China’s RCEP trade deal begins Jan. 1. Why the United States should be concerned

Illustration by Matt Chase

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

The world’s largest trade deal is slated to come into effect on January 1, 2022, with China, not the United States, at the helm.

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

Initially launched in 2012, negotiations between China, Japan, South Korea, Australia, New Zealand, India and the 10 member states of the Association of Southeast Asian Nations languished for much of the deal’s history, but intensified in 2017 when the United States withdrew from the Trans-Pacific Partnership Agreement. At the same time, China has sought to deepen ASEAN supply chains as an alternative to severing economic relations between the United States and China. India’s withdrawal from RCEP negotiations at the end of 2019 paved the way for the deal to be concluded on November 15, 2020.

With its 20 additional chapters and appendices, RCEP is broad, if not deep, in its coverage. Its commitments eliminate tariffs on 90% of all trade within the bloc of 15 countries and reduce regional inefficiencies and customs burdens. Many RCEP rules are rightly criticized as lackluster, especially in the disciplines on investment, services, agriculture, and intellectual property rights. RCEP also leaves out key labor, environment, and state-enterprise rules, provisions that feature prominently in US-led trade deals like the US-Mexico-Canada agreement. .

However, what the RCEP lacks in depth, it more than makes up for in geopolitical ambition. RCEP is China’s first regional trade agreement and the first trade agreement between China, Japan and South Korea, all of the United States’ key export markets. As the biggest economy in the bloc and each RCEP’s biggest or second largest trading partner, China will have a disproportionate influence in setting future standards and regulations for the region in the future. Lower tariffs, common rules of origin with a relatively low content threshold, and easier trade facilitation will help China lock down regional supply chains, attract new foreign investment, and expand its “Belt” initiative. and the Road “by strengthening the links of transport, energy and communication. . The RCEP permanent secretariat gives the bloc a sense of permanence and provides China with a platform to further integrate its state-centric economic model.

Coming into Force of RCEP Poses Significant Problems for the United States On the trade front, American manufacturers and workers all stand to lose from the deal. American agriculture will also become less competitive in Asia compared to its Australian and Japanese competitors. RCEP’s common rules of origin will incentivize the use of Chinese components across ASEAN and lead to a deepening of supply chains linked to China, potentially scuttling the administration’s diplomatic and economic efforts Biden in terms of the supply chain in the region.

While the United States maintains bilateral trade agreements with Singapore, Australia and South Korea, as well as a mini-agreement with Japan, the trend towards regionalization, coupled with the failure of the World Organization of trade to promote new multilateral rules, gives China an important advantage in shaping not only the future of the region, but also world trade rules for the future. This is especially true if China successfully joins the other regional trading bloc, the CPTPP. How to counter China’s growing trade and economic influence without joining this deal is one of the most pressing questions facing the Biden administration as it seeks to concoct an Indo-Pacific strategy.

An Indo-Pacific digital trade deal is currently under consideration, an idea that lacks ambition and reads like a consolation prize following the United States’ withdrawal from the Trans-Pacific Partnership, the precursor of the CPTPP. The mere view of the United States pursuing an 11-page digital deal while China simultaneously negotiates thousands of pages of rules covering all aspects of its trade relations with the same CPTPP countries is demoralizing.

More appealing would be if the Biden administration turned the recently announced Indo-Pacific economic framework into something substantial. In recent talks, Commerce Secretary Gina Raimondo has presented the framework as a “new kind of deal” that will be “stronger” than the CPTPP, but omitted any details on the timeline, structure or countries. involved. If the framework combined new trade rules with trade agreements and national security priorities such as export controls, supply chains and 5G, it could be important. That’s a big ‘if’, however, and it’s unclear what the administration can realistically accomplish over the next two years, particularly if it is to avoid anything that would require congressional approval or agitate. the progressive left.

The most obvious answer, unfortunately, is also the most politically difficult: the United States should join the CPTPP. Despite its background, it is not clear that the CPTPP is as much of a political non-starter as the administration seems to believe. The politics that torpedoed its predecessor, the TPP, in 2017 have changed, as have the overwhelming economic and security justifications for an Indo-Pacific deal that keeps China out of a US-led Pacific. The initial objections of Congress have been largely overcome by events. And, although he campaigned against it, even President Donald Trump toyed with the idea of ​​coming back with acceptable changes – I was in the room when we discussed it.

Today, the United States would have to negotiate improvements to labor, environmental, automotive rules of origin, state-owned enterprises and intellectual property rights provisions to survive a vote in Congress. Granted, it may not be easy for the CPTPP in any form to pass a Democrat-controlled Congress, including with progressive priorities, but that’s exactly why trade requires leadership. presidential. As to whether the CPTPP countries would be willing to improve the text, I have a feeling they would adopt it if it meant bringing the US back to the region as a counterweight to China.

Whatever the administration’s decision, America needs an offensive and meaningful economic program for the Indo-Pacific. The entry into force of RCEP on January 1 is a blow to American interests and only reinforces the fact that continuing to focus exclusively on national industrial policy is not an effective strategy to counter the growing influence of China in the region.

Guest comments like this are written by authors outside of the Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comments and other comments to [email protected]

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