enterprises. This is in clear contrast to the CPTPP, which uses the competitive neutrality approach, and so private and state-owned enterprises compete on the same level, which is a feature that is absolutely against the interest of China. So, it is no surprise that China is no part of CPTPP.

Keeping these two factors in mind, it is obvious that the RCEP is a global win for China.


Nevertheless, another country will get a special role as regulator of the Chinese power in the area, due to several reasons. This country is Japan. In contrast to China, Japan is a leading, member state of CPTPP. Moreover, Japan itself is in many coalitions with the other member states of the RCEP and will use the RCEP itself to restrict China’s power. Nevertheless, the Japanese leadership fears a loss of meaning of the CPTPP due to the RCEP, and so it is hoping for the comeback of one important player in the CPTPP – the USA.


This leads us to the next question: what the future role of the US in a world with RCEP will be? America has brought herself in a difficult position. Starting with the withdrawal from TPP – the ancestor of CPTPP, which could have served to counterbalance the growing influence of China – the US left a void, which was filled by China and eventually led to the RCEP. The US is losing its influence in the Asian-Pacific region continually, and this will lead in the end to a loss of stability and lack of political balance. Now it is time for the US to come back to the table and strengthen the ties with its allies – Japan and South Korea – since these partnerships will form the response of governments in the region to questions of environmental protection, labor laws and human rights.


Will we see these new measures under the new president Joe Biden? The answer is a “clear” maybe! The future president emphasized the importance of negotiation with the allies in the Asian-Pacific area but did not give a clear statement about the RCEP and the CPTPP. Therefore, the role of the US will be a question mark. If Joe Biden starts new negotiations, he should be aware of India, which could have an important role in this area as a counterpart against China.


Last not but least we should focus on the influence of this treaty on the European Union. In order to get a better overview, we will focus on 5 main reasons the EU should consider:


1. Not being a part of the supply chain anymore Due to complex rules (e.g., rule of origin), trading with the EU will become less attractive for RCEP members because they will have the opportunity to trade more easily with 15 other countries. So, it could be possible that, for instance, Japan will shift its supply chain towards the RCEP countries.


2. More Asian standards Due to the first point, Europe’s influence on standard setting will shrink, so there could be the danger that these 15 countries create their own pure Asian standards, instead of more European rules and standards in the global digital economy.


3. Shrinking opportunities for ethical trade deals As mentioned above, the RCEP is not really a booster for solving environmental or labor issues. At first sight, this should not be that problematic for the EU. In fact, member countries like Japan, South Korea, Vietnam, Australia or New Zealand are expected to enforce conditions of trade and sustainable development. However, what about the other countries in the RCEP? And what about the EU standards about social and environmental protection? Will the countries named priorly accept them? The EU could get to its limits and should be aware of this.


4. Losing ground to China Like the USA, the EU is losing influence for the benefit of China. As Manfred Weber said, Europe has to join forces with the US and its new president to counteract China’s growing influence, otherwise the Asian-Pacific region will be completely dominated by China.


5. New negotiations with India As mentioned above, the withdraw of the world’s fifth-largest economy was a drawback for the RCEP and could be a chance for the EU. Lastly the negotiations faltered, but more important than ever before India could be a strong partner for keeping strong the European influence in the Asian-Pacific region.


All in all, the RCEP is a trade agreement that the USA and Europe should observe attentively. It increases China’s influence on the Asian-Pacific Region and could be a huge obstacle for a development in issues regarding environmental protection and labor rights. However, there are also chances and opportunities. The EU should restart its negotiations with India and should support its ally, Japan, by developing the CPTPP. It remains to be seen if the future president Joe Biden will resist against China or if he will have more than enough to do with domestic problems.



REFERENCES


https://www.bloomberg.com/news/articles/2020-11-12/deal-near-for-world-s-biggest-free-trade-zone-anchored-by-china


https://en.wikipedia.org/wiki/Regional_Comprehensive_Economic_Partnership#:~:text=The%20Regional%20Comprehensive%20Economic%20Partnership,Korea%2C%20Thailand%2C%20and%20Vietnam.


https://diplomatist.com/2020/12/12/rcep-trade-deal-fair-or-grim/


https://www.outlookindia.com/website/story/opinion-rcep-fiasco-may-be-good-for-economics-but-a-disaster-for-foreign-relations/341731


https://www.iiss.org/blogs/analysis/2020/11/rcep-trade-deal


https://www.china-briefing.com/news/cptpp-rcep-impact-china-asia-pacific-trade/#:~:text=The%20RCEP%20will%20increase%20global%20incomes%20by%20an,countries%20have%20higher%20tariff%20barriers%20than%20CPTPP%20countries.


https://www.thestatesman.com/opinion/us-must-respond-rcep-trade-deal-1502937943.html


https://theaseanpost.com/article/exclusive-european-union-perspective-rcep


https://www.politico.eu/article/5-reasons-the-asia-pacific-trade-deal-matters-for-europe/


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