China is leading a trading bloc in Asia – the Regional Comprehensive Economic Partnership (RCEP) – that would more than fill the void of the abandoned Trans-Pacific Partnership (TPP) agreement and could leave the United States on the outside looking in.
Most knowledgeable trade practitioners have a good sense of the world’s major trade agreements.
That knowledge tends to be tilted, to a degree, toward the agreements that most directly impact their business. So, for instance, a North American-based importer of goods from Asia might know more about the United States’ free trade agreements (FTAs) with South Korea and Singapore than it would about the broad South American trade pact Mercosur.
It’s a function of bandwidth and resource allocation. Time is spent learning about the FTAs that will directly impact a supply chain before excess time is allocated to exploring the potential of other FTAs.
For trade folks in North America, the 20 deals that touch the United States are of particular and obvious importance. These are the FTAs that influence where goods are sourced, what duties are paid, and compliance regimes.
As North America undergoes a reverse renaissance when it comes to trade, there’s a good chance this universe of trade agreements will begin to rotate around another axis. And the likeliest axis is Asia.
When President Donald Trump abandoned the Trans-Pacific Partnership (TPP) – one of his first actions in office – he also ceded ownership of the United States’ sizable trade gravity. That gravity was already shifting, gradually, across the Pacific. But by giving up on the TPP, the administration hastened the pace of that shift.
There has been talk of a TPP “Lite,” i.e. an 11-nation pact between the remaining nations that does not include the United States. But the biggest example of this shift of gravity is another, potentially bigger trading bloc that is forming in Asia and the surrounding area.
The Regional Comprehensive Economic Partnership (RCEP) is a proposed deal between 16 eastern hemisphere nations. It involves the 10 nations that comprise the Association of Southeast Asian Nations (ASEAN) and the countries with which the ASEAN nations have existing trade deals, including China, India, Japan, South Korea, Australia, and New Zealand.
It doesn’t take much of an imagination to see how massive this deal would be. The RCEP nations would encompass nearly half the world’s population, nearly 40 percent of global GDP, and about a third of global trade.
The RCEP, of course, does not include the world’s biggest economy and most active trading nation: the United States.
If you polled the trade leaders at each of the seven nations involved in TPP and RCEP, you’d likely find that most preferred the TPP. It’s not just that the United States prior to 2016 wanted to proactively create a ring of FTAs around China. TPP’s members in Asia wanted a similar hedge against China’s assumed ascendancy. The TPP gave those countries a chance to be something other than the +1 in a China +1 strategy with developed nations like the United States, Canada, and Australia.
According to recent reports, Beijing has been spearheading RCEP negotiations, eager to fill the void of the TPP. Trade has to take place for the global economy to remain in motion, and if it doesn’t occur optimally, the thinking goes, sub-optimally is better than nothing.
“You can’t beat something with nothing and the Chinese are offering something,” Adam Posen, head of the Washington-based Peterson Institute for International Economics, told the Financial Times in November, a week after Trump’s election.
The development of RCEP is not just dangerous to U.S. trade interests from the perspective of China assuming the mantle of the United States on a sort of superficial level. It also functionally leaves U.S. importers and exporters out in the cold.
While Trump and his trade team are intent on ripping up existing agreements – see the North American Free Trade Agreement (NAFTA) and the U.S.-South Korea Free Trade Agreement (KORUS) – U.S. companies lose out on low- or zero-tariff opportunities in the world’s biggest and fastest growing markets.
Remember, RCEP doesn’t just include the established economies of Japan and South Korea or the up-and-coming but small economies in the ASEAN bloc; it includes the two most populous nations in the world. The ability for the other 14 nations to transact with lower tariffs and in a more homogenous way with the more than 2.5 billion people living in China and India is no trivial matter.
Trade deals can take months, and often years to consummate. So while the United States is pre-occupied with decoupling from existing deals it considers unfair and negotiating new bilateral deals with established trading partners like the United Kingdom, China and India will be plugging deeper into the still-untapped growth potential of countries like Indonesia, the Philippines and Vietnam.
RCEP seems more like a matter of when, not if, given that all the parties are already part of existing trade deals. Never mind that all parties understand better than the United States the value of trade.
When that happens, the United States will be faced with a major conundrum. Will it ask – hat in hand – to join the RCEP party, or will it abstain and further cede its role as the axis of global trade? Neither is particularly desirable in terms of optics, but the former at least would give U.S. importers and exporters better access to markets it missed out on in the failed TPP.
It’s time to realize that whatever the United States chooses to do from here on out, China is in the driver’s seat when it comes to directing globally significant free trade deals. As a result, those deals, like RCEP, won’t include the progressive aspects of the TPP in terms of intellectual property and human rights protections.
Such is the bargain that the United States made when it decided that trade deficits and jobs of the mid-20th century lost to Asia were the culprits for a 21st century economic malaise.
Trade is not the villain, but rather a solution. And it would behoove those importers and exporters that focus exclusively on U.S.-centric trade deals to better understand RCEP, what it means for their supply chains, and how to convince their elected officials that the United States can’t sit on the sidelines while other regions strengthen their trade bonds.
Commentary: RCEP a recipe for U.S. exclusion
