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Date: 19 November 2020 Author: Paweł Paszak

The Regional Comprehensive Economic Partnership (RCEP) and Rivalry in the Indo-Pacific

On November 15, China, the members of ASEAN (Association of Southeast Asian Nations), Australia, Japan, South Korea and New Zealand signed the Regional Comprehensive Economic Partnership (RCEP). The largest trading bloc in the world, accounting for 30% of world’s GDP, will be established when the agreement enters into force. The RCEP is a step forward in the economic integration of East, Southeast Asia and China, probably also being a step backwards in terms of plans for the economic decoupling of production chains. Despite its broad scope, the agreement does not regulate the matters of labor and environmental standards that were the subject of the Trans-Pacific Partnership (TPP), abandoned by the Donald Trump administration.

SOURCE: PXFUEL

The agreement focuses on reducing tariffs on goods exchanged between the parties to the agreement and streamlining investment procedures. A significant subject is the unification of “rules of origin,” which have so far remained varied. According to calculations presented by The Global Times, controlled by the Chinese authorities, the agreement may increase the GDP growth dynamics in the Asia-Pacific region by 2.1%. In turn, the American Peterson Institute for International Economics (PIIE) forecasts that the deal could generate an additional USD 186 billion of national income annually by 2030. The main beneficiaries are to be the largest economies of the RCEP – China, Japan and Korea, whilst the ones who will lose out are the United States and India. The entry into force of the agreement will increase intra-regional trade at the expense of external entities. PIIE’s estimates suggest additional trade flows of USD 428 billion and losses of USD 48 billion to economies outside the bloc.

The RCEP includes developed economies such as Japan and South Korea, which are characterized by high labor costs and access to substantial capital resources as well as developing countries where the labor force is cheap. Facilitating procedures and services will speed up investment processes in ASEAN countries where industry is much more “labor-intensive,” i.e. based on cheap labor force. The impact of the agreement on initiatives to move production from China to other countries in the region in order to diversify supplies remains unclear. On the one hand, the agreement may strengthen economic ties between Japan, South Korea and China, on the other hand, it will facilitate the relocation of factories to Southeast Asia, thus leading to a partial diversification. Fundamentally, however, China’s comparative advantages make decoupling an impossible scenario in the short- and medium-term.

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Initially, India was also supposed to be a party to the agreement, but in 2020 the authorities in New Delhi announced that they were withdrawing from the negotiations. The main reason was the concern about industry in India, which remains less competitive than its regional rivals in many ways. The second issue was the limited impact of the RCEP on the free flow of services, which is the main driving force for the Indian economy and a source of its comparative advantages. Opening up to competitors in the industrial market with little change in relation to services was considered unprofitable from the standpoint of Indian interests. It should be noted that India still has the possibility to join the agreement.

China’s advancement in production chains, rising labor costs and, more recently, the trade war, have led less advanced industries to relocate to Southeast Asia countries – mainly Vietnam, Thailand, Malaysia and Indonesia. These processes have resulted in increased interdependence between the ASEAN economies and China. In the first half of 2020, members of ASEAN replaced the European Union as the PRC’s main trading partner and the exchange reached 300 billion USD. The RCEP will further accelerate these processes and consolidate China’s position as the leading economic actor in the region. Stability and economic development are a priority for the countries of Southeast Asia. Increasing ties with China will mean reducing the influence of the United States. Although ASEAN recognizes the constructive role of the USA in providing public goods and stopping the aggressive behavior of the PRC, at the same time it fears the destabilization caused by the great power competition. The most likely scenario is therefore following the “middle way” of building symbiotic economic relations with China and maintaining diplomatic cooperation with the Quad members (USA, Japan, India, Australia).

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