New Opportunities Under RCEP

 Both Asia-Pacific regional cooperation and the global economic and trade landscape are undergoing a process of restructuring. U.S. President Donald Trump signed an executive action to withdraw the United States from the Trans- Pacific Partnership (TPP) almost as soon as he took office, endangering the deal as a whole and shaking global markets.

Some analysts believe that once the plan is approved by the U.S. Congress, the TPP trade deal will reach a dilemma. Negotiations were already completed, which resulted in a trade agreement favoring the interests of Wall Street and transnational firms. Considering Trump’s business background and Wall Street-friendly cabinet picks, he doesn’t look as poised to challenge powerful interest groups as, say, Lincoln or Kennedy were. Moreover, it is too early to determine whether the U.S. Congress will endorse the country’s withdrawal from the TPP.

For this reason, it is likely that two regional trade agreements, the TPP and the Regional Comprehensive Economic Partnership (RCEP), will both be implemented in the Asia- Pacific region. At the same time, the wave of adjustment of international trade and investment rules stirred up by the Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TISA) is becoming yet another major external factor impacting the economic development of Asia-Pacific countries.

How to optimally balance the relationship between the TPP and the RCEP and the relationship between global trade standards and Asia’s actual conditions has become a crucial issue for Asia-Pacific countries, especially China and India. The two biggest emerging economies in the world are beginning to engage in deeper Asia-Pacific regional cooperation to safeguard their due positions in regional and global economic governance.

Compared to the TPP, which mandates “rigorous and extremely high standards” and is plagued with uncertainty, the RCEP seems more feasible. The early completion of the RCEP will provide a new path and platform for China to integrate with South Asia and for India to better integrate with the Asia-Pacific region.

Boosting Asia-Pacific Economic Cooperation

The RCEP is a trade initiative proposed by the Association of Southeast Asian Nations (ASEAN) that involves the group’s ten member states and six Free Trade Agreement (FTA) partners: Australia, China, India, Japan, Republic of Korea, and New Zealand. RCEP negotiations, launched in 2012, have gone through 16 rounds and are now in the final stage. The 16 participating countries have reached consensus on issues such as tariff reduction, exemptions for tangible goods, rules of origin, technical barriers to trade, sanitary and phytosanitary measures, customs procedures, and trade facilitation. All that remains is discussion of services trade and investment, leaving RCEP negotiations in a substantive bargaining stage. Even though many involved parties are still quarreling over issues like tariff reduction on sensitive products and market entry of sensitive sectors, the final completion of the RCEP is a matter of “when”, not “if”.

Upon implementation, the RCEP will serve as a free trade agreement with ASEAN at its core. The combined population of the 16 member countries is more than 3.5 billion, about 48 percent of the world population, and the combined GDP is US$22.7 trillion, about 30 percent of global GDP. The combined trade volume of these countries is US$9.58 trillion, about 29 percent of the world total.

Unlike the TPP, which emphasizes unified standards and rules, the RCEP is based on the effective international division of labor and the well-developed regional manufacturing network in the Asia-Pacific region. The economic returns and social benefits of the RCEP are mostly found in the reduction of non-tariff barriers and increased output. Affected industries and sectors will gain advantages from trade and investment liberation via the free trade initiative.

A report released by the Asian Development Bank predicts that by 2025, the RCEP will create income gains of US$644 billion and accelerate China and India’s GDP by 1.45 percent and 1.74 percent, respectively. With the TPP mired in uncertainty and the WTO multilateral trade process at a standstill, the RCEP, when implemented, will change the fundamental landscape of Asia-Pacific cooperation and prompt the upgrade of the region’s manufacturing network, an improved trade and investment environment and the construction of a unified regional market.

China-India Cooperation Under RCEP

As the world’s two largest emerging economies, China and India together account for 17.9 percent of global GDP and 13.2 percent of world trade as well as 58.9 percent of the total GDP of RCEP members and 47.4 percent of the group’s combined trade volume.

Both ancient civilizations are members of BRICS and the Shanghai Cooperation Organization (SCO) and the two countries share similar natural and cultural resources, but each has its own unique advantages. Trade facilitation and investment liberation within the framework of the RCEP will bring new opportunities and consolidate the foundation of the continued development of China-India economic and trade relations, sustained growth of their bilateral trade and investment, and the expansion of their value chains and supply chains. This relationship will set an example for bilateral cooperation, using existing comparative advantages to create new ones.

Services and investment have recently been the focus in international trade negotiations. Both are expected to become important growth points for China-India economic cooperation, which will not only facilitate the formation of new manufacturing chains at the bilateral level as well as between other RCEP members, but also ensure continuous growth of bilateral trade and investment.

Statistics from the United Nations Conference on Trade and Investment show that by the end of 2015, China and India received foreign direct investment (FDI) of US$1.2 trillion and US$282.27 billion, respectively, and the combined FDI they received accounted for six percent of the global total and 36.2 percent of the total FDI flowing into RCEP members. China and India’s outward foreign direct investment (OFDI) reached US$1.1 trillion and US$138.97 billion, respectively, and their combined OFDI made up 4.6 percent of the world total and 28.9 percent of the RCEP total. In 2015, China and India’s trade in services reached US$755.44 billion and US$278.95 billion, respectively, and their combined volume in this regard accounted for 10.8 percent of the global total and 44.4 percent of the RCEP total. All this indicates that the two countries occupy vital positions in regional and global investment and trade in services.

Even though both countries have witnessed rapid growth in their shares in the global service trade and investment, the service trade and investment between China and India remain comparatively insufficient. According to China’s Ministry of Commerce, by 2015, China’s direct investment in India had amounted to US$3.77 billion, accounting for only 0.34 percent of the country’s total investment abroad and 1.34 percent of total FDI received by India. The International Monetary Fund (IMF) estimated that by the end of 2014, India’s total investment in China was only US$313 million, accounting for 0.34 percent of its total investment abroad and 0.03 percent of total FDI received by China. There is tremendous space for the two countries to increase mutual service trade and investment.

Promoting Regional and China-India Cooperation

After more than three decades of reform and opening up, China has become one of the most vigorous economies in the world. Its GDP rocketed up from US$302.94 billion in 1980 to US$11.2 trillion in 2015, an average annual increase of 10.9 percent on average. Over the same period, its proportion of the global GDP grew from 2.5 percent to 14.9 percent.

Meanwhile, India’s GDP grew from US$181.12 billion in 1980 to US$2.2 trillion in 2015 at an average growth rate of 7.4 percent, while its proportion of global GDP rose from 1.5 percent to 3 percent.

IMF statistics show that in 2015, China and India contributed 36.7 percent and 16.5 percent, respectively, to world economic growth. Meanwhile, the contribution rates of the United States and Japan were 12.3 percent and 0.7 percent, respectively. As the world’s two largest emerging economies, China and India are expected to maintain long-term growth at a medium or high speed and become important engines for global economic development, along with other emerging economies.

The rapid economic growth of China and India is changing the global economic and trade structure, as well as providing new opportunities for the two countries to expand mutually beneficial, win-win cooperation. China and India complement each other in fields such as service trade, investment, high-end manufacturing and infrastructure, and see tremendous potential for cooperation in softening trade imbalances, combating trade protectionism and building a more rational and mutually complementary trade structure. The countries also share common interests in terms of regional and global cooperation and traditional and non-traditional security. Considering their enormous economic sizes and important positions in the global value chain and industrial chain, China and India should give full play to their respective geographic and economic advantages to enact the RCEP as soon as possible. In turn, the RCEP will provide institutional backing for their bilateral trade and investment cooperation as well as with other RCEP members.

The function of the RCEP in creating trade, promoting investment, fine-tuning industry and facilitating the resulting spillover effect will further improve and reconstruct the manufacturing network, expand the value chain and optimize allocation of trade and production factors in the Asia-Pacific region. This will create new opportunities for every country in the region, especially developing ones, to enhance their growth quality.

Regional economic integration of the European Union and North America under NAFTA has proven that the freer flow of goods and resources helps balance development between various countries. Likewise, shrinking economic gaps between China and India as well as other RCEP members in favor of more balanced regional development, improved living standards and sustainable economic growth meet both Chinese and Indian demands for common development and regional economic integration.

RCEP in Line with FTAAP

Due to the continuous expansion of the Asia-Pacific manufacturing network and value chain, countries in the region are already closely related in terms of trade and investment. The completion of the TPP and the deepening of RCEP negotiations are paving new paths to build a Free Trade Area in the Asia- Pacific (FTAAP). However, it remains uncertain whether the TPP will emerge as the preferred path for Asia- Pacific economic integration, whether the RCEP will form a unified regional market, or whether such agreements will evolve into an East Asian Community positioned to achieve the ultimate goal of establishing the FTAAP. On the road to the FTAAP, countries in the Asia-Pacific region must solve dilemmas such as whether to expand the TPP to serve every member of the Asia-Pacific Economic Cooperation (APEC) or integrate the TPP and the RCEP, how to weigh the “standards” of the TPP and the “feasibility” of the RCEP, and whether they should respond to developed countries’ appeals for higher standards and stricter rules or the humbler interests of developing countries.

In November 2016, the APEC Economic Leaders’ Meeting in Lima endorsed the Report on the APEC FTAAP Collective Strategic Study and passed the Lima Declaration on FTAAP. The Declaration reaffirmed APEC members’ commitment to advance the process in a comprehensive and systematic manner towards the eventual goal of building the FTAAP as a major instrument to further APEC’s regional economic integration agenda, and acknowledged that regional undertakings, including the TPP and the RCEP, will contribute to the eventual realization of the FTAAP.

If the FTAAP is established on the foundation of the TPP or the RCEP, it would be a free trade zone covering 40 percent of the world population and 55.9 percent of global GDP (US$43.6 trillion). Moreover, it would increase APEC members’ GDP growth by 3.5 percent, export volume by 9.6 percent and imports by 9.5 percent.

Unlike the exclusive, isolated TPP, the FTAAP will cover all APEC members and be more open and inclusive. Just like the RCEP, the real value of the FTAAP lies in reconstructing and improving the Asia-Pacific regional manufacturing network. Building a unified regional market is the ultimate goal of the FTAAP. If the FTAAP can expand and strengthen the Asia-Pacific regional manufacturing network based on the TPP and the RCEP as well as furthering Asia-Pacific countries’ integration into regional and global supply chain, it will become a new driving force for the internal growth of the Asia-Pacific economy.

The author is an associate researcher at the National Institute of International Strategy under the Chinese Academy of Social Sciences.