When the Regional Cooperation Economic Partnership (RCEP) was agreed to in November of 2020, then President-elect Joe Biden responded "We make up 25% of the world's trading capacity, of the economy of the world. We need to be aligned with the other democracies - another 25% or more - so that we can set the rules of the road." This view is shared by many in the U.S. and Europe, while neglecting the major Asian democracies that have joined this new trading block including Japan, South Korea, Malaysia, Singapore, and Australia, amongst others. It also misses the long-term integration trends in Asia, and the ground-breaking nature of the agreement. The RCEP is a foundational pillar of cementing long-term Asian integration.
Critics, primarily in the West, push back on RCEP because it is supported and driven largely by China, and is an Asian agreement for Asia, without involving the U.S. or Europe. Historically, trade agreements have run from the West to the East, such as the WTO (or its forerunner the GATT) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (formerly known as TPP). But modern agreements, in many cases, are being written, driven, and led by Asian countries and blocs.
Asian self-determination is nothing new. It has been fueled in China by the memories of the “Century of Humiliation,” the British rule of India and Malaysia, the Dutch in Indonesia, and most recently the independence of East Timor from the Portuguese in 2002, to name a few. Add to this the fighting and ultimate destruction of large swaths of the continent during World War II, and a new path forward of inter-connectedness and regional stability as national security is being pursued.
In the post-war period, the rise of the Asian Tigers, the economic miracle throughout the region, combined with the foundations of peaceful co-existence and regional integration, arose unexpectedly from the ashes of World War II. With the founding of ASEAN in 1967, Asian economic coupling bloomed in the latter half of the 20th century. With the entry of China into the World Trade Organization in 2001, Asian commercial links were turbocharged and the dawn of a new globalization began with surprising speed.
RCEP is a defining agreement that is not only accelerating integration across the region, but also bringing together three regional powers that harbor historical challenges and dislikes for each, under a single banner. China, Japan, and South Korea signing the agreement is a “landmark” in their beleaguered relationship. Their inclusion, with the aim of further integrating Asia, especially given a historically checkered past, contributes to cementing long term peace and stability in the region.
RCEP focuses on dropping tariffs, integrating supply chains, standardizing trade forms and processes, and removing non-tariff barriers for 30% of the world’s GDP and population. The supply chain disruptions caused by COVID-19 have shown countries and businesses the need for multiple sourced, regionally flexible supply chains. This flexibility, combined with the necessity for ease of imports and exports on demand, will catalyze further business growth, product development, and innovation. Complement these factors with the regional ability to produce, procure, and process the raw materials needed for the 21st century, and Asia is primed for transformation.
As an example of the benefits RCEP bestows, an automotive manufacturer in Japan can enjoy up to an 88% reduction in Chinese tariffs. Automotive parts can be imported into China or South Korea cheaply and more effectively than ever before. This will grow the Japanese automotive industry, especially in high-end automotive and specialty parts for Electric Vehicles. This will also allow Japanese companies to set up some production capabilities in China and Southeast Asia to serve those markets and customers faster, cheaper, and more efficiently. In terms of economic growth, the agreement is expected to boost Japan’s GDP by 2.7%.
Another example comes from the Philippines, which will have roughly 98% of its goods tariff-free from RCEP countries. Reduced export barriers are expected to substantially increase Philippine exports to new markets, such as China.
From a strategic sourcing perspective, RCEP signees can secure supplies of critical materials and products from non-Western sources. With semiconductor chips for example, South Korea, Malaysia, and Japan are now the top three suppliers to China. For a Malaysian producer, imported raw materials will be cheaper and export barriers lower. The agreement also dampens potential economic and trade shocks with an improved flow of goods and deepening regional connections.
Along with trading benefits, the agreement draws East Asia, ASEAN, and Australia and New Zealand into a single regional platform, allowing for the expansion and stability of commerce, as well as ease of logistical frameworks. With continued integration and Asia focused solutions, relationships between Asian countries continue to deepen. This is critical at a time of growing concerns about a potential regional conflict. RCEP member nations hopefully will be less inclined to go to war if they know their products, supply chains, financial systems, and masses of citizens will be catastrophically affected. This agreement continues the trend of prodding and pulling countries together for the greater collective interest. As the famous Middle East Philosopher Baha’u’llah proclaimed, “The earth is but one country and mankind its citizens.” On no other continent is this as true as it is in Asia, today.
How does RCEP affect the US-China relationship and the US-Asia relationship at large?
This agreement, over time, will alter the U.S.-China relationship and the U.S. relationship with Asia as a whole. With the U.S. pulling out of CPTPP, and the bungling of the “pivot to Asia,” this left an opening for something new to occur, but also a realization that the U.S. is not the partner it once was, or portrays itself as being. Many in the region want and desire to have the U.S. in the region, both as a partner for trade and security, but also as a counterbalance to China. Keeping the sea lanes and trade open from the Persian Gulf to the Sea of Japan is critical to the region and its security. China has shown a lack of interest in doing this, and has left this largely in the domain of the U.S.
The commentary from the West portrays RCEP as setting the stage for China’s domination of Asia and the U.S. as being pushed out of the region, while at the same time implying the signatories of the agreement (including U.S. allies Japan, South Korea, New Zealand, Thailand, Singapore, and Australia) are unaware of what they are signing up for. This is exactly the reason why the agreement was completed, because the U.S. does not understand the dynamics in the region or the changes that have occurred in it.
The U.S. had its opportunity to drive business and policy in Asia, but by pulling out of the CPTPP it blew it, and left an opening for RCEP and China to fill in some of that void.
What the U.S. is learning now in conversations with its Asian partners is that China is here to stay, and while some. push for tougher sanctions or actions against China, most requests are rebuffed in the region. The reasons are simple. Asian countries trade more with China than the U.S., rely on Chinese investments (although it is still less than U.S. investment at this time), and know that China was here 2,000 years ago, and will still be 2,000 years from now, so they must deal with China on way or another.
The trade agreement does not mean a “pushing out” of the U.S. in Asia. To the contrary, it gives an opening for the U.S. to do what it does best; join and improve it, or build a new agreement that drives the raising of standards of businesses, policies, labor laws and trade, while contributing to the innovation drive that so many countries and industries need. But given the current political climate in the U.S., it remains to be seen if, or what, can be done at all, much to the worry of allies and friends in the region.
RCEP heralds the dawn of a new form of trade and diplomatic agreements in Asia, one where the region no longer has pacts or treaties imposed on them, but are active stakeholders and the principal drivers of their own interests and future.
Asian self-determination is new to the West, and it would behoove it to be more inclusive and accepting of the Asian perspective, just as the countries of the West have been to each other. As Kishore Mahbubani, the well-known Singaporean diplomat has shared; Western powers need to recalibrate their understanding of Asia, and the new power dynamics at work. RCEP is just the beginning of a new phase of Asian trade and commerce transformation, and in doing so, is becoming a pillar of permanent global stability.