There could not be a better timing for China to announce such a huge trade deal in the midst of presidential reshuffling in the US. Furthermore, among many of the wild cards that China could use during the period of political vacuum in the US, opting for trade liberalization is a great plus for China’s image and probably more relevant in economic terms and any other more aggressive option which the media has been discussing, from Taiwan to the South China sea.
Still, it is important to note that the Regional Comprehensive Economic Partnership (RCEP) negotiations have been dragging for eight years and that the final agreement has been watered down in terms of key liberalization measures. Not only was the geographical coverage bigger when the negotiations started– with India – but the scope in terms of liberalization was also larger. Furthermore, when RCEP started as response to the Trans-Pacific Partnership (TPP), the US- China strategic competition was just starting while it is now pooling RCEP members in different directions today. The best example is recent trade frictions between China and Australia but there could be many others. In the same vein, increasingly pervasive US sanctions against China targets will not help making RCEP a success.
While the US – as well as Europe – are key losers remaining outside of this deal, the biggest winner might not necessarily be China. China is no doubt bound to benefit but other members within RCEP may benefit even more. China will face less barriers to exports into the rest of Asia (including e-commerce). But ASEAN, on the one hand, and South Korea and Japan, will find it easier to build their value chain where production is based in ASEAN with North Asian investment. In fact, ASEAN has been receiving an increasing amount of manufacturing FDI from Japan, South Korea and Taiwan, which is already bigger than their FDI into China. Such sharp increase in investment into ASEAN is not only a response to higher labor costs in China but also to diversify away from an excessively China-centric value chain. Thanks to this, Japan, South Korea and Taiwan’s trade integration within ASEAN has also been increasing, especially when focusing on intermediate goods. Against this backdrop, ASEAN will likely grow its own manufacturing capacity, thanks to North Asia’s FDI. However, a good chunk of the final demand might still be in China.
In sum, while the actual increase in market access will remain limited among some of the RCEP members (such as Australia and China), the importance of this deal is for the world to realize that Asia is still dependent on the Chinese market and that Asian countries cannot pass on the opportunity of improved (even if still limited) market access into China. As for the relative losers outside of the deal such as the US, we would imagine that the Biden administration will soon react by engaging in negotiations for a trade deal with Asia.
Source: Natixis Asia Research