RCEP: what the new trade bloc means for the Indo-Pacific and the UK

Dec 4, 2020

 

Policy Exchange’s Indo-Pacific Commission published its interim report on 22 November, arguing that the Indo-Pacific is the most important region for expanding UK trade after Brexit. This comes shortly after the recent agreement between fifteen countries in the region to form the Regional Comprehensive Economic Partnership (RCEP) – the world’s largest trade bloc when measured by population and GDP. So what is RCEP, and what does the new bloc mean for the Indo-Pacific region and the UK’s strategic approach to it?

RCEP explained

RCEP brings together the ten members of the Association of South-East Asian Nations (ASEAN) – Indonesia, Malaysia, the Philippines, Brunei, Singapore, Vietnam, Cambodia, Laos, Thailand and Myanmar – plus five of ASEAN’s major Free Trade Agreement (FTA) partners: China, South Korea, Japan, Australia and New Zealand. Membership of RCEP is illustrated in the map below, with RCEP participants shaded in green.

The idea of RCEP was originally proposed by the ASEAN countries in 2011 as a way of bringing ASEAN’s key FTA partners into one overarching agreement, and negotiations began in earnest in 2013. In addition to the 15 eventual members, India was originally included in the RCEP negotiations, but it pulled out last year (for reasons which are discussed further below).

RCEP’s membership partially overlaps with the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), an 11 member trade bloc which the UK Government is seeking to join (in line with the recommendations of Policy Exchange’s 2018 Trading Tigers paper, and re-iterated recently in Indo-Pacific Commission’s interim report).

However, there are important differences between the two blocs. CPTPP, as its name suggests, covers countries on both sides of the Pacific Ocean. It originated from the previous Trans-Pacific Partnership (TPP), which included the US before its withdrawal in 2016, and it still includes four countries in the Americas (Canada, Mexico, Peru and Chile). RCEP – again, as its name suggests – has a more regional focus, including only Asian and Australasian countries. Notably, RCEP includes China and South Korea, whereas CPTPP does not. RCEP also includes all ten ASEAN countries, whereas CPTPP only includes four (Singapore, Malaysia, Brunei and Vietnam).

India, despite its original involvement in RCEP negotiations, is notable by its absence from the final deal. Its decision to exit the agreement last year primarily reflected a fear that the deal’s tariff elimination would trigger a surge of cheap imports, particularly from China. While India’s exit had the effect of reducing the bloc’s overall market size, some observers have argued that it made the deal easier to conclude, as it had been the main obstacle to progress in areas such as goods market access and investment. India’s exit should be seen in the context of a domestic trade policy environment has taken an increasingly protectionist turn in recent decades; as well as the pursuit of protectionist policies such as the “Made in India” strategy by the Modi administration, the impact of free trade agreements on India’s domestic economy are often criticised by government and opposition politicians as well as industry and farming groups. The remaining partners have left the door open for India to return to the table, but it has shown no interest in doing so to date.

Finally, the establishment of RCEP in addition to the CPTPP means that there are now two major plurilateral trading blocs in the Indo-Pacific region, and neither of them includes the United States. This reflects America’s recent preference for bilateral trade deals as opposed to wider, international schemes.                             

RCEP is ambitious in membership but more limited in scope

RCEP has been presented as the world’s largest free trade area – encompassing 30% of global GDP and 30% of the world’s population, even without India on board. According to estimates by Peter Petri and Michael Plummer at the US-based Peterson Institute for International Economics, RCEP will raise annual global incomes by $186bn in 2030 (compared to $147bn from the CPTPP), and that RCEP will add 0.2% to the aggregate gross domestic product of its members.  

However, size isn’t everything when it comes to trade agreements. The key economic gains will derive from the content of the agreement and the extent to which it liberalises trade, and here RCEP’s benefits are likely to be more muted.

Firstly, most of RCEP’s constituent members already had either bilateral FTAs with one another, co-membership of other trade blocs, or both. The only ‘new’ market access arrangements introduced as a result of RCEP are Japan-China and Japan-South Korea (see table below). This means that the new market access gains are relatively limited. For Australia and New Zealand in particular, the departure of India from the talks was a blow in this respect (neither country has an FTA with India). Arguably, RCEP’s main purpose was as a tidying up exercise for ASEAN, building on the bloc’s existing FTAs with Japan, China, Australia/New Zealand, and South Korea. Negotiators are understood to have referred to the deal as “the stapler” for this reason. Commenting on RCEP at a Policy Exchange event on 23 November, Australian Prime Minister Scott Morrison said, “RCEP is an important agreement for the Indo-Pacific region, because for the first time it brings all of those 15 countries into one arrangement… from Australia’s point of view we had already achieved the access through our individual bilaterals, [but] that is simplified through RCEP.”

Table of pre-existing FTA coverage among RCEP members and India

Moreover, while RCEP’s content does build on some of the existing trade links between the parties, it is much less comprehensive in terms of trade liberalisation than CPTPP. This was also highlighted by Scott Morrison in his Policy Exchange address, when he described the CPTPP as “a much more ambitious agreement” than RCEP. This disparity is unsurprising given the greater diversity of RCEP’s membership – bringing together advanced economies such as New Zealand and Singapore with less developed countries such as Cambodia and Laos.

There are several areas where RCEP lags behind other agreements:

  • Tariffs will be liberalised on 80-90% of products, compared to 96% under CPTPP.
  • The provisions on promoting services trade are not as ambitious as those in CPTPP.
  • The e-commerce chapter does not include rules on cross-border data flows and is not subject to dispute resolution, in contrast to the wide-ranging and enforceable digital trade provisions in CPTPP.
  • There are no provisions at all on labour or environmental standards, or on state-owned enterprises.

With these limits in mind, the main expected innovation and benefit of RCEP, other than its size, is that it will bolster regional supply chain integration by liberalising rules of origin. This will allow traders to source intermediate goods from any of the fifteen members with only one certification of origin. Other than this, the picture remains that the agreement is ambitious in size, but more limited in content.

What is RCEP’s geopolitical significance?

Trade agreements, particularly large plurilateral ones, are as much about geopolitics as economics, and RCEP is no exception. To quote the Indo-Pacific Commission’s interim report, “trade is strategy, not just money.” RCEP is, first and foremost, an example of the trend towards regionalisation in Asia and elsewhere, with the world increasingly grouping into three economic and geostrategic arenas: Europe, North America, and the Indo-Pacific. This increase in regionalisation reflects increasing competition and disagreement on trade between the world’s leading economies, which is a challenge to the multilateral, consensus-based approach of the World Trade Organisation.

Much has been made of the fact that RCEP includes China, but the jury is still out on RCEP’s implications for China’s geopolitical role in the region, and it is not clear that the new agreement will be a game-changer. First, the driving forcebehind RCEP was ASEAN, not China – a reminder that not all developments in the Indo-Pacific region should be seen solely through the lens of Chinese expansionism. While China is certainly seeking to exert regional economic influence, there are other initiatives than RCEP – notably Belt and Road – which would be more conducive to this goal from a Chinese perspective.

Equally, however it is unlikely that RCEP represents a successful attempt by countries such as Japan and Australia to influence Chinese policies in ways that they might like. Many of the regulatory areas where China and Western-aligned countries differ, such as data flows, state-owned enterprises and labour rights, are precisely those where RCEP’s provisions are limited. Moreover, although RCEP and CPTPP are not ‘rival blocs’ per se (given the overlap in membership), there be a geopolitical advantage for China in demonstrating that CPTPP is no longer the only game in town when it comes to regional trade agreements.

It is nonetheless noteworthy that countries such as Australia have signed an agreement with China, despite a recent deterioration in commercial and diplomatic relations (indeed, RCEP has not prevented China from recently imposingpunitive tariffs on imports of Australian wine). This partly reflects the fact that much of the important negotiating work was done years ago when relations were friendlier. But it also highlights that the approach of countries such as Australia and Japan towards China includes engagement as well as competition and strategic independence.

Chinese membership is likely to mean that RCEP’s membership is regionally confined (which may be a feature rather than a bug from China’s perspective). Canada and Mexico, both members of CPTPP, are not involved. One explanation for this is that under the so-called ‘China clause’ of the recently renegotiated US-Mexico-Canada Agreement (USMCA), any of the parties may terminate the agreement if another enters into a trade agreement with a ‘non-market economy’. For this reason, Canada and Mexico face a more binary China/US choice than the likes of Australia and Japan when it comes to trade. For the same reason, it is not clear that Chinese entry into the CPTPP – floated last week by Premier Xi Jinping – is likely in the short-term. New CPTPP members require the approval of all 11 existing partners, and it is highly unlikely that Canada or Mexico would approve Chinese entry if this would risk jeopardising USMCA. (And in any case, it is far from clear that China would be prepared to sign up to the rules of CPTPP in areas which contradict with current Chinese practices in areas such as state-owned enterprises, data flows and labour rights).

Nevertheless, RCEP poses questions about the US approach to trade and commercial diplomacy in the region. Taken together with its 2016 exit from the TPP, there are clear signs that America’s unilateral approach to trade relations has seen others seize the initiative in establishing blocs within the region. This may shape the approach of the incoming US administration; asked about RCEP recently, President-Elect Joe Biden said, “We need to be aligned with the other democracies… so that we can set the rules of the road, instead of having China and others dictate outcomes because they are the only game in town.” It remains to be seen what form this “alignment” will take; re-considering membership of the TPP would doubtless be the preferred approach for US allies in the region, but would face domestic political constraints in Washington.

What are the implications for the UK?

As argued in Policy Exchange’s interim report, the Indo-Pacific is the most important region for expanding UK trade post-Brexit. The Government has signposted its desire to ‘tilt’ towards the Indo-Pacific in both trade and foreign policy. As it does so, it should be aware that the trading and geopolitical landscape there is shifting.

Membership of the CPTPP remains the biggest strategic prize for UK trade policy in the region. RCEP is bigger, but less economically comprehensive. Some of the countries which are members of both blocs – such as Australia, New Zealand, Japan and Singapore – are like-minded partners which the UK should align itself with closely on trade in the future, while not neglecting other key relationships with Europe and the US. It is also the case that UK accession to CPTPP may be closer than some think. In addition to the recent agreement with Japan, the Government has also secured rollovers of the EU’s trade agreements with Chile, Peru and, recently, Canada – and is pursuing further rollovers with Mexico, Singapore and Vietnam. It is also seeking new bilateral deals with Australia and New Zealand. If these rollovers and new deals are concluded in the next year or so, the UK would already have bilateral deals with 9 of the 11 CPTPP members (leaving only Malaysia and Brunei). This will undoubtedly make the accession process to CPTPP easier.

The exit of India from the RCEP negotiations may also offer a cautionary reminder of the potential difficulties of concluding a comprehensive bilateral UK-India FTA, which has been mentioned by the Department of International Trade as a medium-term goal. While there is no harm in trying, the UK should be aware that India has established a reputation as a difficult and reluctant partner when it comes to trade agreements, as demonstrated by the fact that even a relatively low-ambition deal with its neighbours was a bridge too far. New Zealand, a country with a strong track record in trade negotiations, launched FTA talks with India in 2010, but these stalled in 2015 and have not yet been relaunched. Having said this , India remains a very important bilateral relationship for the UK in the context of the ‘tilt’ of UK foreign policy towards the Indo-Pacific. And in any case, FTAs are not the only policy lever DIT has at its disposal, and it should pursue improved bilateral trade ties with India whether or not a comprehensive deal is possible.

[1] ASEAN-Australia-New Zealand Free Trade Agreement

[2] Australia-New Zealand Closer Economic Relations Trade Agreement

[3] Asia-Pacific Trade Agreement (contains China, India, South Korea, Mongolia, Bangladesh, Sri Lanka and Laos).

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