When Xi Jinping asserted at the APEC Summit on November 19th that “China will not shut the door to the outside world but will open it even wider,” he not only forcefully claimed Chinese global leadership on free trade and globalization for years to come, but also sounded the death knell for the Obama administration’s “pivot to Asia.” With the Trans-Pacific Partnership (TPP) as good as dead and Donald Trump in the White House, the 11 TPP nations were left with no choice but to signal their interest in joining China’s competing trade agreement, the Regional Comprehensive Economic Partnership (RCEP).
The first country to jump on the China bandwagon was longtime US ally Australia, after its trade minister gave a ringing endorsement to China’s proposed free trade deals. That can only be bad news for the US, as Washington was already struggling keeping its Pacific alliances intact. Canberra is already heavily intertwined with Beijing – earlier this year there was ample controversy after Chinese influence was alleged behind the decision to award Australia’s biggest military contract to build submarines to France rather than Japan.
Shortly after Australia’s endorsement of RCEP, New Zealand Prime Minister John Key followed suit by saying that China would naturally fill the void if the Trump administration ends free trade, thereby signaling his country’s interest in China’s trade deal. Worse, even Chile and Peru, two nations that weren’t included in the original RCEP negotiations, have also expressed their desire to join the talks.
It’s painfully obvious for any watcher of the region that although Donald Trump won’t move to the White House until January 20, 2017, scuttling the TPP has observable policy effects. Trump’s further derision of Washington’s security commitments to traditional allies such as Japan and South Korea made it abundantly clear that the pivot to Asia in its current form will be discontinued come 2017. Seeing how the TPP was meant to mold the US and Asia together, cementing US prestige and power projection in the region, its scrapping translates into a severe loss of leadership and credibility that is nothing short of a national security disaster.
Enacting China’s RCEP by disgruntled US allies in Asia and Latin America would put the US at a direct competitive disadvantage, which would ripple through 35 industries employing 4.7 million workers. A recent White House report on the consequences of abandoning the TPP estimates losses of US$94 billion for American exporters as well as a chilling of foreign investment into the US economy. If signed into action, RCEP would become the largest free trade agreement in the world, encompassing 46% of global population, a combined GDP of US$17 trillion, and accounting for 40% of world trade. The agreement’s current roster of countries includes all 10 ASEAN members in addition to China, Japan, South Korea, India, Australia and New Zealand.
RCEP – a poisoned chalice?
Paradoxically though, RCEP is not just a TPP “made in China,” but a considerably less ambitious trade deal that will mostly lower tariff and non-tariff barriers without touching national policies (such as environment and labor law) the way the TPP intended. Consequently, RCEP would not just be a loss for the US, but for its future signatories as well. Despite the goodwill shown by many countries in public, behind the scenes the negotiations are on the verge of falling apart due to serious disagreements over one of the key aspects of RCEP – tariff liberalization. ASEAN, Japan and Australia are hoping for massive tariff reductions across the board, but are resisted by India, South Korea and China. Instead, the latter are proposing a three-tier approach of selective tariff reductions based on each country’s pre-existing free trade agreements, which is a very ham-handed way to promote free trade. A second problem comes from China’s overcapacity-addled manufacturing base. Negotiators have lamented the possibility that China would use RCEP to dump its excess steel on member countries and distort trade. That wouldn’t be surprising – over the last few years, China’s supply of cheap steel has already forced Southeast Asian competitors to their knees, particularly in Malaysia, while producers in Japan and South Korea are on the defensive. With import tariffs falling as a result of RCEP, but without tariff reciprocity from Beijing, Vietnam and Malaysia’s already feeble steel sector is at risk of going belly up altogether.