TOKYO – On his presidential watch, Donald Trump did manage to make one thing great: economic cooperation within North Asia.
So chaotic and pernicious was the outgoing US president’s pivot away from Asia that China, Japan and South Korea are dropping the hatchet and joining hands. The unlikely union was formalized on November 15 with the signing of the 15-nation Regional Comprehensive Economic Partnership, or RCEP, free trade agreement.
It marks an epochal setback for Washington nearly four years after Trump left the 12-nation Trans-Pacific Partnership, leaving Tokyo to take up the leadership role and promote the TPP. At the time, the TPP was the biggest trade pact ever, grouping 40% of the world’s gross domestic product (GDP).
America’s departure from the TPP opened a void into which the Beijing-led RCEP, which comprises about 30% of global output, just filled.
The US economy President-elect Joe Biden will inherit on January 20 is not only reeling amid surging Covid-19 cases. It is entering 2021 on the back foot as Beijing positions itself at the center of the global economy for the decade and perhaps decades to come.
And for a region looking to a better post-Covid-19 tomorrow, the RCEP could hardly come along at a better time.
The agreement constitutes two important firsts, namely the first bilateral move to lower barriers between Japan and South Korea and the first time three of Asia’s four biggest economies genuinely compartmentalized economic cohesion away from still-fraught political machinations.
“If RCEP spurs mutually beneficial growth, its members, including China, will gain influence across the world,” says Peter Petri at the Brookings Institution. “US policies in Asia need to adjust to the changing realities of East Asia, recognizing the increased role of China, maturing ASEAN integration and America’s diminished relative economic influence.”
The Japan-South Korea part of the deal is perhaps most impressive of all. For years, the US sought to bring its two squabbling allies closer together, and failed. Tokyo-Seoul relations are now at a nadir in a tense squabble over wartime forced labor compensation.
Now, with the RCEP, Beijing has managed to pull off something approaching economic détente, with Washington looking on helplessly. Biden must confront how the rest of the globe is not waiting for the US to get its own act together – and that may mean altering his own misperceptions.
On November 16, a day after the RCEP was ratified, Biden spoke as if the world economy hadn’t just tilted on its axis. He said that because the US makes up 25% of the world’s economy and is a democracy, it can still “set the rules of the road instead of having China and others dictate outcomes because they are the only game in town.”
Biden, in other words, wants to restore Washington’s indisputably central role in world trade. But can he?
RCEP versus TPP
Caveats abound as the RECP cements China’s place as the dominant Asian powerbroker. One is how the deal owes both Covid-19 and Trump a debt of gratitude. In early 2020, support for joining RCEP was still rather soft from Tokyo to Canberra.
Trade officials in Tokyo insist that coaxing the Biden administration back into the TPP fold is Japan’s priority. From there, Japan would encourage Biden to pull South Korea, Indonesia, the Philippines and perhaps even India into the TPP.
Australia, another TPP enthusiast, harbors similar hopes that Biden will resurrect a pact that lacks certain depth without US involvement.
Prime Minister Scott Morrison’s signing up to RCEP isn’t without controversy, given multiple tensions with Beijing over 5G market access, investigations into the origins of Covid-19 and alleged Chinese political interference in the country’s own systems.
Canberra also was deeply disappointed by India’s decision to leave the RCEP process. Yet even for capitals as suspicious of Beijing as Canberra and Tokyo, Trump’s trade war combined with the pandemic made the RCEP impossible to resist as an economic reboot.
By August, negotiating ministers issued a statement that member nations “recognized the critical importance of the RCEP agreement in light of ongoing uncertainties” as global market chaos “underscored the significant role that the RCEP agreement could play in post-pandemic recovery efforts.”
Devil in the details
Still, RCEP is not the holy grail of trade integration. Or at least not yet.
There’s a reason economists and investors are having trouble valuing the RCEP and governments are hard-pressed to explain its machinations. So far it remains an aspirational document agreed to via video conference.
The challenge now is turning good intentions into a nuts-and-bolts, enforceable commercial contract that distributes power equitably.
One stumbling block is the coming, yet pivotal, “legal scrubbing” process. This is when lawyers, translators and technocrats from 14 nations that are not named “China” go through the deal line by line, phrase by phrase, advective by adjective, qualifier by qualifier and colloquialism by colloquialism to ensure two things.
One, that RCEP really does promote free trade. Two, that when all is said, done and linguistically scrubbed the grouping doesn’t place China with undue power at the center of supply chains.
Nobody needs a long memory to remember how the haste to draw China into the World Trade Organization in 2001 allowed for artful phrasing, which Beijing used to leverage greater global market share.
This concern is sure to keep newish Japanese Prime Minister Yoshihide Suga awake at night – and cozying up to Biden with hopes of TPP enlargement. Tokyo is also still working with other regional democracies. In this way, the RCEP might best be viewed as an open marriage between partners hedging their bets.
In September, for example, the trade ministers of Japan, Indian and Australia agreed to a supply-chain “resilience” deal covering the Indo-Pacific region. It was a rather conspicuous effort to curb China’s dominance even while teaming up with it.
Japan, it’s worth noting, has a similar arrangement with the 10 members of ASEAN, which also signed onto the RCEP.
One selling point for nations worried about Chinese dominance is that RCEP is a vague framework that, for now, is more symbolic than actionable.
But the promise is huge. In addition to comprising 30% of global GDP, it involves about 2.2 billion people. The problem is the “TBD,” or to-be-determined, factor.
The RCEP aims to eliminate about 65% of tariffs and quotas on imported and exported goods. It sets common standards for “rules of origin,” making it easier to produce goods across borders.
Yet the RCEP ignores the issues that make the TPP preferable to officials from Tokyo to Singapore to Wellington: intellectual-property rights, labor and environmental standards and, most importantly in China’s context, subsidies for state-owned enterprises.
In other words, the very challenges that had Asian nations joining the TPP to begin with. Even so, the RCEP stands in sharp contrast to the gridlock in the US, UK and European Union.
Beijing’s Seoul-Tokyo axis
Significantly, it breaks the geopolitical logjam between Tokyo and Seoul as 2021 beckons. This alone “provides a major signal to investors that the region is still committed to multilateral trade integration,” says Joshua Kurlantzick, a senior fellow at the Council on Foreign Relations.
The RCEP marks the first time that rivals China, Japan and South Korea have formed a significant trilateral bloc.
Tokyo and Seoul barely speak. Ditto for Tokyo and Beijing. Nor have relations between Chinese President Xi Jinping’s government and South Korean counterpart Moon Jae-in moved far past the enmity of recent years.
Currently, all indications are that this year’s annual trilateral China-Japan-South Korea summit, due to be held in Seoul, will be canceled.
And yet, under the RCEP, 81% of goods traded between Japan and South Korea will see tariffs eliminated. In the automotive and car parts space alone, this will be a game-changer.
It’s an example of how China is bringing Tokyo and Seoul together. It’s an example, too, of why RCEP is seen adding about $200 billion annually to the global economy by 2030.
If China-Japan-South Korea trade progresses smoothly as expected, Huo Jianguo, a former senior Chinese Ministry of Commerce, tells Global Times, a higher level of regional economic integration is “bound to boost the sluggish global trade and economic growth. In the next five to 10 years, the Asia-Pacific region will become the engine of the world’s economic development in terms of both production and consumption.”
All this is coming at the expense of American influence. Biden inherits a geopolitical scene in Asia that China arguably just managed to tilt in its favor.
“By clinching RCEP with the 10 members of the Association of South-East Asian Nations, together with US allies Japan, South Korea, Australia and New Zealand, Beijing has successfully positioned itself at the center of the region’s trade and investment networks, ousting the US as the leading power in Asia-Pacific economic diplomacy,” says analyst Tom Miller of Gavekal Research.
“This,” Miller says, “will make it hard for US President-elect Biden to fulfill his pledge to place America back at the head of the table in international relations – at least in Asia.”
Granted, Biden benefits from the mere fact he’s not Trump. Biden is a life-long multilateralist whose first impulse will be hosting a series of summits with China’s Xi, Japan’s Suga and South Korea’s Moon, perhaps inviting North Asian leaders to the White House for trilateral talks.
Yet there’s a limit to how much multitasking Biden can do. Trump leaves behind a full-blown coronavirus epidemic and considerable economic fallout. The fractured nature of US politics might limit Biden’s own pivot to working with Asia.
Not that all’s suddenly peachy in North Asia. Prime Minister Suga canceled this year’s trilateral China-Japan-South Korea summit planned for Seoul. Suga, who’s just two months into his premiership, declined to visit South Korea amid rancor over demands Japan pay reparations for forced labor during World War II.
Yet this, too, could work in Beijing’s favor.
“China will probably be able to coordinate bilateral exchanges with both countries,” notes Sandip Kumar Mishra, a professor at Jawaharlal Nehru University. “Mistrust and animosity between Seoul and Tokyo, their drift away from the US, and closer cooperation with China will give Beijing both economic advantage and a political-security upper hand.
“A potential future mediation role for China will only strengthen its position in regional politics.”
Taiwan could be another flashpoint. For years now, the tech-heavy island economy has been angling to enter the TPP. There’s no doubt that East Asia’s sixth-biggest economy would benefit from entering the grouping, and vice versa. The infusion of foreign competition could be just what President Tsai Ing-wen’s economy needs.
But Taiwan’s in-limbo plight – China considers it a renegade province – will require deft and patient negotiating. It also may require a US-led TPP once again.
Count veteran China watcher Richard McGregor among those who think Taiwan, as a WTO member, has every right to join the TPP fold. The trouble is, notes the Lowy Institute senior fellow, a consensus is required to admit new TPP members.
Though China is not in the TPP, it is sure to pressure smaller nations that are to vote no. It remains to be seen whether Biden can make Taipei’s TPP dreams a reality.
Either way, the free-trade coup Xi just pulled off stands in stark contrast to what’s happening elsewhere. And it dovetails with something of which US officials can only dream: the return of steady economic growth.
In recent weeks, South Korea and Japan joined China in the rarefied club of major nations beginning to put the Covid-19 era in the rearview mirror. South Korea grew 1.9% in the three months to September. Japan expanded 5% quarter-on-quarter during the same period, pulling out of recession.
The lesson from Beijing, Seoul and Tokyo is obvious: only by defeating the pandemic can nations bounce back. And here, the economy Biden inherits is surging chaotically in the opposite direction. This week, the globe’s biggest economy blew past the 11-million-infections mark.
As Biden seeks to put out Trump’s fires, Xi’s economy is rising rapidly from Covid-19’s ashes, gaining altitude and making trade allies in vital places.