and the US is not part of it
While everyone was distracted due to COVID and US elections, the world’s largest trade deal was signed. Australia, New Zealand, Japan, China, South Korea, and members of the Association of Southeast Asian Nations (ASEAN- which include Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) came together to sign the Regional Comprehensive Economic Partnership (RCEP). This regional partnership will bind together 30% of the global economy while combining 2.2 billion people and $26.2 trillion worth of GDP. RCEP is predicted to add $209 billion to annual incomes and $500 billion to world trade by 2030. The benefits of this trade deal include:
- Bolstering pandemic-weakened economies by reducing tariffs
- Stengthening supply chains with common rules of origin
- Enhancing online and personal consumer protection
- Transparency in paper-less trading
- Banning tech transfers and protecting intellectual property rights
Overall, this trade deal will help these nations further integrate trade and supply chains. It will also create norms for high tech trade and investment like 5G, digital currency payments, and e-commerce. Many of these nations already trade with their local currencies, paving the way for China to test its digital currency and use it for global trade. Most importantly, the US is not involved in this trade deal.
This trade deal was 8 years in the making. Around the same time, The Obama administration was negotiating the Trans-Pacific Partnership (TPP) with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, Japan, and New Zealand. The main goal of the TPP was to deepen the economic relationship between the US and these other Pacific rim nations by cutting tariffs to boost trade between these nations. Most importantly, by not having China part of the TPP, the US wanted to pull Asia into the US orbit (similar to how with the Trans-Atlantic Trade and Investment Partnership or TTIP the US wanted to further pull Europe into America’s orbit). Then came President Trump, and with his populist rhetoric and bravado, pulled the US off the TPP. The other nations convened to ratify the treaty and awkwardly called it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). By pulling out of the TPP, the US has abandoned Asia. Inconsistent US foreign policy has also made the US an unreliable partner for many allies both in Asia and Europe. As the US retreats and Asia’s economic clout overgrows significantly, the signing of the RCEP trade deal was not only timely but is expected.
Since the US left the TPP in 2017, the remaining Pacific rim nations were desperate for a new trade deal. In 2018, dignitaries from all of the RCEP member states and India met to discuss a potential trade deal. Then in 2020, this became a reality without India, which pulled out of the deal in 2019.
What makes this deal significant, outside of the US not being involved, is that for the first time, Japan and South Korea are teamed up with China to be part of a comprehensive trade deal. It is no secret that there is animosity between Japan/South Korea and China. Especially between Japan and China. Territory disputes (Senkaku/Daiyu islands dispute) and WWII animosity have kept the two countries apart. But now, all three of these countries are signatories to a major trade deal. This trade deal will speed up northeast Asian economic and trade integration. The other significance of this trade deal is the fact that more than China, ASEAN played a central role in this trade deal. It was ASEAN that actually initiated the RCEP trade deal. China let ASEAN take the lead so that China can minimize its conflicts with Japan. Finally, Australia and New Zealand, which mostly identified with the West, are finding their “Asian” roots.
This deal highlights the rapid rise of Asia (led by China) as a leader in global economic decision making. This phenomenon has been happening for a long time, even before Trump occupied the White House. Ever since China joined the WTO in 2001, more nations are trading with China than they do with the US. China is the largest trading nation in the world. China’s economy has grown to be the second-largest in the world (and largest in terms of PPP). This rise has led China to step up and be a leader in the economic space. This rise was cemented when China created the Asia Infrastructure Investment Bank (AIIB). The AIIB was created to compete against the Washington led International Monetary Fund. Many close US allies like South Korea and Australia signed on to be founding members of the AIIB. UK, a long-standing ally of the US, was the first European nation to join the AIIB and be a founding partner. This even surprised Beijing. This also led to many other European nations joining the new development bank as founding partners. This showed that even staunch US allies want to benefit from the rise of China. Former US Treasury Secretary Larry Summers dubbed the founding of the AIIB as the day “America Lost its Superpower Status.” He further said that the US needed to wake up to a new economic era. This is very ironic coming from Larry Summers, given that he cheerled the financialization of the US economy and offshoring of US manufacturing, which led to the rise of China.
This trade deal was signed just as I finished reading Parag Khanna’s book “The Future is Asian.” The main theme in his book is that the coming century will be an “Asian” century, and Asia will decide its own fate and be the center of global economics and business once again. The RCEP trade deal has justified Parag Khanna’s thesis. As Asians trade more with each other than they do with the outside, Asia is further integrating. They are also setting their own standards and rules without any say from the US.
This trade deal also highlights the failure of Trump and Pompeo’s Asia and China policy. Trump’s first mistake was pulling the US from the TPP trade deal. Pulling the US out of TPP created a leadership vacuum, which eventually leads China to come in and fill that vacuum. Filling that vacuum led to the creation of RCEP. US pulling out of TPP was also due to domestic turmoil in the US. Many Americans (especially working-class Americans in the rust belt) had a distrust of trade deals due to their jobs getting offshored overseas. The deindustrialization of the country has led to the economic suffering of many working-class people in the US. Then-candidate Trump saw the pain of these people and ran against Free Trade Deals which “took advantage of the US.” To keep his promise Trump made to his working-class constituents, he pulled the US off the TPP. This also shows how a weakened US (due to deindustrialization and declining living standards of the working class population) struggles to lead the world in an increasingly changing 21st century. Another failure of the Trump/Pompeo doctrine was making countries in Asia choose between the US vs China. Many of these nations do not want to choose sides in the new cold war. ASEAN, Japan, South Korea, Australia, and New Zealand are very happy to have close military ties with the US, sell goods to US consumers, and receive direct investment from US companies. But for all these nations, China is their most important trading partner. Japan would like to sell more Toyota cars to Chinese consumers. Both Japan and Korea want to sell semiconductors to Chinese high tech companies. Australia’s largest export markets are China (40%), Japan (15%), and South Korea (6.8%). ASEAN nations want more Belt and Road Initiative (BRI) funding to improve their country’s infrastructure. These countries also want help from Chinese high tech firms like Huawei and ANT Pay to improve payment technology and bring 5G to these nations. Singapore has especially benefitted a lot from the current US-China tensions. Bytedance (parent company of the popular social media platform Tik Tok) is establishing a big presence in Singapore. Singapore as a financial center will see a boost due to many firms leaving Hong Kong. Singapore’s PM Lee Hsien Loong has explicitly said that the nation will not join the US in a “cold war” against China. For all of these nations, economics and development trump (pun intended) security. These nations would rather sell more goods to China and receive investment from China. These nations do not want to jeopardize their relationship with China. Even US defense treaty allies like Japan and South Korea have kept their geopolitical rivalries aside to increase geoeconomic ties with China. RCEP has proved that unlike the first cold war, no one will choose sides between the US and China.
We still need to see how this trade deal will playout. Many of these countries are mercantilist economies. China is still lashing out to Australia and banning imports from them. Some of the Southeast Asian nations are having territorial disputes with China in the South China Sea. Japan’s new defense minister is a pro-Taiwan China hawk.
As Asia grows economically, Europe wants to further integrate with the region. More European nations already trade more with Asia than they do with North America. Germany, for example, sells more Mercedes and Porsche cars in China than anywhere else in the world. Rolex is taking away retail licenses in the US and Europe and setting up more retailers in Asia. As many Asian allies come together with China to sign a major trade deal, Europe will do the same and integrate with RCEP members. This will give Europe access to the largest trading group in an area with the largest economic growth. The Eurasian Economic Union (the trade union signed between Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan) has already signed a major trade deal with Vietnam. An EEU partnership with RCEP will complete Eurasian integration with Asia. A European, EEU, and RCEP partnership with support from China’s BRI project will integrate Asia and Europe.
China has also shown interest in joining the CPTPP trade deal (the former TPP free trade deal abandoned by the US). This will further integrate RCEP with other pacific nations in South America, Mexico, and Canada. This will make America truly isolated from a large global trading bloc.
Even though India was at the negotiating table for RCEP, India withdrew from the trade-in deal in 2019 due to increased tensions with China. But the trade bloc has opened the door for the country to re-join the RCEP. Still, India is the largest recipient of AIIB loans and is also the second-largest shareholder of AIIB. India’s largest trading partner is China and the nation’s tech sector has received a lot of investment and help from Chinese firms like Huawei, Xiaomi, and BBK Electronics (owner of the Oppo smartphone). India will see the benefits of RCEP and will be tempted to rejoin the RCEP. Just like for South Korea and Japan, for India geoeconomics will trump geopolitics.
The incoming Biden administration will have to engage with Asia in a different way. Forcing nations to choose the US over China will not work. The best way for the Biden administration to engage with Asia is to rejoin the TPP trade deal but negotiate this trade deal in a way that benefits all Americans. But regardless of the next administration, Asia will continue to integrate and create their own standards without help from the US.