RCEP: A Trade Pact amidst a Fracturing Factory Asia

Through its Secretary General Dato Lim Jock Hoi, ASEAN proudly proclaimed that the RCEP signing is an affirmation of the leadership role or “centrality” of the ASEAN in the promotion and formulation of bilateral, regional and multilateral trade agreements in the world. The ASEAN Member States -– Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam – have been trying to build an “ASEAN Economic Community” (AEC) since the turn of the millennium. The AEC idea seeks to transform the region into “one ASEAN market” and “one production base” through programs facilitating the free movement of goods, capital, services and skilled labor within Southeast Asia (AEC Blueprint 2015 and AEC Blueprint 2025). RCEP widens the AEC ambition of ASEAN, that is, to have an FTA market several times bigger than the AEC.

The ASEAN’s partners in the RCEP are China, Japan, New Zealand, South Korea and Australia. These countries happen to be the most dynamic in the Asia-Pacific and among the most technologically-advanced in the world.   

China is widely acknowledged by the mass media as the RCEP’s leader. China had been pushing for the early conclusion of the RCEP negotiations, which started in 2012. Additionally, China, together with Japan and South Korea, is at the center of "Factory Asia" (Choi Byung-il and Changyong Rhee, 2019). China and the 14 other RCEP signatories have been flooding the world market with a dizzying array of industrial goods and services produced through the Global Value Chains (GVCs) set up in the Asia-Pacific by the multinational corporations. Due partly to the GVC system, China has become a major trade partner of all the RCEP signatories, with China doing most of the final stages of assembly work for various industrial products exported by Asia to the world market. For China, RCEP is another instrument to consolidate its leadership in Asia’s GVC system.

Subdued ASEAN response  

And yet, the response to the RCEP among the signatory countries has been relatively subdued. A grand celebration that is normally organized after a major global trade deal was somehow missing. No fireworks and no champagne bottles uncorked.

There were only scanty reports on the upward movement of stock market indices in some signatory countries such as China, Japan, South Korea and Australia (cnbc.com, 2020). All these countries happen to be the “Dialogue Partners” of the ASEAN. They see RCEP as advantageous to them in terms of having bigger markets.

But by and large, the response across the ASEAN bloc was subdued. There are at least two major reasons for this:

RCEP signing amidst a pandemic

First, the RCEP signing happened amidst a global pandemic that has flattened the economies of all the ASEAN countries (Menon, 2020). Only Vietnam, Myanmar, Laos and Brunei succeeded in keeping their GDP growth positive in 2020; however, the decline in their GDP growth was still sharp and severe. The original ASEAN 5 (Indonesia, Malaysia, Philippines, Singapore and Thailand) are all in recession/depression in 2020, registering negative growth that was last seen during the 1997-98 Asian financial crisis. The prognosis is that recovery for most of the ASEAN countries will be slow and gradual in 2021-22.  

National lockdowns have also become a rolling phenomenon, meaning the relaxation of quarantine protocols can be followed by the imposition of strict quarantine and isolation rules whenever there is a surge or resurgence of COVID-19 infection. These lockdowns hit hard the two major pillars of ASEAN economic growth: tourism and the GVC system. Both pillars require open borders and open trading systems, both of which have been shut down by the pandemic. The disruption of GVC operations due to weakened global market demand and paralyzed transport and logistics facilities led to temporary closures of many GVC factories; in some countries, the closures are permanent.   

Hence, the November RCEP signing at the ASEAN Summit hosted by Vietnam in November 2020, conducted online, was a surrealistic spectacle. How could a pact for borderless trade be adopted by countries whose national borders have been closed by COVID-19?

RCEP consolidates the ASEAN “noodle bowl” of FTAs

There is, however, another and more cogent reason for the subdued response of the ASEAN countries. The pact will not necessarily usher in major changes in the existing economic structure of the ASEAN and the individual ASEAN Member States.  

RCEP is just one level above the existing system of FTAs forged either by the ASEAN as a bloc or by the individual ASEAN countries in the last two decades or so. This has resulted in a confusing “noodle bowl” of free trade pacts that are focused on the freer movement of goods and services, which happens to be the same focus of RCEP. The UN Development Program noted as early as 2005 (UNDP Regional Center) that Asia, ASEAN in particular, had nurtured a “great maze” of over a hundred bilateral and regional FTAs since the establishment of the World Trade Organization (WTO) in 1995.

The proliferation of these FTAs in the ASEAN and other regions of the world was partly a response to the failure of the WTO to push its deeper global trade liberalization agenda in the new millennium.  A series of WTO Ministerial Conferences -- Seattle (1999), Cancun (2003) and Hongkong (2005) – had been shuttered by protests organized by trade unions and civil society organizations as well as by the unresolved differences among participating governments on how the WTO “new” round of trade liberalization would proceed.      

Within the ASEAN, the motivation for FTAs making is to promote regional economic integration through greater intra-ASEAN trade. Among the early major agreements are the ASEAN Free Trade Agreement (AFTA), ASEAN Framework Agreement on Services (AFAS) and ASEAN Comprehensive Investment Agreement (ACIA). These agreements have been bundled together under the AEC Blueprint (2015 and 2025).

However, progress in the realization of AEC has been slow. The ASEAN consists of ten countries with ten different levels of development. Their economies are not complementary; sometimes there is even competition in certain areas, such as  garments manufacturing or agricultural production. Thus, growth in intra-ASEAN trade has remained stagnant, accounting for a quarter of the total global trade of the ASEAN Member States.  

To improve intra-ASEAN trade, the ASEAN, in its AEC Blueprint 2025, came up with a list of trade-facilitating measures in 2016. And yet, the implementation of these measures has been poor. Lau Zhou and Natasha Tan (2020) of the ASEAN Prosperity Initiative wrote that five years after the launching of AEC 2025 in 2016, only 15 per cent of the liberalization measures have been fulfilled. Worse, non-tariff barriers (NTBs) have been increasing rapidly. The NTBs include quantitative export restrictions and tighter rules on domestic quality standards, inspection procedures and customs regulations.

As to trade relations with its “Dialogue Partners”, the ASEAN and the individual ASEAN Member States had been negotiating FTAs with each one of them before the RCEP signing.  The process started with the three East Asian neighbors: China, Japan and South Korea.  This gave birth to the “ASEAN + 3” tag on ASEAN trade partnership with these three non-ASEAN countries. The trade talks have been focused on bilateral one-on-one trade relations as well as on a “comprehensive economic partnership” between the ASEAN and each of the three.  Then the “ASEAN + 3” became “ASEAN + 3 + 3”, when Australia, New Zealand and  India became “Dialogue Partners” too of ASEAN.  With the RCEP signing, the foregoing “ASEAN + 3 + 3” has become meaningless.   

Reality: RCEP is shallow integration

Will the consolidation of the various FTAs under RCEP spur more robust intra-regional trade relations? The quick answer: not so much given the incremental pace the ASEAN’s trade facilitation program and, the lack of depth and breadth in the RCEP as a trade pact.

US critics of RCEP have been blunt.  For example, Joshua Kurlantzick of the US Council on Foreign Relations (2020) wrote:

“RCEP is not a complete free trade agreement. It codifies the removal of tariffs mostly on items that are already exempted due to other free trade deals, and it has a large loophole under which countries can maintain tariffs in a broad range of sectors; it will not result in some massive increase in intra-regional trade in the short term”.

China, the presumed leader of RCEP, does not dispute the shallow character of RCEP. Dan Steinbock, writing for  China Daily (December 11, 2016), explained that “shallow integration” is better suited to the emerging economies of Asia “where governments play a critical role in economic development” and “the idea of national sovereignty is vital”.  Of course!  China, the RCEP leader, has a state-led economy. It cannot afford to participate in a trade agreement that requires the government to give up its leadership role in industrial and agricultural development, procurement of goods and services needed by the populace and so on.

One major indication of the shallow character of RCEP’s integration is the elimination of 90 percent of tariffs on imports between signatories within 20 years of coming into effect.  This is consistent with the ASEAN style of regional governance, that is, “slow by slow” consensus taking.  Note how the original ASEAN target of fully realizing AEC by 2015, set or published in 1997, has been extended to 2025 via the AEC 2025 Blueprint.

Other indicators of shallow integration are all over the text of the RCEP agreement. Divisive topics such as labor and environment are not included. Government procurement, the perennial target of neo-liberalizers for abolition, is even recognized as necessary in furthering regional integration and enhancing economic development.  Dispute settlement is focused on consultation and reliance on WTO guidelines. The least developed countries – Cambodia, Laos and Myanmar --  are given space and time in the fulfillment of liberalization schedules. Signatory countries are also given 18 months or until 2022 to complete the ratification of RCEP. Even India, which withdrew from the negotiations in 2019, is asked to reconsider and rejoin RCEP anytime.

Reasons for India’s withdrawal     

The shallow character of the RCEP’s regional economic integration thrust is based on the need to preserve unity among the 15 signatory countries with different levels of development and national priorities. The architects of RCEP does this by coming up with an agreement that lacks the depth and breadth of a trade and economic agreement such as the European Union’s custom union or the North American Free Trade Agreement (NAFTA). The idea is to have an RCEP that is acceptable to all.   

And yet, not all are fully prepared for RCEP. The most publicized case is that of India, which played a prominent role in the RCEP negotiations until its withdrawal in late 2019. India’s worries are fully documented (Gaur, 2020).  India, which runs trade deficits with most of the RCEP signatory countries fear that its domestic market would be flooded with Chinese manufacturing goods that it calculates would ruin many Indian industries and farms. India is also fearful that its large dairy sector would be swamped with dairy products coming from Australia and New Zealand. On the other hand, India’s proposals for the freer movement of workers (under Mode 4 of trade in services) and special and differential treatment failed to get the nod during the negotiations.

India, however, was also critical of China, the RCEP’s leader. It accused China of “protectionist policies”, pointing out that India’s trade deficit with China was due to China’s “unfair, restricted market access”, not due to “comparative advantages playing out” (Yuda and Sharma, 2019).  

Another RCEP complication: Some members joining rival CPTPP

What is clear is that India has been extra vocal about its national interests.  But other countries, less vocal about their  national concerns, are also extra sensitive.  They have been re-strategizing their overall position in the trading and GVC systems of Asia. In particular, there is a group of RCEP countries which are also members of a rival FTA – the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These are Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam.

The CPTPP is the product of an American initiative – the Trans-Pacific Partnership (TPP). The TPP was launched by President Barack Obama as a counter-weight to the China-led RCEP.  But unhappy with Obama’s trade initiatives and angry at America’s trade deficits with China, Japan and Europe, President Donald Trump unilaterally withdrew from the TPP.   

However, Japan and other members of TPP decided to stick to the TPP project by re-naming it as CPTPP and loosening some of the proposed contentious TPP rules (e.g., strict clauses on intellectual property rights), which paved the way for the CPTPP signing in 2018.  In short, the RCEP-CPTPP Asian countries are not confining themselves to RCEP when it comes to trade in Asia. In pursuing their respective national interests, they have ironically become members of the two rival regional economic blocs.  

They are also re-strategizing their GVC program in Asia, partly in response to the US-China trade war. Japan, for example, is investing heavily on Vietnam, Indonesia and India.  Japan and Australia even agreed with India in the launching of a supply chain “resilience” program in the Indo-Pacific region, which seeks the development of supply chains that are not dependent on China (Tani and Gaguto, 2020). 

US-China trade war: a major  disruptor of the GVCs 

The biggest disruptor of the Asian GVC system is the US-China trade war.

The  Obama Administration conceived the TPP project to counter the growing economic might of China and the latter’s leadership in the RCEP.  However, President Donald Trump had no patience for trade diplomacy and no subtleties in dealing with trade partners enjoying positive trade surpluses with the United States. Trump withdrew from the TPP and openly launched a “US-China trade war”. 

One outcome of the trade war, reduced by Trump into a major tariff war, is the relocation of some GVC factories out of China. The main beneficiaries of the GVC factory exodus are Vietnam, Indonesia and India. However, China itself is engaged in the relocation business. One rationale: escaping the higher tariffs imposed by the United States on exports coming directly from China (Miura, 2019). But another rationale: China is getting expensive as a location for GVC operations dependent on cheap labor as a comparative advantage.

Enters the Belt and Road Initiative (BRI)

A year after the start of the formal RCEP negotiations, China came up with its “One Belt, One Road” Initiative in 2013.  Now called simply as the  “Belt and Road Initiative” or BRI, this China project is an ambitious program to tie as many countries as possible to China. It is aimed at promoting development partnership between China and its trade partners along the imaginary Silk Road Economic Belt and the Maritime Silk Road involving initially over 65 countries of Asia, Africa and Europe (Serrano et al, 2019).  The two Belts now reach all the way to Latin America.

The focus of the BRI is to help finance the infrastructure needs of countries signing on to the BRI.  The estimates of how much China would spend for the BRI program has been rising, from an initial figure of US$ 1 trillion to tens of trillions of dollars. For this purpose, Beijing established the Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB), which is similar to the ADB and World Bank in lending and development assistance operations (Serrano et al, 2019).

Will the BRI spawn new GVCs led by Chinese firms which enjoy facilitation assistance, courtesy of infrastructure spending funded by the AIIB and China Eximbank? The answer is obviously yes, but the shape of the new Chinese GVCs is clearly still a work in progress.  

Technological Revolution: another major disruptor

Given the foregoing outline of the RCEP, RCEP-CPTPP rivalry, US-China trade war and the BRI, the architecture of "Factory Asia" is changing in a complex way. To this changing complexion, one must add the role of  the technological revolution sweeping the globe. Robotization and automation of various industries and business  are disrupting industries and work processes in the Asia-Pacific, just like in Europe and North America.  

The “fragmentation” of work in big industries allows the big corporations to outsource labor-intensive production such as assembly work to low-cost producers.  This outsourcing is beginning to decline, partly due to the Fourth Industrial Revolution or “industry 4.0”.  Advances in technology enable big corporations to do more integrated production at home, thus minimizing  the outsourcing of work at labor-intensive processes (Ofreneo, 2019).

In its 2020 World Investment Report, the UN Conference on Trade and Development (UNCTAD) declares that a “new industrial revolution” (NIR) is shaping the international production system, particularly the GVC system of the MNCs.  Robotics-enhanced automation, enhanced supply chain digitalization and additive manufacturing can alter the global outsourcing system depending on the policy on trade and investment.  The technology revolution can trigger the following changes in the GVC system: 1) re-shoring (less fragmented value chains and less investments in GVC-hosting countries), 2) regionalization (GVC investments focusing more on regional markets rather than global production), and 3) replication (shorter value chains and rebundling of production stages).   

The above NIR scenario outlined by UNCTAD has serious implications on "Factory Asia", which is largely a product of global outsourcing work by American, European and Japanese MNCs.  Should these firms decide to take full advantage of industry 4.0, the existing GVC system in Asia for each MNC is likely to change.  The overall demand for labor is also likely to decline.

Will RCEP help offset the labor displacement impact of industry 4.0?  The only clear answer: there will be some winners but many losers.  

What has been the response of the trade unions and CSOs to RCEP?

In the 2020 “virtual” ASEAN People’s Forum held on November 5-7, 2020 in Hanoi, around 1,200 CSO participants from the ASEAN countries issued a concluding Joint Statement. Among the demands raised by the participants: an alternative economic regionalism, one that is not “purely market-oriented”. The Statement calls for a reversal of free-trade economic development policies and movement “away from such FTA as RCEP” (APF, Joint Statement, 2020).

The truth is that RCEP and the ASEAN’s bowl of FTAs have no constituencies among the trade unions and CSOs in the ASEAN and in the larger Asia-Pacific. Trade unions have been blaming the FTAs and the search of MNCs for cheap, docile and non-unionized workers as the root causes of falling labor standards, inequality and even joblessness across Asia-Pacific (Ofreneo, 2013).

The unemployment problem is due to the twin realities: 1) the GVC system weakens the domestic industries and capabilities of a host country, and 2) "Factory Asia" does not hire everybody (Ofreneo, 2013). On the other hand, the disruptive impact of the FTAs on the agriculture sector of developing countries is one reason why the WTO has failed to advance its new trade liberalization agenda. The foregoing are precisely the reasons why India’s trade unions, peasant movements and industry associations succeeded in stopping India’s Narendra Modi in signing on to the RCEP.  

As to social and economic inequality under the ASEAN bowl of FTAs, the APF 2020 participants cite the 2019 Report of the UN Economic and Social Commission for Asia and the Pacific (ESCAP), which says that the region is characterized by “widening wealth concentration and worsening hunger, food security, nutrition and sustainable agriculture indicators”.  ESCAP said that Southeast Asia is on course to “to miss all” the 17  SDG targets set by the United Nations as the global indicators of growth and development.  APF 2020 participants assert that RCEP will only “magnify”  inequalities within and between countries.

Conclusion

The RCEP signing came at a time of great uncertainty for "Factory Asia". The GVC system is  rocked by the intensifying great-power rivalry between the United States and China amidst a technological revolution that is re-shaping the system of industrial production and outsourcing worldwide.  It is also affected by the rise of protectionist sentiments among RCEP and CPTPP countries despite their hollow free-trade rhetoric. Developed countries are re-strategizing their global and Asian investment programs in accordance with their own national interests, while the less developed countries in ASEAN are pushing for a slow-by-slow program of investment liberalization under RCEP. It is indeed a VUCA world – vulnerable, uncertain, complex and ambiguous.

However, for the working people of ASEAN, East Asia and the Asia-Pacific, the RCEP’s arrival is puzzling. It has not received a warm welcome from the people at the grassroots. This is so because past and existing FTAs have not delivered the promised gains from a free-trade arrangement: full employment, social protection and  well-being for the working people.  These FTAs have instead unleashed a race to the bottom among GVC investors and even among host governments, as the latter try to roll back workers’ rights just to attract foreign investments. Thus, in the APF 2020, RCEP received wide condemnation from the 1,200 participants coming from all the ASEAN countries.   

 Yes, regional economic integration is desirable IF –

• the rules of trade are fair and the outcomes beneficial to all,
• there is pragmatic recognition that not all countries are equal, and that the principle of special and differential treatment is respected to give each country policy space to determine national priorities in accordance with its level of development,
• the social dimension of regional economic integration fully addressed, specifically the poverty, health, social and environmental concerns of whole society, and
• the affected sectors of a trade pact – trade unions, peasant organizations, business associations, micro-small enterprises – are informed, consulted and involved in the crafting of the trade pact.

The point is that a trade pact should be based on a clear social contract, at the national and regional levels.  It is a social pact where the working people are at the center, not as objects of development but as the principal agents of change.

REFERENCES:

ASEAN Leaders, 2020. “Joint Leaders’ Statement on the Regional Comprehensive Economic Partnership (RCEP)”. Downloadable at: https://asean.org/storage/2020/11/RCEP-Summit-4-Joint-Leaders-Statement-Min-Dec-on-India.pdf.

ASEAN People’s Forum 2020. “ASEAN People’s Forum 2020 Joint Statement”, Hanoi, November 5-7, 2020.  Downloadable at: https://apf2020.org.vn/news/358/joint-statement.

ASEAN Secretariat News, 2020. “ASEAN hits historic milestone with signing of RCEP”, in ASEAN.org website, November 16. Downloadable at: https://asean.org/asean-hits-historic-milestone-signing-rcep/.

Byung-il, C. and Rhee, C., 2014. Future of Factory Asia, Mandaluyong City: ADB and Korea Research Institute.

ESCAP, 2019. Economic and Social Survey of Asia and the Pacific 2019: Ambitions beyond growth, Bangkok: ESCAP.  Downloadable at: https://www.unescap.org/publications/economic-and-social-survey-asia-and-pacific-2019-ambitions-beyond-growth.

Gaur, P., 2020. “India’s withdrawal from RCEP: neutralizing national trade concerns”, in Journal of the Asia Pacific Economy, London: Routledge Taylor & Francis, pp. 1-19. Downloadable at: https://www.tandfonline.com/doi/full/10.1080/13547860.2020.1809772.

Kurlantzick, J., 2020. “The RCEP Signing and Its Implications”, a blog post in the website of the US Council on Foreign Relations, November 16. Downloadable at: https://www.cfr.org/blog/rcep-signing-and-its-implications.

Menon, J., 2020. “ASEAN Recovery Outlook 2021: Cooperation to Reopen Borders”, in ASEAN Integration Report 2020, Singapore: ASEAN Prosperity Initiative, pp. 6-15.

Miura, Y., 2019. “The Impact of US-China Trade Friction on Asian Supply Chains”, in Pacific Business and Industries, XIX, No. 74, Tokyo: Japan Research Institute.

Ofreneo, R., 2013. Asia & the Pacific: Advancing Decent Work Amidst Deepening Inequalities, Singapore: ITUC-AP.

Ofreneo, R., 2019. Unionism and the future of work in ASEAN, Singapore: FES. 

Serrano, M. and Pupos, E., 2019. The Belt and Road Initiative in Asia, Geneva: Building Workers International.

Steinbock, D., 2020. “RCEP: Why world’s largest free-trade pact matters”, in China Daily.com.cn, November 16. Downloadable at: https://www.chinadaily.com.cn/a/202011/16/WS5fb2438da31024ad0ba946e4.html

Tan, W., 2020. “Asia markets bounce as countries in region sign giant trade deal”, in cnbc.com, November 15. Downloadable at:  https://www.cnbc.com/2020/11/16/asia-pacific-markets-apac-trade-deal-rcep-oil-and-currencies.html.

UNCTAD, 2020. World Investment Report 2020, Geneva: UNCTAD.

UNDP Regional Center, 2005. The Great Maze: Regional and Bilateral Free Trade Agreements in Asia, Colombo: UNDP Regional Center.

Yuda, M. and Sharma, K., 2019. “Up in the Air: Asia races against the clock to save the RCEP”, in Nikkei Asian Review, Tokyo: Nikkei, Inc., September 23-29, pp. 32-35.

Zhou, L. and Tan, N., 2020. “Post-COVID Supply Chain Reconfigurations: Convergence or Divergence in ASEAN Economic Integration?”, in ASEAN Integration Report 2020, Singapore: ASEAN Prosperity Initiative, pp. 16-28.

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On text of RCEP, please go to ASEAN.org; for the summary of the RCEP agreement, go to: https://asean.org/storage/2020/11/Summary-of-the-RCEP-Agreement.pdf.

*The views expressed in this article are not necessarily those of Heinrich-Böll-Stiftung.