Economics & Trade Policy Global Policy Studies & International Security

The TPP Precedent and the RCEP Reality: Multilateralism in the Asia Pacific, Part 1

In direct affirmation of his campaign promise, President Trump withdrew the United States from the Trans-Pacific Partnership (TPP) just days into his first term. This set an unmistakable precedent not only for the “America First” administration, but also for the future of greater Asia-Pacific-U.S. relations. U.S. disengagement has drastically altered the course of economic integration in the Asia-Pacific region, fostering the emergence of new deals, new institutions, and new regional leadership.

Last fall, at the Asia-Pacific Economic Cooperation (APEC) annual meeting, the leaders of the world’s two largest economies took the stage to espouse two fundamentally competing ideas for the future of economic cooperation in the Asia Pacific.

In “America First” fashion, President Trump blatantly denounced multilateral trade agreements, remarking, “I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and will abide by the principles of fair and reciprocal trade.” Trump dashed any hope of future U.S. participation in regional trade deals, stating that the U.S. will steer clear of “large agreements that tie our hands, surrender our sovereignty, and make meaningful enforcement practically impossible.”

President Xi Jingping spoke to the future of globalization, stating firmly that it is an “irreversible historical trend.” Championing China as a leader of free trade, President Xi called for further regional economic cooperation: “We should support the multilateral trading regime and practice open regionalism to allow developing members to benefit more from international trade and investment.”

These contrasting remarks are a reiteration of the growing dichotomy between American foreign policy and that of our Asian trading partners. Historically, despite being a world trade hub, Asia is less economically integrated than other globalized regions. Today, budding trade deals, emerging institutions, and Chinese economic leadership are driving economic cooperation in the Asia Pacific.

In the wake of U.S. withdrawal from the TPP, globalization will continue. It has already begun to take shape in a number of ways, including the Regional Comprehensive Economic Partnership (RCEP), China’s Belt and Road Initiative (BRI), and the newly revived and revised Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

In this two-part series I will move through analyses of each of these agreements, paying particular attention to how each affects the U.S. This first article will be devoted to explaining the TPP and what is often noted as its alternative, RCEP.

The Trans-Pacific Partnership

Before examining what Asia-Pacific multilateralism will look like without U.S. participation, it’s important to talk about what could have been. The TPP, as signed by President Obama, involved twelve signatories: the U.S., Peru, Chile, Canada, Mexico, Malaysia, Singapore, Australia, New Zealand, Brunei, Vietnam, and Japan. That’s five Asia Pacific economies and a notable omission of China. The TPP would have encompassed over 40% of world GDP, one-third of world trade, and 800 million people, creating a market two times the size of the European Union. The TPP can be broken down into five overarching objectives:

  1. Reduce and remove tariffs over 30 years
  2. Enforce reforms for state-owned enterprises (SOEs)
  3. Increase connectivity and data sharing between partied states
  4. Enhance opportunities for service industries in developing nations
  5. Enforce high labor and environmental standards for all partied states

Essentially, the TPP would not only have established the world’s largest common market, it also would have created an effective channel to bypass existing and stagnant international financial institutions such as the WTO. The TPP was poised to spur necessary reform in developing nations, encourage cooperation and foreign direct investment, and solidify U.S. influence in the region.

Without the U.S., this version of the TPP loses over 60% of its combined GDP. Simply put, it won’t be the same. Nevertheless, multilateralism in the Asia Pacific will move forward. The U.S. has abdicated economic leadership in the region, leaving a vacuum that China seems more than willing to fill.

A power shift in the Asia Pacific is afoot. ASEAN states find themselves balancing a very delicate scale between engaging the U.S. and China. It is a fine line to walk, as one does want to fall completely within the orbit of either. U.S. disengagement and increasing Chinese leadership will inevitably tilt the scale towards a Sino-dominated region.

The Regional Comprehensive Economic Partnership

The Regional Comprehensive Economic Partnership (RCEP), which is expected to be finalized later this year, is made up of Japan, Australia, New Zealand, Brunei, Malaysia, Singapore, Vietnam, Cambodia, Thailand, the Philippines, Indonesia, Myanmar, Laos, South Korea, India, and China. The RCEP is made up of 24% of the world’s GDP, 46% of the world’s population, and encompasses all ten member states of ASEAN. The RCEP aims to lower tariffs but lacks the TPP’s broader ambitions.

The RCEP includes no provisions for labor or environmental standards, nor will it demand SOE reform in partied states. Participating states will not be given the same incentives for increased communication or investment as stipulated by the TPP. Consequently, the RCEP cannot and should not be discussed as a direct substitute for the TPP.

The RCEP will nominally increase trade among participants, but the tangible benefits received by both larger and smaller players will be slim. States such as South Korea and Japan have little to gain from marginal increases in regional trade while many small Southeast Asian (SEA) states such as Indonesia, states that are very dependent on commodities exports, are also unlikely to incur meaningful gains. For the great majority of its signatories, the RCEP is the inferior deal.

The true beneficiary of the RCEP is China. In the past, China has run trade deficits with its Southeast Asian neighbors. In the last decade, the opposite has been the case. China is both SEA’s largest import and export market. Top shares of both imports and exports are comprised of intra-industry trade in the electronic and manufacturing sectors. Lowering tariffs, especially on China’s generative sectors, will put regional manufacturing at risk. As a result, the scope of RCEP will likely be extremely narrow in order to protect regional industry. While a narrow deal won’t provide much in the way of gains, it will bolster Chinese economic leadership in the region.

The good news is that a narrow RCEP will come at a smaller economic cost to the U.S. Ultimately the true cost of the RCEP will be political rather than economic as regional leadership shifts away from the U.S. towards a growing, ambitious China. While it may not hurt American pocketbooks, the reality of the RCEP is that economic disengagement can and will come at a steep price to American hegemony.

Trump’s “America First” preference for bilateralism treats Asian economic integration as a possibility. In fact, it should be treated as an inevitability. Simply put, multilateralism in the Asia Pacific will go on with or without us. It is our choice whether or not to participate.

The RCEP is simply one avenue by which the Asia Pacific will move toward integration. As noted, in the next article I will explain China’s Belt and Road Initiative and the CPTPP. Until then, suffice it to say, our absence from these deals in no way precludes regional economic cooperation, it simply excludes us from the narrative.

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