On the 15th of November, China and 14 other Asia-Pacific countries signed the world's largest trade agreement, the Regional Comprehensive Economic Partnership (RCEP) agreement. The agreement covers a market of 2.2 billion people, accounting for about 30% of the global population; a global output of US$ 26.2 trillion, which also accounts for 30% of the global economy. In terms of population and economic scale, the RCEP agreement is larger than the scope covered by the United States-Mexico-Canada Agreement (USMCA) and the European Union.
The world is currently under the tide of anti-globalization and also simultaneously ensnared in the COVID-19 pandemic. In addition, the United States has just completed its election and is in a vacuum state before the alternation of power between the new and the old, the fact that there is a successful signing of a multilateral trade cooperation agreement by 15 Asia-Pacific countries is quite conspicuous in the current global geo-economy under the pandemic.
How then, should we perceive the role of RCEP? What is the prospect of RCEP? How should China make good use of RCEP?
Some institutions regard the RCEP as a superficial agreement, which will not have any substantial effects in the short term. To cite an example, analysts at Citi Research believe that the economic benefits of this mega-scale trade agreement will take many years to realize. Gareth Leather, a Senior Economist in the Emerging Asia team at Capital Economics, said that more than 70% of the trade between the 10 ASEAN countries is carried out with zero tariffs. RCEP member countries also have bilateral or smaller multilateral trade agreements. Tariffs are already very low, so the direct economic benefits of the RCEP are limited. Compared with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) signed in 2018, the RCEP is a weaker trade deal. These views are calculated from the point of view of short-term tariff reduction and trade increase.
There are of course, those who hold different views. Simon Baptist, global chief economist of The Economist Intelligence Unit, pointed out that the RCEP lays the foundation for deeper cooperation between members in the future, especially those without existing bilateral trade agreements. Possible bilateral "matching" countries include China and Japan, the world's second and third largest economies, as well as Japan and South Korea, which are entangled in bilateral trade disputes. Now that this framework has been established, all parties will have the opportunity to continue to advance with the RCEP as a basis in the future.
Many analysts are more concerned about the geopolitical and diplomatic value of the RCEP, especially China's role in it. Citi Research analysts believe that the diplomatic significance of the RCEP may be just as important as its economic significance. Under U.S. President Trump's "America First" foreign policy, when the United States withdrew from the Asia-Pacific region, the signing of RCEP agreement is seen as a geopolitical victory for China. Indeed, it has even been described as "a coup for China".
On the other hand, researchers at ANBOUND see that the significance and role of RCEP are multifaceted. It is meaningful both in terms of geo-economics and geopolitics. One then, should not only focus on short-term tariff concessions and trade promotion. We believe that in the "post-Trump era," the wave of anti-globalization will be partially weakened, and globalization will return to a certain extent on a new level. The signing of the RCEP not only reflects the actual needs of relevant countries for trade and economic cooperation, but also the desire to establish a regional platform for the return of globalization in the future. ANBOUND's researchers noticed that although there are different views on the value of the RCEP, all parties basically agree that in the context of increasing tensions between the United States and China, as well as the increasing concerns about deglobalization, the signing of the RCEP can achieve the following goals: (1) It is an indication that East Asia is open to business and recognizes the economic benefits of deepening trade integration. (2) It reduces the perception that China's domestic market in the "dual-circulation strategy" has become more inwardly focused. (3) In terms of economic policy, Asia-Pacific economies do not want to choose between the United States and China, even for countries with strong security alliances with the United States (such as Japan and South Korea).
China is an important participant and promoter of the RCEP mechanism. It must also be acknowledged that the RCEP is extremely important to China at present. When negotiations began 8 years ago, the RCEP was just an ordinary multilateral trading platform for China. However, in the context of the overall deterioration of U.S.-China political and economic relations, the RCEP represents a rare international stage for China. It also carries the significance of new geo-economic and geopolitical space. Under the impact of the U.S.-China trade war in the past two years in addition to the COVID-19 pandemic, China's foreign trade pattern has changed. ASEAN has become China's largest trading partner, which makes the RCEP even more valuable to China. Through the RCEP mechanism, China has been able to improve its already stable economic and trade relationship with U.S. security allies such as Japan, Australia, and New Zealand, which undoubtedly adds another channel of communication. The RCEP also leaves an option for the return of globalization in the future. ANBOUND's researchers noted in a follow-up study that in the coverage of Japanese media, China was originally not active in signing large-scale economic partnership agreements, formulating intellectual property rights and information circulation regulations, but because of the intense U.S.-China antagonism, there is an urgent need for a trade framework that does not include the U.S., hence China is willing to compromise concerning tariffs on Japan.
For China, making good use of the RCEP platform gives it an important space to resist the assaults from the U.S. and hedge against geopolitical containment. To make good use of this hard-won multilateral platform, China needs to take a long-term view and consider the RCEP from a strategic perspective and utilize this agreement to promote its internal reforms as well as raise its level of openness in line with international standards. There are two areas that may need to be improved for China in the future:
The first is to increase the level of openness in trade in services. The importance of international trade in service is increasing, and China's trade in service opening commitments have reached the highest level of existing free trade agreements. On the basis of the WTO's commitments, China has added 22 areas, including R&D, management consulting, manufacturing-related services, and air transport, as well as increased commitment levels in 37 areas that comprise of finance, law, construction, and shipping. However, there is still a gap between China's trade in service opening and other countries. In this RCEP agreement, 7 members including Japan, South Korea, Australia, Singapore, Brunei, Malaysia, and Indonesia adopt negative list commitments, while the remaining 8 members including China adopt positive list commitments, which will be converted to negative list within 6 years after the agreement takes effect. This will provide space for China to reform and upgrade in the future.
The second is to greatly improve China's investment transparency. In terms of investment, the 15 member states of the RCEP have adopted a negative list approach to make high-level openness commitments for investment in the five non-service sectors of manufacturing, agriculture, forestry, fishery, and mining. In addition, the RCEP also contains investment protection clauses such as fair and equitable treatment, expropriation, foreign exchange transfer, and loss compensation, as well as investment facilitation clauses such as dispute prevention and coordination and settlement of foreign complaints. All parties agreed to discuss an investment dispute settlement mechanism between investors and countries within two years after the RCEP agreement comes into effect. Investment is the driving force for the adjustment of the industrial chain and supply chain. Under the new mechanism, China needs to make significant improvements in both its foreign investment and opening-up of the domestic investment market in order to truly take root under the RCEP mechanism.
Final analysis conclusion:
The signing of the RCEP agreement by the 15 Asia-Pacific countries is a rare achievement under both anti-globalization and the raging COVID-19 pandemic, which brings hope for the return of globalization. The RCEP has also brought a rare geo-economic and geopolitical space for China. Taking this as an opportunity, China needs to further promote reforms and raise the level of openness, so as to utilize the RCEP platform to truly promote the "domestic and international dual-circulation."
