Trans-Pacific View | Economy

RCEP: The Future of Trade in Asia

Insights from Peter Petri.

Mercy A. Kuo
RCEP: The Future of Trade in Asia
Credit: Pixabay

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into U.S. Asia policy.  This conversation with Dr. Peter Petri – Carl J. Shapiro professor of international finance in the Brandeis International Business School; non-resident senior fellow at the Brookings Institution and its John L. Thornton China Center; and co-editor of “Toward Northeast Asian Integration” (2020 forthcoming) – is the 250th in “The Trans-Pacific View Insight Series.” 

Explain the strengths and weaknesses of the Regional Comprehensive Economic Partnership (RCEP) for the 15 Asia-Pacific member nations.

RCEP is literally a big deal. It will reduce economic frictions among countries that account for about 30 percent of the world’s population and production. According to computer simulations Michael Plummer and I recently published, RCEP promises to add $209 billion annually to world income and $500 billion to world trade by 2030. These gains will mainly benefit RCEP members — China, Japan, South Korea, Australia, New Zealand, and 10 Southeast Asian countries.

RCEP consists of remarkably diverse countries — rich and poor, vast and tiny, highly advanced and those just beginning to industrialize. To accommodate these wide priorities, the terms of RCEP (tariff cuts and trade rules) are less ambitious than those in the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP), the other mainly East Asian agreement concluded in the Trump era. President Trump withdrew from the predecessor of the CPTPP, the Trans-Pacific Partnership, but Japan led the remaining 11 countries to conclude the deal.

How will Beijing exercise and extend China’s regional influence via RCEP?

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This is a key question. China is RCEP’s biggest economy and will shape its evolution. The U.S.-China trade war, RCEP, and the CPTPP will all deepen economic integration within East Asia and enhance the region’s prominence as a trading center. China’s central role in RCEP will be watched throughout the world.

I hope that China will help RCEP create a mutually beneficial, model partnership — by opening its own markets, containing export surges, supporting investments in the region through its Belt and Road Initiative, and welcoming new members. But China could also overwhelm regional competitors and demand political concessions by exercising its economic leverage. China’s long-term influence in the global economy will much depend on what strategy it follows.

What is the impact of India’s absence in RCEP on Indo-Pacific trade?

We estimate that including India would increase global gains from RCEP by about 25 percent. But most of these gains would flow to India, and its absence will not significantly affect other members. India was included in RCEP to help balance China’s political influence. It left RCEP because of nationalist concerns about opening its markets, and especially about imports from China. I think they made a bad decision; membership in RCEP would have been India’s fastest route to entering global manufacturing supply chains and upgrading domestic industries.

How will RCEP shape the future of trade in Asia?

RCEP, along with the CPTPP, will reduce trade costs and create a framework for cooperation among the region’s trade officials. Members will link their strengths in technology, manufacturing, agriculture, and natural resources. Their economies will become more efficient individually and, as a bloc, more competitive globally. East Asia will also become more attractive to investors and trade partners from Europe and Latin America. Deeper agreements, say among China, Japan, and South Korea, may follow. The United States could also return to join the CPTPP agreement, assuming it can overcome domestic political divisions. But America’s influence will be more modest.

Assess RCEP’s geopolitical and economic implications for U.S. leadership in the Asia Pacific.

U.S. policies in East Asia need to recognize the region’s changing realities. Key trends include the rising economic role of China, maturing Southeast Asian integration through ASEAN, and growing concerns about the reliability of both the United States and China. Under the Trump administration, the United States failed to recognize, much less address, these issues. It ratcheted up tensions with China, withdrew from the CPTPP and harshly criticized competitors and allies alike. It focused its attention mainly on the Quad, a security alliance involving Australia, India, Japan, and the United States.

As a result, East Asian countries increasingly felt pressured to choose between rising economic ties with China and long-standing security relationships with the United States. As Lee Soo-hyuk, South Korea’s ambassador to the United States, recently put it, “Just because Korea chose the U.S. 70 years ago does not mean it has to choose the U.S. for the next 70 years, too.”

Redefining America’s East Asia strategy is President-elect Biden’s greatest foreign policy challenge. China leaves the Trump era stronger and more confident, and with growing ties to other East Asian countries. Yet most of those countries still want the United States to continue to balance China’s influence — a vital role. To do so, the Biden administration will have to develop sustainable relations with China, renew its engagement in East Asian dialogues and economic networks, and create a security posture that stabilizes rather than disrupts the region. None of this will be easy to do.