RCEP and Asia-Pacific Regional Cooperation

Zhang Jianping Dong Liang

Director, Center for Regional Economic Cooperation Studies of Chinese Academy of International Trade and Economic Cooperation

Associate professor, School of Economics, Peking University

On November 15, 2020, the 4th RCEP leaders Meeting was held via video-link, at which China, Japan, South Korea, Australia, New Zealand and the 10 ASEAN countries formally signed the Regional Comprehensive Economic Partnership (RCEP), bringing into reality the worlds largest and most influential free trade deal and a mega-FTA.

The Needs for Asia-Pacific

Regional Economic Cooperation

Give Rise to the RCEP

The RCEP, from conception to final realization, benefits from continuous progress of the wave of economic globalization and regional integration. Since the 1990s, as science and technology advance and as means of transport and communication improve, the size of international trade and investment has enjoyed exponential growth. Multinational corporations of developed countries have proliferated different processes, links of production and services of their products to all parts of the world whereas other participating parties to globalization as represented by East Asian developing countries have embedded themselves in certain links of the value chain with their comparative advantage and by availing themselves of the opportunity for value-adding and development through vertical specialization.

To reduce cost for division of labor, global production networks demand to decrease international trade barriers and promote flow of production factors, which urges Asia-Pacific countries to conclude bilateral and multilateral free trade deals and join free trade areas (FTAs) according to these agreements. To date, free trade agreements have become an important supplementary arrangement to the World Trade Organization (WTO), displaying some brand new development trends.

First of all, participating principals to free trade agreements are becoming more extensive. In terms of number of members, it has gradually moved from bilateral to multilateral, and in terms of geographical distribution, from agreements within a region to trans-regional ones. On level of development, newly established FTAs such as the RCEP have begun to encompass more diversified economies on greatly different levels of development, while talks on free trade deals led by developed countries such as the CPTPP and the TTIP have also become more active.

Secondly, free trade agreements are now increasingly rich in content with gradually improved standard. Free trade agreements in the past normally only included reciprocal trade arrangements and trade policy consultation, and mainly focused on border measures like tariff concession. However, as international economic and trade cooperation increasingly deepens, the coverage of free trade agreements have begun to involve within-border measures like e-commerce, property right protection, government procurement and competition policy, transcending traditional scope of cooperation.

Finally, free trade agreements have moved from competitiveness towards integration. As the number of free trade agreements increases, increasingly complicated agreement clauses markedly increase international trade cost, with differences on preferential treatment and rules on origin between various free trade agreements increasingly underlining the “spaghetti bowl effect”. Therefore, many talks on mega FTAs are engaged in integrating existing free trade agreements within a region so as to increase wealth effect of free trade.

Besides dynamics from economic globalization, several economic crises in history have also an important role to play in promoting Asia-Pacific regional economic cooperation. After the Asian Financial Crisis of 1997, all of the East Asian countries came to see the necessity of preventing risks in international cooperation. In 2000 in Chiang Mai, Thailand, finance ministers of China, Japan, South Korea and 10 ASEAN countries came up with a joint initiative to set up a regional foreign exchange reserve pool and establish a regional currency swap network, taking an important step towards regional economic integration. In 2001, China started trade talks with the 10 ASEAN countries that led to the conclusion of the first “10+1” free trade agreement in East Asia, followed with the same successively by Japan, South Korea, Australia, New Zealand and India, which laid the foundation for the negotiations on RCEP.

After the International Financial Crisis of 2008, all of the East Asian countries again had the strong imperative of huddling together for warmth against the background of global economic recession. In 2011, China put forward the initiative of establishing a “10+3” East Asian FTA whereas Japan contrapuntally proposed the initiative to set up a “10+6” East Asian comprehensive economic partnership. As differences on the path exist, the two initiatives have eventually evolved into the “10+3” and the “10+6” mechanisms of the East Asian Leaders' Meetings respectively but failed to move towards regional economic integration in a substantial way. As such, the 10 ASEAN countries proposed a new motion to integrate existing bilateral free trade deals with the ASEAN as the core and build a mega FTA jointly participated by all regional countries, which set the talks on RCEP on the right track. Through long consultations, the 15 signatories except India concluded all text content negotiations by the end of 2019 and formally signed the RCEP by November 2020, marking the achievement of another important interim result of Asia-Pacific regional economic cooperation.

At present, as the impact of COVID-19 pandemic has yet to recede,the prospect is unfolded that the global economy will fall into a new round of recession, and all of the East Asian economies have once again felt the serious pressure of economic slowdown with increasing cry for deepening regional economic cooperation. In the foreseeable future, the level of Asia-Pacific regional economic cooperation will continue to improve on the basis of current conditions, injecting new vitality into regional economic development.

RCEP Promotes

the Process of

Asia-Pacific Regional

Economic Cooperation

As an important result of the promotion on demand for Asia-Pacific regional economic integration, the implementation of the RCEP will also accelerate the process of regional economic integration. On macro level, the RCEP FTA has integrated five “10+1” free trade agreements and urged some of the signatories to reach bilateral arrangements for the first time, which will evidently improve the level of trade and investment within the region and bring about huge economic benefit. On micro level, the RCEP has accommodated concrete conditions of developing signatories and added many innovative clauses, which will be conducive to the creation of East Asian single market and promote optimized allocations of resources and industrial transfer and upgrading within the region.

The 15 members of the RCEP FTA include all of the 10 ASEAN countries and 5 non-ASEAN countries of China, Japan, South Korea, Australia and New Zealand, the size of their economy, population and trade all accounting for 30 percent of the global total. However, as one of the three major manufacturing centers of the world, the level of internal trade and investment of the East Asian economic circle with the participation of the above countries falls far short of that of West European economic circle under the framework of the European Union (EU) or that of North American economic circle under the framework of the United States–Mexico–Canada Agreement (USMCA), and features clear fragmentation. The building of the mega FTA this time around will make up for the shortfall and produce gigantic trade creation and investment effect. According to relevant estimates, the RCEP will improve Chinas wealth level by 1.116%, and that of foreign trade by 8.549%, with evident improvement of wealth and trade level of other regional countries and the world at large.

As an important participant of the RCEP process, although India has a huge market of 1.3 billion people, its manufacturing basis is relatively weak. Furthermore, in terms of doing business environment, level of infrastructure and administrative efficiency, the country falls short of the standard as required by the RCEP, and therefore it chose to withdraw at the last stage of the talks. Though the RCEP agreement has made a special arrangement for India to return to its framework, the process may have a long way to go.

Besides India, the 15 RCEP members include a diverse mix of developed countries like Japan, South Korea, Australia and New Zealand and emerging economies like China and ASEAN economies on vastly different development levels. As such, the RCEP has made pertinent readjustment in many aspects. For instance, it has made gradual arrangements for developing countries, requesting them to gradually reduce their tariffs to zero from present level in 10 years. In the area of trade in services, it has adopted arrangements of positive list for 8 members including China that are weak in competitiveness, asking them to turn the positive list into a negative one in 6 years after the RCEP becomes effective and thereby providing a certain buffering period.

The RCEP agreement has also made rather flexible arrangements for rules of origin, where all signatories are taken for a whole and goods produced cross-border are accounted as accumulation of value elements of origin. It means that with cutting back on barriers of origin, linkage of regional industrial chain will be closer, and enterprises can make full use of varying comparative advantages between countries to rationally arrange links of production and thereby improve international competitiveness of their products.

Moreover, the RCEP agreement has, for the first time, added a special chapter for e-commerce with 17 clauses, being adapted to the current development trend of cross-border e-commerce trade, among which clauses on paperless trading, validity of electronic authentication signature, and temporary duty exemption help create more convenient business environment online, clauses on consumer information protection, spam management, and network security help prevent cyber-harms relating to cross-border e-commerce trade, and clauses on increasing transparency and dialogue, limited cross-border data transfer, and data access and storage standardization will be conducive to government-enterprise cooperation between countries. In a future RCEP FTA, the integration of advantages of cross-border e-commerce and traditional manufacturing will be the key for enterprises to reduce their cost.

On top of all this, the RCEP agreement has also made pertinent provisions in areas of movement of natural persons, settlement of disputes between government and private companies, protection of intellectual property rights, trade remedy measures, and trade facilitation. Through comprehensive arrangements covering trade, investment and industrial areas, the RCEP will urge all signatories to continue deepening international division of labor and optimizing allotment of resources on the basis of their own endowed advantages. In addition, the expansion of overseas market will exert reform pressure on supply side, promoting industrial transfer and upgrading between members. As a result, the level of comprehensive competitiveness of the Asia-Pacific region as a whole will improve.

The RCEP and Prospect of

Asia-Pacific Regional

Mechanisms

In Asia-Pacific region there exists a rather complicated pattern of regional economic cooperation, in which the existing China-ASEAN FTA serves as basis of cooperation, China-Japan-South Korea FTA under negotiation will serve as a higher platform, and the CPTPP led by developed countries will serve as a possible track. After the implementation of the RCEP, on top of the direct impact described above, it will also produce linkage benefit with these regional economic mechanisms, better promoting the process of Asia-Pacific regional economic integration.

1. The APEC: Gradually Moves toward Asia-Pacific FTA

Set up in November 1989, the Asia-Pacific Economic Cooperation (APEC) now with 21 members aims to create a multilateral trading system of interdependence, common interest and persisting openness and to reduce regional trade barriers. Being as an important force in promoting Asia-Pacific regional cooperation, to advance related processes for a Free Trade Area of the Asia-Pacific (FTAAP) is a principal mode for the APEC to function.

In 2004, Canada took the lead to put forward the conception of FTAAP, which was taken up by the APEC as its long-term goal. However, lacking appropriate negotiation track and institutional foundation, the FTAAP made little substantial headways then. Not until President Xi Jinping put forward Beijing Roadmap for the FTAAP and the Goals of the Asian-Pacific Dream at the 2014 Beijing APEC Summit did the relevant process take off after acquired main basic conditions.

As a multilateral free trade agreement in a larger scope than the RCEP, FTAAP will link two major economic circles of North America and East Asia, which means that its negotiation path is far more complicated and difficult than that of all currently existing free trade agreements. On the one hand, as gap in development levels between Asia-Pacific countries is sizable, it is difficult for many developing economies to adapt to high standards set by developed economies for trade and investment liberalization and facilitation. And on the other hand, complex Asia-Pacific political and economic pattern and fragmentation of its regional economic and trade cooperation also increase the difficulty in integrating various kinds of free trade agreements. Moreover, the APEC has adopted the decentralized mode of cooperation featuring freedom, equality and consultation, in lack of a leading core in promoting the negotiation process like the ASEAN. This will also affect actual speed of progress of the FTAAP.

In regard to Asia-Pacific regional economic integration, China has all along emphasized the principles of going from the easy to the difficult, advancing step by step, and operability, hoping to advance gradually along the same path as from bilateral and multilateral free trade agreements to “10+1” and “10+6” mechanisms and on to the RCEP and eventually reach the ultimate goal of the FTAAP. As such, with the conclusion of the RCEP, the preconditions for launching formal negotiations on the FTAAP are basically in place, and the implementation of the mega-FTA will also remove some of the obstacles to regional economic and trade cooperation, laying a solid foundation for the ultimate realization of Asia-Pacific economic integration.

2. CPTPP: Another Possible Track for Asia-Pacific Economic Integration

The forerunner of the CPTPP is the Trans-Pacific Partnership (TPP) initiated by four countries of Singapore, New Zealand, Chile and Brunei in 2002, and joined successively through consultation by eight other countries including the United States, Japan, Australia and Vietnam, aiming to create a FTA of high standard and broad coverage and led by developed economies. After the Trump administration unilaterally withdrew from the negotiations, the TPP was reorganized into the CPTPP and the agreement was eventually signed by the rest of 11 countries in March 2018. At present, the CPTPP has been implemented already.

The CPTPP accounts for 13% of global GDP, the number of its members and the size of their population being less than the RCEP while the standards of its relevant content being higher than the RCEP. In regard to border measures, the CPTPP makes acute issues of strict rules of origin, complete liberalization of trade in goods, all round opening of trade in services, pre-establishment national treatment and negative list system, and in regard to post border measures, it goes into great length to regulate non-traditional issues such as protection of intellectual property rights, freedom on the Internet, governance of state owned enterprises, and labor and environmental standards. On the whole, the CPTPP meets more the needs of developed economies whereas the RCEP takes more into consideration the actual conditions of broad developing economies. For emerging economies like China and the ASEAN the latter is of greater comfortability and operability.

With the conclusion of the RCEP agreement, the dual-track pattern of the process of Asia-Pacific regional economic integration has been formally established. As the signatories of both agreements overlap to a large degree, in fact the relationship between the RCEP and the CPTPP is not competitive and even less antagonistic. As far back as in 2013, China made clear its position that both the TPP and the “10+3” and “10+6” were likely paths to advance Asia-Pacific economic integration and that China always encouraged and supported different countries to choose fitting regional economic integration platforms according to their own concrete conditions.

In November 2020, President Xi Jinping remarked at the 27th APEC Leaders Meeting that the Chinese side will actively consider joining the CPTPP. It shows that China will continue to advance institutional reform and open to the outside world on the basis of the RCEP, and that the existing dual tracks of the RCEP and the CPTPP may as well converge into one in the future when conditions are ripe, making contributions to the completion of the Asia-Pacific Economic Community.

3. China-Japan-South Korea FTA: Northeast Asian Economic Circle of Higher Quality

As important participants of East Asian production network, between the three neighboring countries of China, Japan and South Korea, there are close international trade relations, and they have already become a virtue economic community. As early as 2002, the conception of setting up China-Japan-South Korea trilateral FTA was formally put forward but it did not produce any substantial results for multiple reasons. In 2012, China-Japan-South Korea FTA was once again put on the agenda. However, the negotiation process was seriously disrupted as the intensification of the Diaoyu Islands dispute and the THAAD dispute led to deterioration of China-Japan and China-South Korea relations. Not until 2018 did the negotiation process for China-Japan-South Korea FTA return to the right track and so far it has gone through 16 rounds of talks at the verge of final conclusion.

Though being a trilateral free trade arrangement, the total economic size of China-Japan-South Korea FTA will have surpassed that of the EU, accounting for 80% of the RCEP total and 25% of the global total. The annual volume of China-Japan trade and China-South Korea trade has already reached US$400 billion and US$300 billion respectively, second only to China-ASEAN bilateral trade in the region. As such, it is not dispensable to have China-Japan-South Korea FTA, and it is possible for the FTA to be built on top of the RCEP on a higher standard in light of the actual capacity and needs of the three countries, forming a “RCEP+” that promotes Northeast Asian regional economic integration.

Through the mega-FTA to be formed by RCEP, for the first time there are China-Japan and China-South Korea free trade relationships, countries which have hitherto signed no bilateral free trade agreements. Reduction of trade barriers and consensus for cooperation will effectively cut trilateral consultation and gaming cost, and accelerate the negotiation process for China-Japan-South Korea FTA. In the future, the implementation of the FTA will profoundly help tap the potentials for regional economic and trade cooperation, facilitate the three countries to further bring into play complementarity on the industrial chain, and greatly improve the comprehensive competitiveness of the Northeast Asian economic circle.

4. CAFTA: Partnership for Closer Economic and Trade Cooperation

Being a FTA between China and the ASEAN established through “10+1” agreement, China-ASEAN FTA (CAFTA) boasts of a population of roughly 2 billion people and a total GDP approaching US$18 trillion. When CAFTA was officially launched in 2010, the average tariff rate on ASEAN goods sold in China decreased from 9.8% to 0.1%. Since then, the ASEAN has gradually become the largest destination of Chinas overseas investment. In 2020, the size of China-ASEAN bilateral trade increased against the trend of COVID-19 pandemic, and for the first time, the ASEAN surpassed the EU in being Chinas largest trading partner, attesting to the marked achievement of the construction of the FTA.

Based on this, a RCEP with more extensive coverage and of higher standard will bring about still more opportunities. On the one hand, reduction of non-tariff barriers will help reduce trading cost, increase trading efficiency and enlarge profit space, and on the other hand, accumulative rules of origin will allow the existing supply chain to further optimize its distribution. Either for Chinese companies to tap investment potentials in resources and labor intensive industries in the ASEAN region or for ASEAN high value-adding industries to seek development in the Chinese market, it will inject new vitality to current bilateral economic and trade relations within the framework of CAFTA and the Belt and Road Initiative.

At present, between China and the ASEAN, a pattern of extensive production capacity cooperation and closely linked supply chain has taken shape. The impact of the pandemic underscores a bright prospect of China+ASEAN model of the worlds factory. As China and the ASEAN continue to conduct systemic cooperation, the two sides will move toward comprehensive integration in trade, investment, industrial and financial areas, heralding a coming “diamond decade” of bilateral economic and trade cooperation.

As the largest free trade agreement so far in economic size undergoes implementation, the birth of RCEP benefits from rapid development of FTAs against the background of economic globalization, and also results from several crises in history that have propelled regional cooperation. Not only does a mega-FTA built by the RCEP directly create economic benefit and development opportunities for various countries, it will also beneficially interact with other Asia-Pacific economic mechanisms such as the FTAAP, the CPTPP, the China-Japan-South Korea FTA and the CAFTA, injecting new vitality into the process of regional economic integration.