The signing of the Regional Comprehensive Economic Partnership represents a setback for U.S. trade leadership and a significant win for China. While the historic free trade agreement that will add US$500 billion to world trade by 2030 is often inaccurately deemed “China-led,” it nonetheless strengthens China’s position in the Asia-Pacific. China will use the RCEP to help offset the effects of the U.S.-China trade war, increase the exchange of high-tech equipment to pursue the objectives of Made in China 2025 and its 14th Five-Year Plan, and ultimately augment its geopolitical influence.
On November 15, 2020, 15 countries—ten member states of the Association of Southeast Asian Nations (ASEAN) and China, Japan, South Korea, Australia, and New Zealand—signed the Regional Comprehensive Economic Partnership (RCEP). The RCEP is arguably the largest free trade agreement in history and promises to add US$500 billion to world trade by 2030.
The multilateral treaty represents the culmination of a decades-long ASEAN-led effort to increase economic cooperation between nations in the Asia-Pacific. While the RCEP is not specifically “China-led,” the PRC nonetheless will gain a bevy of benefits from the agreement and enhance its geopolitical influence in the region, aided by President Donald Trump’s “America First” foreign policy that resulted in a U.S. withdrawal from the Trans-Pacific Partnership (TPP) in 2017.
The trade agreement helps China open developing markets to its domestic businesses, recover from the U.S.-China trade war, and pursue the aims of its Made in China 2025 (MIC2025) initiative through the exchange of high-tech equipment. Furthermore, China will use the RCEP as part of a broader campaign to shape regional trade rules. Beijing’s pursuit of other multilateral agreements and its interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the successor agreement to the TPP, are also aspects of this campaign.
Boon for Chinese Businesses
China’s businesses will reap significant economic benefits from the RCEP. According to the Peterson Institute for International Economics, China—as the trade bloc’s largest participant—will likely be the biggest single economic beneficiary of the treaty, accentuated by India’s exit from the pact, and is poised to accrue up to US$100 billion in added income. The RCEP also does not severely restrict China’s commercial activity: The treaty makes no mention of standards related to labor, the environment, or state-owned enterprises—all subjects of major chapters in the CPTPP.
The RCEP opens vibrant developing markets across Southeast Asia to Chinese businesses, a boon for the PRC’s export industry: As a result of the trade pact, China’s total exports are projected to rise by US$248 billion. In addition, the agreement supports the central “dual circulation” strategy of China’s 14th Five-Year Plan (FYP) that aims to both stimulate domestic Chinese demand and support international engagement with foreign investors.
Securing access to these diversified markets under the RCEP will aid employment growth and internal demand of the Chinese economy, offering somewhat of an economic lifeline to many domestic firms reeling from the ramifications of the U.S.-China trade war and the global economic downturn from the COVID-19 pandemic. In 2019, China registered a 6.1 per cent GDP growth rate—its slowest pace in three decades—caused in no small part by punitive measures that impeded China’s ability to export goods to the United States, its largest trading partner. While not a comprehensive solution, conservative estimates show the RCEP will singlehandedly offset about one-third of China’s US$304 billion losses in income from the trade war.
The RCEP will facilitate exchanges of high-tech equipment between China, South Korea, and Japan, aiding China’s pursuit of MIC2025, a state-led policy initiative with the aim of “transforming China into a leading manufacturing power by the year 2049.” These objectives closely align with the development of strategic technologies like semiconductors and other digital infrastructure outlined in its 14th FYP for 2021-2025.
Compared to the CPTPP, the RCEP is less comprehensive, boasting relatively lenient provisions on tariff reduction that permit member countries to retain tariffs on industries deemed particularly important or sensitive. This degree of flexibility is unique to the RCEP and reflects its diverse membership, which includes robust economies like China and less-developed ones like Cambodia and Laos. Nonetheless, such broad stipulations enable China to both sustain its extant supply chain advantages and strategically promote nascent domestic industries like electric-vehicle technologies. While China immediately scrapped broad swaths of tariffs in industries where it already holds a competitive edge, its tariffs around electric vehicles—designated a “strategic emerging industry” by the central government and a key priority of both MIC2025 and the 14th FYP—tell a different story. Under the RCEP, China will not be required to remove tariffs on certain electrodes and materials for electric car batteries until 2036. This allows China to tactically shelter certain high-tech sectors from foreign competition.
China’s “Victory of Multilateralism and Free Trade”
While the RCEP will extend significant commercial and economic benefits to China, its greatest significance lies in bolstering China’s reputation as a champion of internationalism and thereby strengthening its geopolitical influence. Chinese Premier Li Keqiang described the RCEP as “a victory of multilateralism and free trade.” This image stands in stark contrast to the Trump-era U.S. that brusquely abandoned the TPP. Moreover, the issue of absent U.S. trade leadership in the Asia-Pacific is unlikely to be immediately remedied by a new administration: protectionist sentiment remains high within the U.S., and President-elect Biden has remained essentially silent on plans to either join the RCEP or the CPTPP.
As the incoming Biden administration tries to convince blue-collar and progressive voters of the merits of international trade—while simultaneously mired in combating the worst public health crisis in over a century—China has continued its pursuit of multilateral treaties. Five days after the signing of the RCEP, Xi Jinping said that China will “favorably consider” joining the CPTPP. Beijing has also recently finalized a major China-EU investment treaty and pledged to “speed up negotiations” on a China-Japan-Korea free trade agreement.
Long story short: The RCEP is a significant win for China’s economy and geopolitical influence.
Image: By Tiger 7253 – Own work, CC BY-SA 4.0