RCEP reinforces China’s edge in Asia

Amid a definitive shift towards disaffection for globalisation in the wake of the coronavirus pandemic-induced economic crisis, 15 East Asian economies agreed to establish the Regional Comprehensive Economic Partnership (RCEP), the largest ever free trade agreement (FTA). This should not be surprising as the driver of RCEP during the eight years of negotiations has been the 10-member Association of South East Asian Nations (Asean), whose membership includes some of the world’s most open economies. In 2019, the trade to Gross Domestic Product (GDP) ratio of the grouping was nearly 88%.

The idea of RCEP emerged during the 19th Asean Summit in 2011, where its members resolved “to establish an Asean-led process by setting out principles under which Asean will engage interested Asean FTA partners in establishing a regional comprehensive economic partnership agreement…”.

The idea of an FTA in the East Asian region was mooted by Japan in 2006 when it proposed the Comprehensive Economic Partnership in East Asia between the then members of the East Asian Summit (EAS), which also included India. But while the Japanese initiative received a tepid endorsement from EAS leaders in 2009, Asean seized the moment to initiate the process of establishing RCEP, immediately after the grouping’s FTAs with New Zealand and India became effective from 2010. Now, as the focus of RCEP members shifts to their capitals for its ratification, one question uppermost in most minds will be the role that China could play in the group’s dynamics. Will this FTA of East Asia, in which Asean has been looking to play a central role, hinge on China?

This seems to be a real possibility, especially since China has opened its market significantly to RCEP members, providing opportunities for enhanced economic engagement. To do so, China has offered to reduce its average tariff from 9.4% in 2014 (considered as the base year for effecting tariff cuts) to 1.2% in the 10th year of implementation of the agreement, for its imports from all the Asean members and Australia. Its market opening to Republic of Korea goes even further; average tariff on Korean imports will be below 1% by the 10th year. In addition to tariff cuts, China has offered to maintain tariffs at 5% or less on almost 90% of its imports. Several RCEP members, including Indonesia, Malaysia, and Vietnam, have reciprocated China’s offers by agreeing to deep cuts in their tariffs.

A policy announcement made by Chinese President Xi Jinping earlier this month suggests that opening of its market to RCEP members is part of its larger strategy. Xi reportedly said, “We will remain open and cooperative, and build the Chinese market into the world’s market, a shared market and everyone’s market”. He proposed several measures to meet these objectives, three of which are significant. First, open the market to a new level; second, promote innovative development of foreign trade through government support to cross-border e-commerce; and, finally, making additional efforts to forge FTAs with more countries and regions. RCEP, which includes a chapter on e-commerce, fits Xi’s strategy well.

Xi has thus produced this counter-narrative to the “decoupling from China” thesis, receiving a powerful endorsement through the establishment of RCEP. In addition, despite the political differences that several RCEP members have had with China, their economic engagement with the world’s largest trading nation is set to go up by several notches with the implementation of the East Asian FTA. This is a development that all major economies must take serious note of.

Where does India stand vis-à-vis RCEP? Since the decision was taken to disengage from RCEP a year ago, several members of the grouping have made overtures towards India. The most recent was the Ministers’ Declaration on India’s Participation in the Regional Comprehensive Economic Partnership adopted four days prior to the endorsement of the agreement. The Declaration extended an invitation to India to “commence negotiations … at any time after the signing of the RCEP Agreement once India submits a request in writing of its intention to accede to the RCEP Agreement …” However, a critical comment from external affairs minister, S Jaishankar, after the formation of RCEP, signals that the government has foreclosed its options of joining the grouping, largely owing to China’s presence.

Not only has the government shut its doors on RCEP, but it has also adopted an economic strategy that militates against the logic of globalisation supported by FTAs. While FTAs have foisted the production networks cutting across national boundaries, the Indian government has been focusing on building domestic value chains in a number of critical sectors through the Atmanirbhar Bharat Abhiyan. This policy direction promoting self-reliance was reinforced by Jaishankar’s observation that the India’s past trade agreements have been detrimental to the country’s interests, causing de-industrialisation in some sectors. The minister’s prognosis on FTAs, coupled with the newly-minted economic strategy, could be a signal of the government’s rethink on globalisation.

Given the government’s critical response to RCEP and the possibility that China will play a key role in the East Asian region through this FTA, will there also be a rethink on the three-decade-old Look East/Act East policy, one of the more enduring pillars of India’s global economic integration policy?

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