China spreads its wings

by Christian Siviere
Christian Sivière runs Solimpex and is an international trade
consultant and lecturer.

Signed in Hanoi, Vietnam on November 15th, 2020, the Regional Comprehensive Economic Partnership (RCEP) between China and 14 other Asia-Pacific countries creates the largest Free Trade Agreement in the world: 15 countries, 2.2 billion people, a GDP of $US22.1 billion representing 28 percent of world trade and 30 percent of world GDP.

Collectively, member states of the RCEP make up almost one third of the world’s population and of global GDP, putting it ahead of both the Canada-US-Mexico Free Trade Agreement and the European Union.

Read more from our February 2021 print edition.

Current members are Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. India, although part of the negotiations started in 2012, is not part of the deal as it feared the lowering of customs tariffs would put its home producers at a disadvantage.

The RCEP will replace several bilateral agreements, reducing tariffs among member countries over a 20-year period, bringing common trading rules, including uniform rules of origin. The RCEP will drive intra-Asia growth, as having one set of rules will facilitate business development and trade within the region.

Big benefits

The potential benefits have been quantified by several sources. For example, the Washington-based Peterson Institute for International Economics estimated that the RCEP could add US$186bn to global national income annually, adding 0.2 percent to the economy of its member states. The Brookings Institute, also based in Washington, predicted that the RCEP could add $209bn to world income each year and $500bn to world trade by 2030.

The agreement needs to be ratified by member countries, and then implemented. This can take several years. Since the tariff elimination will be phased in over 20 years, the actual impact will be slow and we won’t be able to measure it for some time.

Milestone for China

However, it represents a milestone and a victory for China. One could question why free-market economies like Singapore, South Korea or Japan would want a free trade deal with a state-controlled economy and an authoritarian regime.

Australia has had an FTA with China since December 2015, but is learning the hard way that criticizing the Middle Kingdom for human rights abuses or industrial espionage comes with huge costs. China has recently either banned or introduced prohibitive tariffs on imports of Australian coal, grain and wine.

Canada knows firsthand how China conducts its foreign policy. Canadians Michael Kovrig and Michael Spavor were taken hostage and have been held there since December 2018, following the arrest in Vancouver of Meng Wanzhou, chief financial officer of Huawei Technologies, who was under an arrest warrant and extradition request from the United States. China also suspended its imports of canola oil from Canada, following the arrest of Meng.

Effects of U.S. policies

Interestingly, this trade agreement came near the end of President Trump’s term, during which U.S. leadership in the world was largely diminished due to the combined effect of ‘’America First’’ and the various ‘’tariff wars’’, not just with China, but also with U.S. allies like Canada, Mexico, the European Union. The U.S. is also the only important country in the world blocking the introduction of a GAFA (Google, Amazon, Facebook, and Apple) tax on digital companies. Trump even encouraged a no-deal Brexit.

And, let’s not forget that one of Trump’s first measure was to withdraw the U.S. from the Trans-Pacific Partnership. Had the U.S. continued to lead the TPP, more countries would likely have joined it and it’s an open question whether the RCEP would have come to fruition then. It could almost be said that the RCEP is an indirect collateral result of a messy four-year U.S. presidential term.

Although the full details of the RCEP haven’t been analyzed yet, it does not cut tariffs as much as the TPP (or the CPTPP, as it’s now known), and doesn’t go as far. But, it’s the first multilateral trade deal signed by China, which naturally likes to promote itself as the champion of free trade, as the world has witnessed Trump’s ‘’tariff war’’ against China, and other countries, over the last several years. It undoubtedly extends China’s influence in the region and in the world.