China & Asia-Pacific: The Largest Trade Deal in History

Earlier this month, leaders from 15 Asia-Pacific nations signed a historic deal that would reduce trade barriers in an area covering a third of the world population and a similar share of the global economy. The new free-trade zone is larger than the US-Mexico-Canada Agreement and the European Union. Economists estimate it can add $200 billion annually to the global economy by 2030. The Regional Comprehensive Economic Partnership (RCEP) brings together China, Japan, and South Korea in a trade deal for the first time while also including 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Australia and New Zealand are the only non-Asian partners on board, while the US sits on the sidelines.

The RCEP signing sets Asia on the path of becoming a coherent trading zone. The deal would have been even larger if India had not retracted from the negotiations last year over concerns that lower tariffs could hurt local producers. Chinese premier Li Keqiang described the agreement as a victory of multilateralism and free trade. Australian prime minister, Scott Morrison, said the deal would open up new doors for Australian farmers, businesses and investors. Lee Hsien Loong, the prime minister of Singapore, said, “We signed today, after a tough slog of eight years. This is a major step forward for our region. At a time when multilateralism is losing ground, and global growth is slowing, the RCEP shows Asian countries’ support for open and connected supply chains, freer trade and closer interdependence.” Peter Petri, professor of international finance at Brandeis University, stated that “By some measures, this is the largest free trade agreement in history. The critical point about RCEP is that the region is enormously diverse. There are big countries and small countries, rich countries, and developing countries. The rules have essentially accommodated all of these diverging interests.”

The RCEP is expected to kick-in by next year. Once in motion, it will eliminate as much as 92% of tariffs on imports between signatory nations. The RECP aims to reduce costs and time for companies by allowing them to export their products to any signatory nation without meeting each country’s individual requirements. It also includes provisions on intellectual property, financial services, e-commerce, and professional services while shying from any commitments on environmental and labor standards. However, the biggest game-changer lies in its rules of origin, which officially define where a product comes from. Many member states already had free trade agreements (FTA) with each other, but they were very complicated to use compared to RCEP. Businesses with global supply chains used to face tariffs even within an FTA if their products contain components that were made elsewhere. For example, a car manufactured in Japan containing made-in Indonesia seatbelts can face tariffs in China. However, the new rules of origin declare that all member nations will be treated equally within the free-trade bloc. It means a company can sell without any fee as long as the components in its product come from anywhere in the 15 countries of RCEP. Firms can build and sell across the region with just one certificate of origin paper. Considering the size and diversity of RCEP markets, this is a significant advantage to all Asia-based firms. It will motivate companies in RCEP countries to look within the trade region for suppliers. On the other hand, it will probably get hard for companies from countries that are not part of the RCEP to compete in Asia.

Japan and South Korea are likely to be the biggest winners of the RCEP. China’s imports of Japanese auto parts account for the bulk of total bilateral trade at around 27 percent. Under the RCEP, nearly 90 percent of Japanese auto parts shipped to China will be exempt from import tariffs. Japan will also gain huge benefits from the new trade pact with South Korea, its third-largest trading partner. Under the RCEP, up to 92 percent of Japan’s export to South Korea will be tariff-free, compared with 19 percent currently. The optimism over the impact of the trade pact on Japan’s automotive sector has been displayed in the stock market. Following the signing of the trade deal on Sunday, shares of Nissan alone jumped more than 5 percent. Likewise, Korean companies, especially in steel, automobiles, and electronics, will also benefit enormously from the new mega deal. South Korea’s exports to RCEP nations were $269 billion last year, accounting for half of its total exports. Korean trucks and passenger cars are currently subject to over 40 percent tariffs in the South East Asian market, but the trade pact will allow the rates to be reduced slowly to zero. The latest agreement also enables Korea to trade with Japan under their first-ever free trade deal, meaning Korea is now in FTA with all the world’s top five economies – the United States, China, Japan, Germany, and India.

Moreover, the RCEP will improve the protection of Korean companies’ intellectual property rights in the region. The 2007 FTA between Korea and the Association of Southeast Asian Nations (ASEAN) had limitations in effectively protecting Korean corporate intellectual property rights. Retailers in South East Asia were often taking advantage of selling products by misusing Korea’s country name, even for products not made in Korea. Under the RCEP trade deal, however, a total of 83 provisions are stipulated in areas such as trademarks, patents, and designs, which will strengthen the protection of intellectual property rights in the ASEAN region.

Coming amid the ongoing US economic pressure, the RCEP is the first multilateral FTA China has ever joined. Some media outlets have labeled the deal as the Chinese alternative to Trans-Pacific Partnership (TTP), which excludes China. The TPP was a part of the Obama Administration’s venture in Asia that intended to counter China’s rise by improving economic cooperation with regional allies. Unlike RCEP, it included a raft of environmental, human rights, and labor regulations that stood to strengthen US competitiveness. President Donald Trump famously withdrew from the TTP three years ago, declaring it as another free trade deal that would ship manufacturing jobs overseas. Although RCEP was an ASEAN initiative, we cannot deny that it offers China a fresh start to counter US influence in Asia-Pacific. Considering the US-China trade tensions and the uncertainties over trade with the EU, the RCEP gives China a new and committed market to trade.

The world’s biggest trading bloc that does not include the US will be a significant challenge for president-elect Joe Biden when he takes office. Biden’s trade policy or how it will engage with the Asia-Pacific region has not been clarified yet. The Trump administration has slapped tariffs on nearly all of China’s goods, as well as those of several trading partners in what he said were unfair trade practices. In general, the US-China trade war has hurt many Asian exporters by reducing demand for their goods and slowing down growth. The urgency to conclude RCEP increased drastically after that. Unless Joe Biden starts to re-engage more energetically with the region, ASEAN members will get pulled deeper into China’s economic and political orbit in the long term. It is also speculated that the incoming Biden government would pressure South Korea and Japan to lean more towards the US-led TTP as a countermeasure against the China-backed RCEP. Both nations will find it difficult to refuse. As long as the world’s two superpowers are engaging in a battle for dominance, many other countries can also get stuck in a similar situation. For now, we can only say that the new deal is confirming that Trump’s policy to isolate China and cut it off from global value chains has failed.

In conclusion, it is critical to point out that the RCEP was not just promoted by Beijing but also by other governments as having immense ramifications in the midst of the financial crisis caused by the COVID-19 pandemic and the anti-free trade approach of the West. It is also further proof of Asia’s growing power. The RCEP is showing us that the global center of economic gravity is pushing relentlessly to the East. The region keeps walking ahead to trade liberalization even as other regions have become more cynical. Regardless, for any of the above predictions to come true, signatories must first ratify the agreement. That could happen by January 2022. Once RCEP is in motion, there is no doubt that countless firms will be able to enter markets that they may never have considered in the past.