How afraid should the US be of China and the RCEP?

6 January 2022

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement amongst 15 countries in the Asia Pacific — and by far, the world’s largest free-trade bloc to have ever been formed. 

Given former US president Trump’s pull of the US out of the Trans-Pacific Partnership (TPP) and the recent Biden administration’s vaccine diplomacy in SEA to cultivate goodwill and trade, will the RCEP be China’s… trump card to regaining power in the East whilst diminishing the light of the US?

But first, what’s the RCEP?

Kicked in on Jan. 1 this year for 10 countries in the Asia Pacific, the RCEP was initiated in 2012 by the Association of Southeast Asian Nations (ASEAN) in order to strengthen ties with China and other APAC nations.

Currently, Brunei Darussalam, Cambodia, Laos, Singapore, Thailand, Vietnam, China, Japan, Australia, and New Zealand already have the agreement in place. 

South Korea would join the bloc on 1 February 2022, 60 days after its ratification, whereas Malaysia, Indonesia, Myanmar, and the Philippines are expected to ratify it soon.

US-China diplomacy dances

China has long had strained relationships with the US, even as early as 1949. Over the decades, relations between US and China waxed and waned, but it was in the late 2000s when tensions started escalating.  In 2010, China overtook Japan to become the world’s second-largest economy, and only two years prior, became the US’ largest foreign creditor, or, holder of US debt or treasuries. 

Goldman Sachs’ chief economist Jim O’Neill stated back then that China is on track to overtake the US as the number one economy by 2027. Then-US secretary of state, Hillary Clinton in November 2011, outlined a US “pivot” to Asia, calling for increased investments and diplomacies in the Asia Pacific to counter China’s growing strength. 

The same month, then-President Barack Obama announced that the US and eight other countries had reached an agreement on the TPP, which would become the centerpiece of the strategic pivot to Asia.

On Asia and free trade agreements

The Trans-Pacific Partnership (TPP) was to be an FTA for 12 Pacific Rim economies, promising lowered tariffs and trade barriers between several Asian countries, as well as North and South America. It would have been the world’s largest free trade agreement, covering over 40% of the global economy. 

Proponents of the TPP believe that the deal would have expanded US trade and investment abroad, spurring economic growth, lowering consumer prices, and creating new jobs, while at the same time advancing US strategic interests in APAC.

However, its detractors, including then-president Donald Trump, felt that the deal was going to exacerbate the decline in manufacturing, lower wages, and increase inequalities in the US. Tensions between China and the US escalated again in 2012 as the US and its allies brought China before the World Trade Organization, alleging violation of international trade norms, to which, of course, China disagreed.

The same year, China started gathering support for the RCEP, and underwent a leadership overhaul, replacing 70% of its leadership bodies, including then-president Hu Jintao with current president Xi Jingping. The CCP spoke about the “rejuvenation” of China. China’s support for the RCEP hit its peak in 2017, and the same year, then-US President Trump withdrew the US from the proposed TPP (Trans-Pacific Partnership) pact. 

As such, it couldn’t proceed, and the other nations worked on establishing a newer version, called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). 

Fast forward to 2021, China had been engaging in vaccine diplomacy efforts of its own, rushing out its own variations of the Covid-19 vaccines and giving them to countries with strings very clearly attached — to mixed results, however

Earlier in 2021, the Biden administration wasn’t doing much in the area, but this changed in May, in a bid to counter not just China, but Russian vaccine diplomacy in Asia. 

In Sep 2021, China applied to join the pact, although the Biden administration wasn’t keen on rejoining. 

And now, with China joining the RCEP, many expect it to be a key tool for China to get an edge over the West’s influence in the Asia Pacific. 

What will the RCEP bring for signatories?

The RCEP comprises a mix of low, medium, and high-income countries in the Asia Pacific, and is expected to boost the region into digital economy dominance.

Its key selling point is the elimination of tariffs for cross-border trade in goods. 

It is a big deal, as inter-Asia trade already is bigger than trade between Asia, North America and Europe put together. 

Once the RCEP came into effect, 65% of tariffs have gone down to zero — and this number is expected to rise to as much as 90% within 20 years. 

For RCEP exporters to enjoy these tariffs, they would need to abide by its common “rules of origin” framework, shared Ajay Sharma, HSBC’s regional head of global trade and receivables finance for the Asia Pacific, in a report by SCMP

This means sourcing at least 40% of inputs from within the RCEP bloc, in order for their end-products to enjoy the tariffs when they’re exported to other member nations. 

Sharma further opined that diversification of supply chains and FDI (foreign direct investment) will be accelerated as companies will find it easier to use ASEAN as a base of production, given lower associated business costs. 

He also added that it would “streamline existing FTAs in APAC and strengthen intra-regional trade linkages.” 

Asia and cross-border trade

The Asia Pacific, especially ASEAN, has long had a history of close and successful cross-border trading, primarily due to proximity and similarity of cultures, which facilitates logistics and market demand for goods.

However, unlike the European Union (EU), the APAC region had been a little on the slower side to rectify existing bottlenecks in processes, laws, regulations, tariffs, and access to financing, especially in relation to global value chains. 

Whilst ASEAN trade was admittedly negatively impacted by the pandemic in the past two years, heavy damage was largely averted through several approaches. 

Digitalization in the form of enhanced digital connectivity, automation of operational services, and strong governmental policies prioritizing digitalization in cross-border trade played a huge role in dampening the effects of the pandemic in ASEAN.

Furthermore, the region is one that’s quick to recognize and take advantage of fintech. This is largely applied to foster better financial inclusion, in the region home to the world’s largest population of unbanked and underbanked consumers. 

Aside from fostering smoother payments, digitalization brings with it a host of other benefits for businesses and consumers alike, especially in the digital payments powerhouse that is Southeast Asia.

RCEP and the Chinese economic impact

The RCEP comes at an opportune time for China, as its ambitions for foreign trade had been doubly impacted by not just strained relationships with Washington, but also through the effects of the Covid-19 pandemic. 

The APAC region itself is earmarked for massive success, and a huge enabler for this would be China’s presence in the trade and supply routes, as well as a huge domestic market hungry for ASEAN goods. This, surely, is a beneficial arrangement for both China and ASEAN alike.

As reported by SCMP, according to vice-minister of commerce Ren Hongbin, China’s participation in the RCEP will “hedge against the negative economic impacts of Covid-19”, and also serve as a “powerful leverage” for keeping trade and foreign investment stable in 2022.

According to Yu Benlin, head of international economic and trade affairs at the commerce ministry, both China and RCEP member countries will see a reduction of tariffs on both sides, such as machinery and equipment, electronic information, chemical industry, light industrial textiles, and more than 57% of China’s exports to Japan next year will immediately achieve zero tariffs. 

However, with that said, Chinese exporters complained in December about rising costs of freight rates, due to supply chain issues around the world — one exporter claims prices for a 40-ft container have more than tripled. According to SCMP, industry insiders expect these challenges to continue into 2023. 

Additionally, according to a Moody’s Analytics report last October, China is both a contributor to, and a victim of, supply-chain disruptions wreaking havoc across the globe. Authors Katrina Ell and Ryan Sweet said: “China’s zero-tolerance approach to Covid-19 can mean that ports or factories close at short notice in response to an infection outbreak.”

Such closures at critical production hubs “disrupt production and the flow of goods on a global scale, and not just at home”. 

Given how the world is still trying to deal with Omicron, and with another new variant on the horizon, IHU, we don’t expect China to resume its dogged pursuit of ruthless trading and shipping efficiency just quite yet — the government still has a lot left to iron out.

But this of course doesn’t mean the US should rest on its laurels — whilst these are issues China has to iron (curtain) out, they are historically quick at adapting and overcoming tough situations.