As Trump kills the TPP, can China-backed RCEP fill the gap?
After Donald Trump dismantles eight years of TPP negotiations on ‘day one’ of his presidency, Asia will try to strengthen its own regional economic ties by reducing tariffs
With the stroke of a pen and possibly a string of accompanying tweets, US-President elect Donald Trump is poised to trigger the withdrawal of the world’s biggest economy from the Trans-Pacific Partnership (TPP) pact immediately after he takes office on January 20, sinking the ambitious free trade agreement even before it comes into force.
The exclusion of the United States from the 12-nation Pacific-Rim pact will mean that nearly eight years of negotiations done over 32 rounds – a process prolonged partly due to Washington’s expectations for a high-quality deal – now come to nought.
But leading trade experts are urging governments in trade-hungry Asia-Pacific nations from Singapore to Vietnam to quickly end their hand-wringing over the wasted effort, and instead conclude alternative deals without the US and its new protectionist leader.
Emerging at the top of the alphabet soup of potential trade pacts is the pan-Asian Regional Comprehensive Economic Partnership (RCEP), which excludes the US and until recently played second fiddle to the soon-to-be-killed Pacific Rim pact.
Experts say the RCEP can now be the centrepiece of 21st century free trade, a title they previously bestowed on the TPP.
Long seen as a project led by Beijing to counter the US-backed TPP, the RCEP involves the 10 Association of Southeast Asian Nations (Asean) and six countries with which the bloc has existing free trade pacts: China, India, Japan, South Korea, Australia and New Zealand. The pact, first mooted in 2011, will span territories that are home to 3.5 billion people and have a combined gross domestic product of US$22.6 trillion.
China denies it is spearheading the RCEP from behind the scenes, claiming it is an Asean-led effort.
In December, Chinese officials and some countries negotiating the RCEP signalled their intent to finalise the pact by the end of this year.
Seven out of the 16 countries negotiating the RCEP – Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam – are signatories to the TPP.
“Concluding RCEP is critical for supporting trade growth and deepening supply chains in Asia amid rising protectionist sentiments and TPP uncertainties,” Ganeshan Wignaraja, an adviser with the Asian Development Bank, told This Week in Asia.
“An RCEP agreement seems probable in 2017 due to intensified negotiations,” he said.
Edmund Sim, partner at the multinational trade and investment law firm Appleton Luff, said the pact would “primarily benefit the manufacturing sector by eliminating tariffs on trade within the Asian supply chain and simplifying the rules governing preferential trade in goods”.
“This effect will be especially pronounced for those RCEP partners who currently have no [free-trade agreement] relationships [such as] China-India, Japan-Korea and Korea-India,” Sim said.
Other experts said the demise of the TPP did not automatically mean the RCEP would take off, and cautioned against hopes that the deal would achieve the high standards of the Pacific Rim pact agreed last year.
The TPP targets the eventual removal of tariffs on almost all goods and requires the adherence to rules on a wide range of issues from the environment, labour rights, state ownership of firms and intellectual property. The RCEP mainly focuses on tariff reductions in goods.
The TPP has not come into force because it requires the legislative ratification of at least six countries that make up 85 per cent of the economies involved, which means the approval of lawmakers in the US – which makes up about 62 per cent of the bloc’s GDP – is mandatory. President Barack Obama was unable to obtain congressional ratification during last year’s election season. Trump, who beat Democratic nominee Hillary Clinton by campaigning on an anti-free trade platform, said after his victory that he would kill the pact “from day one” of his presidency.
The TPP is seen as the economic bulwark of President Barack Obama’s so-called pivot to Asia strategy.
“The easiest place to see the difference in quality between the TPP and RCEP is to look at tariff cuts,” said Deborah Elms, executive director at the Singapore-based Asian Trade Centre consultancy.
“TPP started by removing tariffs completely on roughly 90 per cent of all goods on the first day of the agreement and building to nearly 100 per cent of all goods at zero tariffs,” Elms said.
“RCEP, if we are lucky, will finish at something like 90 per cent of goods included in the agreement. Not all of these goods will have tariffs at zero and many of these cuts will take place a long time from now.”
The participation of India in the RCEP is also under scrutiny. Prime Minister Narendra Modi’s government is eager to negotiate greater labour mobility in the Asia-Pacific for the country’s rising number of service-sector workers, but there are worries in some countries that an immediate liberalisation will trigger an influx of Indian migrant workers.
The Asian juggernaut economy is keen on boosting exports with Modi’s “Make in India” campaign, but it remains averse to opening up domestic markets to imports. “I think the likelihood of India joining RCEP in 2017 is very low, or that if India does join, RCEP will be a very shallow and limited trade agreement,” said Jacob Funk Kirkegaard, a senior fellow at the Washington-based Peterson Institute for International Economics.
Geethanjali Nataraj, a trade economist with the New Delhi-based Brookings India think tank, said the converse was true. “It used to be the case a few months back but the government has realised the importance of signing up to the RCEP,” Nataraj said.
And India’s participation is just one of several potential hurdles. “Another challenge is the possible spillovers of territorial tensions and disputes onto the RCEP negotiation,” said Kaewkamol Pitakdumrongkit, a multilateralism studies professor at Singapore’s S. Rajaratnam School of International Studies.
“How well the members manage such matters would affect trust among the bargaining parties and determine the RCEP’s fate as trust is an important element helping to conclude [the] agreement,” she said. ■