Opportunities and Challenges Presented by RCEP for China
January 28, 2022
About the author:
Brian Wong Yushun
Ph.D. candidate, Oxford University
TI Youth Observer
The Regional Comprehensive Economic Partnership (RCEP) is the latest free trade agreement to emerge from the rapidly growing cluster of Asia-Pacific economies. With 15 member countries that collectively comprise 30% of the world’s population and global GDP, the RCEP is the largest free trade bloc in the world today.[1]
The RCEP plays a pivotal role in reducing tariffs and other trade barriers between its signatories, as well as facilitating harmonization of rules of origins and regulations undergirding trade between its members and others in the world. The agreement places a substantial premium on ensuring maximal coverage and participation from regional actors—with six out of ten ASEAN countries and five non-ASEAN countries counting amongst its signatories.[2]
The trade pact came into effect on January 1, 2022, for most countries—including China, which ratified it in April 2021.[3] For the first time in history, four of Asia’s five largest economies: China, Japan, South Korea, and Indonesia, are connected by a free trade agreement.[4]
(Source: global.chinadaily.com.cn/)
The Pivotal Role Played by RCEP in the Region’s Pandemic Exit Strategy
The pandemic has posed large challenges for the world, especially amongst large-scale economies that have strained to balance and satisfy the demands for upholding public health (through restrictions) and keeping economic activities related to consumption, capital inflow and labor ongoing.[5] The tightrope’s ramifications have manifested themselves in shrinkages and declines in countries’ manufacturing sectors and supply chain disruptions.[6]
China was no exception. 2020 proved to be a difficult year, as large-scale lockdowns and fears over the spread of COVID-19 culminated at a significant economic slowdown. China’s GDP growth rate dropped from 5.9% in 2019 to 2.3% in 2020.[7] With that said, with much of its fundamentals intact, China has made a speedy recovery from the pandemic with KPMG forecasting a growth rate of 8.8% in 2021.[8]
RCEP offers its member states several critical benefits, which cannot be overlooked, as the region seeks to make a viable exit from the ongoing pandemic.
Trade Creation. Firstly, through removing a large number of prohibitions on internal trade, RCEP is projected to drive up imports and exports, including between less-covered or exposed ASEAN and Asia-Pacific economies, and China. Articles 2.4 and 2.5 of the agreement call for an immediate reduction to customs duties, with heightened transparency requirements and commitment to accelerated removal of tariffs.[9]
Additionally, the temporary admission of goods—per Article 2.10—will be helpful in reducing frictional costs, smoothening supply chains and encouraging the expansion of trade into other industries.[10]The commitment to eliminating “quantitative restrictions” such as quotas, bans and embargoes, or other artificial restrictions for goods in Article 2.17, is an important first-step in handling the inefficiency induced by the protectionist measures of some ASEAN and Oceanian economies over industries of domestic importance. As much as 90% of tariffs on goods between signatories—over the next 20 years—will be eliminated, with China itself clearing 70% of its tariffs on imports from ASEAN.[11] It is anticipated that this reduction in trade barriers will yield up to 0.4% - 0.6% additional growth in GDP across most of the signatories, which will be important throughout 2022 and 2023, as signatories seek to emerge from the disruption of COVID-19.[12]
Standards Unification. Secondly, the RCEP provides all of its signatories with the unique opportunity to harmonize diverse rules on investment, e-commerce, intellectual property, safety, and packaging and labelling requirements. More specifically, Articles 5.6, 5.7, 5.8, 5.9, and 5.10 outline the ways in which standards on disease control, risk analysis, auditing, certification, and import checks can be reconciled.[13] These reforms are vastly important—not only do they render RCEP participants more attractive to each other and boost trade, but also protect the interests of consumers and investors as they engage with goods of foreign origin whilst ensuring they retain the right of complaint should their interests be violated.[14]
The reopening of regional economies to international travel and re-entry into consolidated supply chains is likely to be gradual and continuous throughout 2022 and 2023. The RCEP plays a role in accelerating the process by vastly reducing the costliness of trade, investment, and informational exchanges. Such unification of standards could even pave the way for accelerated medical research collaboration, which is an important factor in enabling a cogent COVID-19 exit strategy. All of these are active pluses for countries such as Malaysia, Indonesia, and China, which are seeking to step up to more regional leadership in coordinating intra-regional trade, and liaising with external economic blocs including the EU, MERCOSUR, and the African Free Trade Zone on behalf of other economies in Asia.
New Markets. Thirdly, the RCEP will open doors for Southeast Asian producers and firms to new markets and sites of production, which will facilitate the creation of jobs and economic opportunities across struggling economies in the region such as Cambodia and Laos.[15] As China’s Vice Minister of Commerce Ren Hongbin notes, the RCEP “will effectively hedge against the negative economic impacts of COVID-19.”[16] Tariff-free access to key and developed consumer markets such as Japan and South Korea would prove to be immensely helpful to production-centric and export-driven economies.[17] Such is the win-win nature of the agreement, as it boosts investment in countries with lower production costs and widely available low-skilled labor, redirecting capital and resources to countries that need them the most, especially in the aftermath of the past two years of economic downturn.
Tariff-free access to these key export markets will be a vital engine of China’s emergence from the shadows of the pandemic.[18] For China, which sits on the divide separating the two groups of states within the RCEP: the more advanced, and those catching up, the agreement equips it with an opportunity to both attract and offer significantly more entrepreneurial talents in the region. Investors from the developed economies like Japan, Korea, Australia, New Zealand,[19] and emerging markets looking to advance their returns in a reliable, expansive, and mature investment market, need look no further than setting up operations in Southeast Asia.[20] On the other hand, Chinese firms, facing troubled relations between China and the West, are provided with a secure arena of economic operations, especially in relation to e-commerce and information-centric industries.[21]
Consolidation of the Pre-eminence of Supply Chains. Fourthly, and in the short to medium term, the RCEP offers a boost to its members’ status as the nexus of global supply chains. The drastic reduction to costs related to production provides RCEP states with the necessary wherewithal to slash costs.[22] Indeed, in China’s context, its entry into the agreement has provided Chinese manufacturers with a much-needed buffer as they aim to transition into alternative industries in preparation for the long run. The four advantages above render membership in the RCEP uniquely strategic and valuable for many countries.
Challenges for China – The Case for Dynamic, Compassionate Cooperation
China’s vision for the RCEP remains one undergirded by a commitment to regional cooperation and largely equal access to dividends from the operations undertaken by RCEP states. Yet, there remain important barriers, challenges, and concerns that must be duly addressed, in order for true multilateralism to emerge.
With Great(er) Power Comes Great(er) Responsibility. As by far the largest economy in the RCEP, China bears the unique onus as acting as the lynchpin to the bloc. Its ability to engage in responsible rulemaking has never been as important, especially in relation to shaping the fortunes and reflecting fairly the interests of its neighbors. A skeptical Japan Times headline reads, “RCEP benefits come with challenge of keeping China in check.”[23] If mishandled, China’s position in the regional bloc could be easily portrayed by critics as further evidence of its hegemonic tendencies for one over smaller or weaker economies. A related downside is the dangers of alienating those that depend upon China for bilateral and preferential trade. How the close economic ties between China, Cambodia, and Laos will fare under RCEP liberalization remains to be seen.
Protectionism May Well Be Necessary for Economies with Uncompetitive Production Sectors. Producers in certain Northeast Asian states have been steadily losing out to their rivals in ASEAN, which manage to not only produce the same quality of goods at lower costs, but also disseminate them to a larger range of consumers domestically and abroad. How such countries could ensure that employment and interests of firms in their vital industries are upheld whilst preserving a push for greater efficiency, competitiveness, and organic growth is a critical balancing act.
Harmonization of Standards is Incomplete Without Labor Standards and Rights. Domestic investors, businesses, and manufacturers’ interests obviously matter. Yet what is equally important are the interests of laborers and workers. Laborers’ lives matter. Concerns have been voiced in the media over the agreement’s negligence of working hours, minimum wages, and conditions of labor.[24] As President Xi Jinping notes repeatedly, common prosperity constitutes a core pillar of his vision for China’s economic trajectory and future; “common prosperity is an essential requirement of socialism as well as an important feature of Chinese modernization.”[25] Whether this is obtainable could be a vital litmus test of whether China’s vision of responsible governance could be transferred and implemented successfully across the region.
What is needed here from the RCEP is dynamic, compassionate cooperation driven by leadership that is considerate of the interests and concerns from not only regional players but also domestic stakeholders of interest within each of the agreement’s signatories. All RCEP participants could stand to gain from this advancement in the region’s globalization efforts, but such gains can only emerge if policymakers engage in restraint and prudence over the liberalization of trade, capital, and information. It would behoove regional stakeholders and partners to engage in consultative and deliberative processes, especially when it comes to prospective modifications to the terms of the agreement in question. Indeed, in China’s case, while it is certainly an economic powerhouse, there remains distance between this and genuine economic leadership, which will require it to work with regional partners in coordinating and balancing the interests of its partners.
If managed with caution and precision, the RCEP could well be a first of many trade agreements to come for Asian states, and a cornerstone in Asia-Pacific economies’ forging a common consciousness and solidarity. If mishandled, or if runaway growth and vast imbalances are permitted to emerge, however, it could well be confronted by the kind of existential crises that have precipitated much unrest and fragmentation among its predecessors in other regions, such as the European Union. Compassion is indeed a virtue.
[5] Peter J. Morgan and Long Q. Trinh, “Impacts of Covid-19 on Households in ASEAN Countries and Their Implications for Human Capital Development,” SSRN Electronic Journal, no. 1226. Mar. 2021. https://doi.org/10.2139/ssrn.3870909
[11] Suvannaphakdy, “RCEP Will Drive ASEAN Economic Recovery.”
[19] Wang, “RCEP: China Says World’s Largest Trade Pact Gives It ‘Powerful Leverage’ to Cope with 2022 Challenges.”
[22] “RCEP: Asia Readies World’s Largest Trade Deal.”
[23] Tominaga, “RCEP’s Benefits Come with Challenge of Keeping China in Check.”
This article is from the January issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the January issue, please click here:
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