China Is Racing Ahead to Lock in Asian Trade. Time to Worry.

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Friday 28th of January 2022

China Is Racing Ahead to Lock in Asian Trade. Time to Worry.

About the author: Kelly Ann Shaw, a partner at Hogan Lovells, served in the Trump administration as the deputy assistant to the president for international economic affairs, and as deputy director of the National Economic Council.

The world’s largest trade agreement is set to enter into force on Jan. 1, 2022, with China—not the U.S.—at its helm. 

 

If the Biden administration isn’t panicked yet, it should be. China’s bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, earlier this fall was a blow to U.S. interests in the Indo-Pacific region. But the entry into force of the Regional Cooperation Economic Partnership, or RCEP, a trade deal among 15 countries covering nearly a third of global gross domestic product, 53% of the world’s exports, and 2.3 billion people that orbits around China’s economy, is just as bad.

Originally launched in 2012, negotiations among China, Japan, South Korea, Australia, New Zealand, India, and the 10 Association of Southeast Asian Nations member states languished through much of the deal’s history but intensified in 2017 when the U.S. withdrew from the Trans-Pacific Partnership agreement. At the same time, China sought to establish deeper Asean supply chains as an alternative to a fracturing U.S.-China economic relationship. India’s withdrawal from the RCEP negotiations in late 2019 cleared the way for the deal to conclude on Nov. 15, 2020. 

With its 20 chapters and additional annexes, RCEP is broad—if not deep—in its coverage. Its commitments eliminate tariffs on 90% of all trade within the 15-country bloc and reduce regional inefficiencies and customs burdens. Many of RCEP’s rules are rightfully criticized as lackluster, especially with respect to disciplines on investment, services, agriculture, and intellectual-property rights. RCEP also leaves out key rules on labor, the environment, and state-owned enterprises, provisions that feature prominently in U.S.-led trade deals like the United States-Mexico-Canada Agreement. 

Yet what RCEP lacks in depth, it more than makes up for in geopolitical ambition. RCEP is China’s first regional trade deal, and the first trade agreement between China, Japan, and South Korea—all key U.S. export markets. As the largest economy within the bloc, and largest or second-largest trading partner of every RCEP member, China will have outsize influence in setting future standards and regulations for the region moving forward. Lower tariffs, common rules of origin with a relatively low-value content threshold, and eased trade facilitation will help China lock in regional supply chains, attract new foreign investment, and expand its Belt and Road Initiative by strengthening transportation, energy, and communication links. RCEP’s standing secretariat gives the bloc a sense of permanency and provides China with a platform to further integrate its state-centric economic model. 

 

The entry into force of RCEP poses significant concerns for the U.S. Commercially, U.S. manufacturers and workers all stand to lose from the deal. U.S. agriculture also will become less competitive in Asia compared with its Australian and Japanese competitors. The common RCEP rules of origin will incentivize the use of Chinese components throughout ASEAN and lead to a deepening of Chinese-linked supply chains, which could scuttle the Biden administration’s diplomatic and economic supply-chain efforts in the region.

While the U.S. maintains bilateral trade deals with Singapore, Australia, and South Korea, and a mini-deal with Japan, the trend toward regionalization, coupled with the failure of the World Trade Organization to advance new multilateral rules, gives China an important advantage in shaping not just the future of the region, but also global trade rules moving forward. This is especially true if China successfully accedes to the other regional trade bloc, the CPTPP. How to counter China’s growing trade and economic influence without rejoining that deal is one of the most pressing questions facing the Biden administration as it seeks to cobble together an Indo-Pacific strategy.

Currently under consideration is an Indo-Pacific digital trade deal, an idea that lacks ambition and reads like a consolation prize following U.S. withdrawal from the Trans-Pacific Partnership, the precursor to the CPTPP. The optics alone of the U.S. pursuing an 11-page digital deal while China simultaneously negotiates thousands of pages of rules covering all aspects of its trade relationship with the same CPTPP countries are demoralizing.

 

More appealing would be if the Biden administration turned the recently announced Indo-Pacific Economic Framework into something substantive. In recent interviews, Commerce Secretary Gina Raimondo touted the framework as a “new kind of agreement” that will be “more robust” than CPTPP, but left out any detail on timing, structure, or countries involved. If the framework were to combine new trade rules with commercial deals and national security priorities like export controls, supply chains, and 5G, it could be significant. That’s a big “if,” however, and it’s not clear what the administration can realistically accomplish in the next two years, particularly if it wants to steer clear of anything that would require congressional approval or agitate the progressive left. 

The most obvious answer, unfortunately, is also the most politically challenging: The U.S. should rejoin the CPTPP. Despite its baggage, it isn’t clear that CPTPP is as much of a political nonstarter as the administration seems to believe. The politics that torpedoed its predecessor, TPP, in 2017 have changed, along with the overwhelming national security and economic justifications for an Indo-Pacific deal that keeps China out of a U.S.-led Pacific. Congress’ original objections largely have been overcome by events. And, despite having campaigned against it, even President Donald Trump toyed with the idea of getting back in with acceptable changes—I was in the room when we discussed it. 

Today, the U.S. would need to negotiate improvements to provisions on labor, the environment, automotive rules of origin, state-owned enterprises, and intellectual-property rights to survive a congressional vote. Admittedly, it may not be easy for CPTPP in any form to pass a Democratic-controlled Congress, including with progressive priorities, but that’s exactly why trade requires presidential leadership. As to whether CPTPP countries would be open to improving the text, my sense is they would embrace it if it meant bringing the U.S. back into the region as a counterweight to China. 

Whatever the administration decides, America needs an offensive and meaningful economic agenda for the Indo-Pacific. RCEP’s entry into force on Jan. 1 is a significant blow to U.S. interests and only reinforces the point that continuing to focus exclusively on domestic industrial policy is not an effective strategy for countering China’s growing influence in the region.


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