RCEP-Countries Create Asia-Pacific Free Trade Zone
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NO. 3 JANUARY 2021 Introduction RCEP-Countries Create Asia-Pacific Free Trade Zone Trade Facilitation but No Integrated Bloc Heribert Dieter The signing of the Regional Comprehensive Economic Partnership (RCEP) on 15 Novem- ber 2020 establishes the world’s largest free trade area. The agreement was hailed as an important step forward for the international trade system: protectionism is no longer the only visible option for the third decade of the twenty-first century. But RCEP is a relatively weak instrument. It consolidates existing trade agreements in the region, but does not represent a breakthrough to a liberal economic space. It lacks the potential to make the Asia-Pacific region into a monolithic trading bloc, nor does it contribute to overcoming growing political tensions in the Indo-Pacific. The process that led to RCEP began in 2012, RCEP does not in fact involve great change and was initiated by the ASEAN states. The in trade relations between ASEAN and China, agreement includes that organisation’s which have been governed by a free trade ten members (Brunei, Indonesia, Cambodia, agreement since 2010. That agreement was Laos, Malaysia, Myanmar, the Philippines, an initiative of then Chinese Prime Minister Singapore, Thailand and Vietnam) plus Zhu Rongji rather than ASEAN. China, Japan, South Korea, Australia and New Zealand. One of the original motives for the ASEAN states was to create a counter- Japan, China, South Korea weight to the Trans-Pacific Partnership (TPP). After US President Donald Trump withdrew So an agreement involving ASEAN and from TPP in 2017, the smaller and rather China is nothing remarkable. The problem less ambitious Comprehensive and Progre- was bringing together Asia’s two real eco- ssive Agreement for Trans-Pacific Partner- nomic and political heavyweights, China ship (CPTPP) was realised in its place. This and Japan. Concluding RCEP despite politi- did not represent a full substitute for RCEP cal tensions in the region represents a because important ASEAN members re- notable success. mained outside, in particular Indonesia Tokyo’s relations with Beijing are fraught. and Thailand. Alongside the United States, Australia and
India, Japan is a member of the Quadri- Council in 2015, most businesses were
lateral Security Dialogue (Quad), a loose not exploiting the opportunities offered by
military alliance in the Indo-Pacific region. existing free trade agreements. Just 22 per-
Although it has been a very weak formation cent of Asia-Pacific trade (between countries
to date, the Quad’s principal objective is with free trade agreements) made use of the
clear: to form a military counterweight to agreed preferences. The other 78 percent
China. was conducted under standard WTO rules
While firmly in the camp taking a criti- and tariffs. In other words, the existing free
cal view of China’s increasingly assertive trade agreements did not contribute a great
foreign policy, Japan is also interested in deal to trade liberalisation in the Asia-
expanding trade. In fact the rivalry between Pacific region.
Tokyo and Beijing explains Japan’s partici- RCEP, on the other hand, will reduce ad-
pation in RCEP: abandoning the agreement ministrative costs for importers and export-
would have allowed China to further ex- ers. As soon as it comes into force uniform
pand its influence on the rising Asian econo- rules of origin will apply across all partici-
mies. pating economies, although businesses will
While Sino-Japanese rivalry has been still have to compare the cost of certifica-
simmering for decades – and occasionally tion of origin with the tariff they would
coming to the boil – China’s relationship otherwise have to pay. It would certainly
with South Korea seldom makes waves. appear plausible to expect the share of
One exception was a conflict in 2017, when trade conducted under RCEP terms to be
Chinese state media called for a boycott of significantly higher than under many of
South Korean consumer goods and movies the existing trade agreements.
after Seoul deployed a US missile defence
system. The South Korean–owned Lotte
supermarket chain was specifically targeted Violation of Article 24
after providing land for the missile system,
and responded by announcing it would RCEP contributes to liberalising trade be-
withdraw from China. tween the participating nations by reducing
The biggest benefit of RCEP is that it the costs of importing and exporting goods
eases the application of existing trade and services within the free trade zone. But
agreements in the Asia-Pacific region. For it also contributes to the ongoing erosion
years economists have been complaining of the multilateral trade system. Every free
that the region’s multifarious trade agree- trade agreement represents an exception
ments increase rather than reduce regu- to Article 1 of the General Agreement on
latory obstacles, limiting their economic Tariffs and Trade (GATT), the fundamental
benefits. Reducing tariffs in bilateral trade “most-favoured-nation clause” under which
in fact increased the administrative costs all trade liberalisations must be granted to
for businesses, which had to deal with all WTO members. This is permitted under
documenting origin. To be traded tariff-free GATT Article 24, which stipulates that
under a free trade agreement, goods require exempted free trade agreements must cover
valid certification of origin. In many cases “substantially all the trade”. RCEP does not
the costs involved have neutralised the satisfy that condition. Agriculture is largely
savings attributable to abolition of tariffs. excluded, as is fishing; the arrangements
for trade in services are weak. But these
deficits apply to almost all free trade agree-
Simplifying Complex Rules ments. The reason this state of affairs is
tolerated is simple: a WTO member would
The economic effects of trade policy have have to lodge a complaint, and because they
to date been disappointing. According to a all violate Article 24 none of them have
study for the Pacific Economic Cooperation any interest in so doing.
SWP Comment 3
January 2021
2So RCEP does not represent a return to lic. In November 2020, Beijing’s embassy
the trade-liberalising spirit of the 1980s and in Canberra provided the Australian media
1990s. It tends to further weaken the multi- with a short document detailing fourteen
lateral trade system rather than strengthen- reasons for the rapid deterioration in rela-
ing it. It is advantageous for the partici- tions, including criticism of statements by
pating nations, but not for the global econo- Australian politicians on Taiwan, Hong
my. Even for its members the effects are Kong, the South China Sea and Xinjiang.
marginal. A study by the Peterson Institute
for International Economics (PIIE) suggests
that the increase in aggregate annual GDP Australia: Canary in the Coalmine
of member economies in 2030 will be just
US$174 billion. Distributed among a popu- Australia is where the region’s foreign policy
lation that already comprises 2.5 billion tensions and contradictions are most ap-
people the economic benefit at the indi- parent. It juggles close security ties with the
vidual level will be almost unmeasurable: United States with expanding economic co-
annual per capita economic output will operation with China. Canberra has become
increase by about US$70. Nobody will be accustomed to fierce criticism from Beijing,
able to call that a significant gain. for example over condemnation of human
rights violations against the Uighurs in Xin-
jiang and the suppression of the protests in
Shallow Rules without Hong Kong, or the exclusion of the Chinese
Shared Standards technology firm Huawei from contracts
for Australia’s 5-G network. Now Beijing is
Despite fears in certain quarters, RCEP will testing how far it can go. In that sense,
not create a new Chinese-led economic Australia is the canary in the Asia-Pacific
bloc. Its regulatory ambition is explicitly coalmine.
modest: It contains no environmental rules The Australian situation is especially
at all and refrains from imposing uniform complex. The history goes back a long way,
labour standards. Even more importantly, with Chinese immigrants contributing to
the agreement does not constrain the future Australia’s development since the gold rush
trade policy of its signatories. In contrast to of the 1850s. Until the pandemic there were
the European Union, whose customs union about 180,000 Chinese students in Australia,
involves a common trade policy for all its and 1.2 million annual visitors. Australia
members, RCEP permits its participants to also has roughly that number of residents
continue to pursue their own trade policies. with Chinese roots.
For example Australia can conclude a free No other country has profited so strongly
trade agreement with the EU as and when it from China’s economic growth. China has
chooses. That would change if RCEP became been Australia’s largest trade partner since
a customs union. But in the current politi- 2007. In 2018/19 it was by far the biggest
cal climate it is almost inconceivable that destination for Australian exports of goods,
countries like Australia or Japan would sign worth about 135 billion Australian dollars
up for a customs union with China. In that (AUD) – plus AUD 18 billion in service
sense RCEP creates very close ties to China exports. Japan followed with AUD 59 bil-
but only in very limited dimensions. The lion. The sum of Australia’s exports of
agreement is not the beginning of an Asia- goods and services to China is greater than
Pacific integration process. In fact, just two its exports of goods and services to Japan,
weeks after its signing the political tensions the United States, India and South Korea
blocking broader integration in the Indo- combined. At first glance Australia would
Pacific region became very visible. The most appear susceptible to arm-twisting.
prominent case is Australia, which has very In fact Australian society is increasingly
close commercial ties to the People’s Repub- sceptical towards China. In 2019 half of
SWP Comment 3
January 2021
3Australians held a positive opinion of the networks. Japanese firms were already very
United States, despite all the difficulties active in the ASEAN countries, playing a
with the US government and President major role in turning Thailand into a sig-
Trump. But only about one-third thought nificant manufacturing location for exam-
positively of China even though Australia’s ple. Euphoric observers were already calling
prosperity depends heavily on resource Thailand “the Detroit of Asia”. Simplifying
exports to China and Chinese demand for the rules of origin will now allow Japanese
educational and tourism services. The nega- carmakers to source more components
tive stance of many Australians has hard- from across the entire region.
ened further in 2020, with a full 94 percent The exclusion of agriculture is enor-
now supporting their government’s policy mously politically helpful for Tokyo. Japan
of reducing dependency on China. has always resisted liberalising agricultural
In Australia we see how thin the sheen trade, whether in the WTO or in bilateral
of modernity can be. Journalist Richard and minilateral free trade agreements. Japa-
McGregor called it “a modern multicultural nese agricultural products are expensive and
country with deep xenophobic roots”. Aus- cannot compete on price. Opening the Japa-
tralia’s massive European immigration pro- nese rice market to imports from the region,
grammes after the Second World War were for example, would have a high political
accompanied by a “yellow peril” scare. In price. Combining potentially considerable
the 1950s Australians feared Japan, today benefits for Japan’s still very competitive
it is China. manufacturing industries with ongoing pro-
Like the public, the government also tection for Japanese farmers, RCEP appears
struggles with ambivalent perceptions of absolutely made-to-measure for Tokyo.
China. When German Chancellor Angela
Merkel visited Australia in 2014 she asked
then Prime Minister Tony Abbott what fac- China
tors influenced Australia’s policy towards
China. Abbott responded: “fear and greed”. China stands to profit from the free trade
All that has changed since then is that the zone in similar ways to Japan. Chinese
sense of threat has grown. enterprises will benefit from reduced trade
Today Beijing expects Australia to avoid bureaucracy and the possibility to regional-
any criticism of its internal affairs: the clas- ise their production networks. But the ques-
sical kowtow. RCEP will contribute absolute- tion is whether China is actually seeking
ly nothing to lessening tensions. Australia such internationalisation. In November
has lodged complaints against Beijing’s 2020 Communist Party General Secretary
arbitrary punitive tariffs – not through the Xi Jinping presented his new economic
dispute settlement process in its existing strategy, which forms the backbone of the
bilateral free trade agreement with China, five-year plan for 2021 to 2025. Its essence
but through the WTO. The advantages of is the idea of “dual circulation”.
multilateral dispute mechanisms become This involves partially decoupling China
especially clear when the going gets rough. from the global economy. The share of
exports in China’s GDP has already fallen
from 36 percent in 2006 to 18 percent in
Japan 2019, while the trade war with the United
States reminded Beijing how dependent
A free trade agreement is useful for China’s parts of its domestic economy are on im-
eternal rival. Tokyo was able to join RCEP ports. Almost two-thirds of all semiconduc-
because the agreement serves its interests tors used in China in 2019 were produced
without incurring significant political costs. abroad (down from 80 percent in 2015).
RCEP permits Japanese businesses to fur- 16.6 percent of Chinese imports in 2019
ther expand their regional manufacturing were semiconductors and other electronic
SWP Comment 3
January 2021
4components, with a value of US$350 bil- Korea came from China; for Japan the figure
lion. was 36.9 percent.
The list of the ten biggest semiconductor Many corporate leaders in South Korea
manufacturers in 2020 includes six from the and Japan experienced a painful realisation
United States, two from South Korea and that sourcing components from China de-
one each from Taiwan and Japan, but none mands unfailing logistics. When the Covid
from China. Beijing aims to be 70 percent crisis disrupted supply chains, entire pro-
self-sufficient in semiconductors by 2025, duction lines ground to a halt; cheap com-
but analysts regard that as overambitious. ponents suddenly cost businesses dearly.
It is too early to predict the consequences This experience will dampen the interest of
of the new policy of dual circulation. Xi has East Asian manufacturers in sourcing more
described the establishment of “fully domes- components from China and other South
tic supply chains” as a matter of national East Asian countries after RCEP comes into
security. Essentially, this represents a re- effect.
tread of the autarchy model of the 1930s.
If China was serious about pursuing a new
version of autocentric development, RCEP India Stands Aside
would be superfluous.
In fact the current leadership envisages RCEP would have been a more significant
China continuing to participate fully in development if India had joined. But the
international circulation. The goals of the country has been wavering for years over
new strategy include preserving the impor- its role in the global economy. On the one
tance of the Chinese market for foreign hand, Indian companies are very active
companies. Continuing to import foreign- abroad, in manufacturing as well as ser-
made goods such as luxury cars for exam- vices. Significant parts of the British car
ple, could help deter foreign governments industry today belong to the Indian Tata
from criticising the Communist Party’s Group, for example (Jaguar, Land Rover).
new trade strategy too vigorously. As such, On the other hand Indian governments
Beijing would be deliberately exploiting have consistently worked to slow and block
the motive of greed cited by Tony Abbott to the development of new rules for interna-
preserve dependencies. German businesses, tional trade. Before the beginning of the
first and foremost the car industry, offer WTO Doha Round in 2001, New Delhi threw
prime examples of such dependencies. its weight behind the concerns of the devel-
oping countries and emerging economies.
The sometimes exaggerated demands of
South Korea this group contributed significantly to the
failure of the Doha Round. Expectations
South Korea’s situation is similar to Japan’s. that the election of Narendra Modi in 2014
South Korea has grown affluent without a would usher in a government with the
free trade agreement with China. And like courage to significantly liberalise India’s
Japan, South Korea also shares a profound trade policy have proved unfounded. India
interest in protecting its agricultural sector. is entrenched in a position of scepticism to-
But both nations learned hard lessons wards globalisation and is focussing – like
in the course of 2020, most prominently China in its new five-year plan – above all
through production losses in their car in- on domestic economic development.
dustries early in the year when components India is a special case in the contempo-
failed to arrive from China. Hyundai and rary international trade system, having no
Kia had to suspend manufacturing alto- free trade agreement with any of the major
gether, while Honda and Nissan in Japan economic spaces (East Asia, Europe, North
were forced to reduce production. In 2019 America). For a long time Prime Minister
31.1 percent of car parts imported to South Modi created the impression that he was
SWP Comment 3
January 2021
5determined to turn India into a modern to a policy of economic opening. This trade
and internationally competitive economy. policy reversal is especially unexpected
He often criticised the protectionism of US because the Indian public has always re-
President Trump, and was celebrated at the sponded very positively to the effects of
2018 Davos World Economic Forum for his globalisation.
appeal to accept globalisation and strength-
en international institutions like the WTO.
Even then observers were warning about Strong Support for Globalisation
the gap between the Indian government’s
words and deeds. Essentially Modi has It is conspicuous that RCEP encounters little
always pursued a protectionist line. India or no political resistance in the participating
ranked 120th in the Heritage Foundation’s nations. The main reason for the acquies-
2020 Index of Economic Freedom, well cence of their civil societies is that RCEP
behind ASEAN members Malaysia (24th), involves a group of countries that one could
Thailand (43rd) and Indonesia (54th). call the “winners of globalisation”. Support
India’s relative economic dynamism in for trade liberalisation and a far-reaching
the early years of Modi’s government and international division of labour remains
his pro-globalisation rhetoric sustained strong in the Asia-Pacific region. While the
an impression that India would join RCEP. original proponents of globalisation, prin-
Participating would have allowed India to cipally the majority of OECD countries, have
liberalise its trade relations with dynamic become weary and mistrustful, many Asian
economies, simplify trade bureaucracy and nations articulate a remarkably clear desire
probably receive a great economic boost. for greater opening and connectivity. In
An Indian economic opening should not surveys the populations of Vietnam and the
be expected in the foreseeable future, for Philippines consistently exhibit the greatest
two reasons. Firstly, tensions between India support for globalisation. People in most
and China worsened considerably in 2020, RCEP countries regard more international
culminating in a military confrontation in trade as an opportunity rather than a threat.
the Himalayas. In response New Delhi has The consequences of globalisation are
recalibrated its foreign policy and is today seen a great deal more critically in many
more willing to join the United States, Japan, OECD states today. The loss of employment
Australia and other democratic states in chal- through relocation of production to coun-
lenging China. It is currently inconceivable tries with lower wages and weaker environ-
that India would join a free trade agree- mental standards outweighs the consumer
ment in which China was also involved. benefits of cheaper imported products. The
The second reason is the renaissance of widely heard assertion that the EU and the
an economic policy that concentrates on United States should be taking action to
the internal market and seeks to limit im- liberalise their own trade policies is there-
ports. “Atmanirbhar Bharat” seeks a high fore a misplaced and unpolitical demand.
degree of economic autarchy. Today New Donald Trump won the election in 2016 by
Delhi is pursuing the strategy that John emphasising the negative effects of globali-
Maynard Keynes propagated in 1933 as sation for American workers. Support for
“national self-sufficiency”. At the end of trade protectionism has probably increased
November 2020, immediately after the sign- since then. President Biden did not win the
ing of the RCEP agreement, Indian Foreign 2020 election by promising free trade, which
Minister Subrahmanyam Jaishankar railed lacks popularity both within the Democratic
against globalisation, asserting that India’s Party and among the broader electorate.
industry had been seriously harmed by ear- Europe, on the other hand, often regards
lier liberalisation measures. itself as the trailblazer of free trade. In fact
The Modi government thus cannot be of course the EU is just as protectionist as
expected to abandon its course and revert the United States, placing strict constraints
SWP Comment 3
January 2021
6on agricultural trade, as well as certain
other sectors such as the car industry. When
the Covid crisis is over, the EU will probably
further tighten its trade policy, for example
by introducing tariffs to promote low-car-
bon production processes. For developing
countries and emerging economies such
climate tariffs can rapidly become barriers,
for example if emissions associated with
transport are factored in. Cut flowers from
African countries could then disappear © Stiftung Wissenschaft
from European shops. That kind of protec- und Politik, 2021
tionism enjoys broad public support in All rights reserved
Europe. But from the perspective of poorer
This Comment reflects
countries climate-driven trade restrictions
the author’s views.
represent more a threat than a promise.
RCEP is a positive development, with a The online version of
large group of nations continuing to sup- this publication contains
port trade liberalisation. But it will not functioning links to other
SWP texts and other relevant
significantly alter the future of internation-
sources.
al trade. What it will do is provide the sim-
plification of trade bureaucracy that busi- SWP Comments are subject
nesses in the Asia-Pacific region urgently to internal peer review, fact-
need, and facilitate trade in goods and ser- checking and copy-editing.
vices in the region. It will not, however, do For further information on
our quality control pro-
anything to resolve the political conflicts
cedures, please visit the SWP
that hinder or prevent broader economic website: https://www.swp-
and political integration in the Asia-Pacific berlin.org/en/about-swp/
region: Beijing’s contested territorial claims quality-management-for-
in the South China Sea, its increasingly swp-publications/
aggressive foreign policy and the still un-
SWP
resolved relationship between state-sub- Stiftung Wissenschaft und
sidised Chinese enterprises and trade part- Politik
ners subject to free-market processes. German Institute for
At the same time it is conspicuous that International and
the two most populous states in the Indo- Security Affairs
Pacific region are turning away from the
Ludwigkirchplatz 3–4
open trade paradigm. This will probably 10719 Berlin
lead to a slowing of economic growth in Telephone +49 30 880 07-0
both countries, and especially in India Fax +49 30 880 07-100
delay recovery from the consequences of www.swp-berlin.org
swp@swp-berlin.org
the pandemic.
RCEP will likely mark the high-water ISSN 1861-1761
mark of integration in the Asia-Pacific doi: 10.18449/2021C03
region, rather than the starting shot for re-
gional economic and political union. Translation by Meredith Dale
(English version of
SWP-Aktuell 97/2020)
Prof. Dr. Heribert Dieter is Senior Associate in the Global Issues Research Division at SWP and
Associate Professor at the University of Potsdam.
SWP Comment 3
January 2021
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