Much has been made of the Regional Comprehensive Economic Partnership (RCEP) since it was signed in November. After all, participating countries account for 30% of the world’s GDP. Conspicuously absent was the United States.
As president-elect Joe Biden prepares for his inauguration, the international community is anticipating how the incoming administration will approach free trade. In some ways, RCEP is the result of America’s shifting attitude on such trade.
In the early stages of the negotiations, China insisted on basing the free trade framework on ASEAN countries “Plus Three” (Japan, China and South Korea). Tokyo, worried about Beijing further expanding its influence, advocated adding India, Australia and New Zealand, to form an “ASEAN Plus Six” framework.
Getting the negotiations off the ground itself was a challenge. China only agreed because Tokyo was about to join the U.S.-led Trans Pacific Partnership (TPP) negotiations. Beijing was afraid to be isolated from the Asia-Pacific trade zone that the agreement encompassed.
But then, the tables turned regarding RCEP.
The United States withdrew from the TPP as the Trump administration was inaugurated. But the trade-skepticism issue isn’t just associated with the outgoing president. There was a growing streak of anti-free trade sentiment even before that, with Sen. Bernie Sanders having gained momentum with his Social-Democratic, anti-free trade platform during the 2016 election. The claim that free trade frameworks, such as the TPP, were robbing Americans of jobs resonated with many in the working class.
India also withdrew from the RCEP negotiations, fearing that its market would be flooded with Chinese imports if it reduced or eliminated tariffs on products from the world’s second-largest economy. Furthermore, India claimed that China was boosting its exports by subsidizing its companies.
Back in the time of the Barack Obama administration, Washington called for re-balancing and emphasized the Asia-Pacific region. But in terms of trade, both the United States and India withdrew from the free trade agreement, leading to China’s presence in the region increasing.
The TPP was a mechanism the Obama administration sought to use to win over Beijing.
Since China joined the World Trade Organization in 2001, talks to create new trade rules reflecting new economic realities have moved at a glacial pace. New rules for the 21st century must be created separately from the WTO. So long as China is part of the talks, there’s little chance for an agreement regarding issues specific to China, such as rules on state-owned enterprises.
The goal of the TPP was to create high-level rules without China. Luckily, Vietnam was part of the talks — a communist country similar to China with many state-owned enterprises. The key was to negotiate with Vietnam as a so-called “virtual China.”
As a result, issues that Washington raised with Beijing, such as the protection of intellectual property rights, stopping the practice of requiring technology transfers and rules on state-owned enterprises, have been stipulated in the TPP agreement.
In the end, at the heart of all free trade agreements is favorable treatment among members — insiders will get preferential treatment; outsiders will not.
That’s why, in the case of an extensive free trade agreement such as the TPP, the number of countries will only increase. In fact, after the conclusion of the TPP negotiations, South Korea, Taiwan, the Philippines, Thailand, Indonesia, Colombia and the United Kingdom all showed interest in joining.
In other words, if the TPP expands with the participation of countries that are afraid of being excluded from the framework of the massive free trade zone where the United States enters, China will have to join as well. At the time, Obama tried to impose a high level of discipline on China under the TPP agreement.
Unfortunately, neither Sanders nor Trump understood his vision.
Trump, who once referred to himself as “tariff man,” sought to tighten the screws on Beijing with higher trade duties — but Beijing struck back with higher tariffs on American soybeans. China, as a great power that also attaches great importance to saving face, does not bend easily.
It’s under these circumstances that Trump was vanquished and a new U.S. president will come into power.
It is almost certain that trade will not be at the top of the Biden team’s priority list as it will surely focus on containing the pandemic, as well as tending to domestic issues like health care and police reform. Some time will pass before Biden turns his attention toward trade issues.
That said, there is bipartisan concern regarding China’s rise. Trump’s strong-arm tactics weren’t so successful.
Under the Biden administration, some expect Washington to step up multilateral pressure on Beijing through human rights issues — something that Democrats place great importance on.
In terms of trade, a multilateral push for a rules-based approach with China may sound like an effective plan, but with China being a big part of the WTO, there is only so much that can be expected on the prospects of reaching meaningful agreements that run counter to China’s interests.
So for Biden, the rational choice is to revisit the Obama administration’s strategy and return to the TPP. After all, the current Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, pact is based on the assumption that the United States will return — though that may take some time, given the anti-free trade sentiment that has built up through the years.
Until then, RCEP will be the major driving force of free trade. However, RCEP is not the best choice for Japan.
First, the level of trade liberalization falls short compared to TPP and others. The percentage of items for which tariffs are eliminated on Japanese industrial products is only 91.5%, compared to almost 100% under the TPP arrangement. Neither China nor South Korea have abolished tariffs on automobiles, which the Japanese side is most interested in.
Even in terms of rules, under RECP they did not even touch on China’s state-owned enterprises during the negotiations. They also couldn’t reach an agreement on banning the mandatory disclosure of source codes, which are the blueprints of the software for the new forms of trade and electronic commerce.
A ban on stopping the practice of requiring technology transfers was stipulated though.
But will new rules and requirements be implemented properly? Although dispute settlement procedures have been stipulated to correct problematic issues, can the Japanese government, which is worried about displeasing Beijing, raise such issues with China?
Worried that China’s presence and influence will grow too big to manage, Tokyo will continue to seek India’s accession — though that is an unlikely scenario given China’s membership.
The return of the United States to the TPP is also in the interests of Japan, which emphasizes rules and discipline. Britain, which has left the EU, is also eager to join the TPP. In that sense, promoting India’s inclusion in the TPP is an option.
The return to the TPP will be a major factor in re-balancing with an emphasis on the Asia-Pacific region. It also fits Biden’s claim that it emphasizes allies and international cooperation.
Biden, who advocates multilateralism, would do well to revisit the Obama administration’s grand strategy on trade.
Kazuhito Yamashita is research director of Canon Institute for Global Studies and a senior fellow of the Research Institute of Economy, Trade and Industry.
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