Commentary / Japan

Compromising free trade to save free trade

by Yoichiro Sato

Contributing Writer

Negotiations for concluding the Regional Cooperation for Economic Partnership (RCEP) agreement among 16 countries including China, Japan, India, South Korea, Australia, New Zealand and ASEAN members ended during the recent summit meetings in Bangkok. Fifteen of the 16 members said they will aim to sign the agreement by 2020.

At the last minute, India said it could not join the RCEP out of concern it would not adequately safeguard its manufacturing and farm markets against a drastic increase in Chinese exports. Japan was quick to announce that it will continue to seek the inclusion of India and managed to insert language to that effect in the joint statement issued at the end of the Bangkok meetings, whereas China quietly let India isolate itself from the multilateral free trade negotiations that will have global significance.

Since the United States pulled out of the Trans-Pacific Partnership in 2017, the RCEP grouping has been billed as the world’s largest free trade area, and would account for half the global population and one-third of its gross domestic product.

The RCEP negotiations were launched in November 2012 with two tactical objectives. First, growing Japanese investment and economic interdependence in East Asia created practical corporate interests in removing tariffs across a broad range of economic sectors.

While a trilateral attempt at reaching a free trade agreement stagnated among China, Japan and South Korea over their political disputes, Southeast Asian countries and India boosted their relative share of the regional economy. The broadened framework of the RCEP offers a larger grouping with more economic benefits and with a multilateral atmosphere in which the trilateral disputes among Tokyo, Beijing and Seoul can be subsumed.

Second, the East Asian grouping would exceed the North American (North American Free Trade Agreement) and European (European Union) groupings in size, reducing potential incentives within the other two blocs to unilaterally turn to protectionism. The launching of the Asia-Pacific Economic Cooperation (APEC) forum in 1989 and trade liberalization efforts in this framework initially carried the hope of bridging East Asia with the Pacific coast of the Americas to form the world’s largest free trade grouping, but this nonbinding framework has yielded limited concessions.

The more progressive forces within the APEC group (such as Australia, New Zealand, Singapore and Chile) led an effort to launch the TPP negotiations excluding China and signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership among 11 members (adding Brunei, Canada, Mexico, Peru, Vietnam, Malaysia and Japan) in 2018 despite the U.S. withdrawal.

U.S. President Donald Trump’s initiation of the ongoing trade war with China in 2017 and bilateral bullying of other trade partners since then quickly brought China and Japan together to accelerate the RCEP negotiations in late 2018, despite China’s growing challenge against Japan’s sovereignty over the Senkaku Islands.

The prospect of India returning to the RCEP talks is far from certain. Upon withdrawing from the negotiations, the Indian government reversed its previous denial of pursuing a free trade agreement with the U.S. While it makes sense to leverage one set of negotiations against the other, the fundamental lack of competitiveness in many of India’s economic sectors makes dealing with the U.S. equally, if not more, challenging. India would be mistaken to assume that its strategic significance as a “swing state” in the growing U.S.-Chinese rivalry will bring about concessions by Washington.

China’s interests are in locking in the RCEP agreement and working on readmitting India to make the grouping larger and more attractive to the U.S. and the EU, but without granting any new concessions to India. The U.S. will bilaterally negotiate trade agreements with China, India and Japan, according to the classical realist tactic of “divide and conquer,” drawing maximum concessions from its negotiating counterparts while protecting its own domestic industries.

Present circumstance poses a tactical dilemma for Tokyo. Japan, like China and India, would gain leverage in negotiating a trade agreement with the U.S. with the RCEP already in place. With stronger leverage, Japan could better resist anticipated U.S. protectionist demands in the automobile sector.

However, leaving India behind and signing the RCEP would expose India to bilateral pressure from both China and the U.S., and hinder the momentum for growing trilateral strategic cooperation among the U.S., Japan and India to counter China’s maritime assertiveness. The inclusion of India, however, would mean allowing India to slow down its economic reforms.

For Japan to bring India back into the RCEP, upskilling the Indian economy should be the top priority. Japanese investment and technology transfers are welcomed by India, and India must liberalize its regulations and install more rigorous protection of intellectual property rights to further encourage Japanese investment.

In fact, India faces a similar set of reform demands from the U.S. — a reflection of the Trump administration’s reluctance to accept more IT workers from India. Japan, facing a shortage of IT workers, can instead accept more. This would be done through launching bilateral negotiations to upgrade the existing economic partnership agreement with a narrow agenda designed to reach a quick conclusion. It would be best to do so while both Prime Minister Shinzo Abe and his Indian counterpart, Narendra Modi, enjoy a strong domestic political standing.

Yoichiro Sato is a professor at Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture.

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