Tag Archive for: RCEP

ASEAN’s productive year

Against all odds, Vietnam has concluded its chairmanship of ASEAN with the signing of the world’s largest trade agreement. The Regional Comprehensive Economic Partnership of all 10 ASEAN members states and China, Japan, South Korea, Australia and New Zealand combines a third of the world’s population and GDP. The signing of RCEP, on the final day of the 37th ASEAN Summit, capped a productive year for ASEAN, despite the coronavirus pandemic and the resort to virtual meetings. The summit concluded some 80 agreements among its members and dialogue partners—the highest number in over 50 years of ASEAN history.

A great deal of ASEAN’s success this year can be attributed to Vietnam’s ability to keep the focus on critical bread-and-butter issues. Defying initial expectations that traditional security and maritime issues would dominate Hanoi’s chairmanship, its largest contribution was to the economic domain, including trade, Covid-19 recovery plans, and innovation for a post-pandemic world.

The finalisation of RCEP is a big deliverable and reasserted ASEAN’s centrality in the economic architecture of East Asia, even as India opted out after years of negotiation. It is a symbolic accomplishment and contributes to the goal of connecting the Indo-Pacific via a dense network of trade—the so-called ‘noodle bowl’ of bilateral and multilateral trade agreements that serve to intertwine the economies of Southeast Asia and Northeast Asia.

Many RCEP members already have free trade agreements with one another. For example, Australia has ratified agreements with eight Asian countries and now is party to a third regional agreement. RCEP, however, is the first trade agreement outside the World Trade Organization that comprehensively brings together the two subregions of Asia.

Vietnam has been among the strongest supporters of free-trade networks, expanding the number of its own bilateral agreements, but also promoting connections to two of its top investors—the Republic of Korea and Japan. Of course, the RCEP mega-pact, as with all multilateral trade agreements, will not benefit all members equally and details of implementation will vary according to economic sectors and an individual state’s ability or willingness to conform. Indonesia, for example, has already declared it will exclude sensitive sectors rice and alcohol, meaning no relief there for Australian winegrowers facing punitive tariffs in the China market. But collectively, RCEP does present ASEAN’s unequivocal support for multilateralism, a rules-based regional agenda, and a rebuttal of the Trump administration’s tariff war.

On the wider strategic agenda, Vietnam is one of the strongest critics within ASEAN of China’s growing assertiveness in the South China Sea. Hanoi’s approach has been consistent in the face of growing pressure from Beijing over conflicting maritime territorial claims. While Vietnam has been candid about internal discord within ASEAN in responding to the US–China rivalry, it knows that it is unrealistic to expect all ASEAN members to be on the same page in their geopolitical calculations. Hanoi tried to bridge issues that threaten the group’s unity by focusing on collective initiatives for a post-Covid recovery, in line with its chairmanship theme of a ‘cohesive and responsive’ ASEAN community. As such, while the South China Sea issues featured, neither they nor the economic and environmental challenges of Mekong River use dominated this year’s discussions.

Vietnam’s successful battle with Covid-19 within its borders has been critical for its leadership of ASEAN this year. Hanoi needed to perform at its best—it marked the 25th anniversary of its membership of the regional grouping. Joining ASEAN was particularly important for Vietnam. It broke the diplomatic isolation it fell into after the end of the Cold War. Since then, Vietnam has earned a reputation as a strong contributor to ASEAN—a high benchmark it needed to uphold. Both external and internal factors compelled Hanoi to perform well. Other important anniversaries in 2020—the 10th anniversary of the ASEAN Defence Ministers Meetings Plus, an initiative that Hanoi proposed in 2010 when it last chaired ASEAN, and the 15th anniversary of the East Asia Summit—also required Hanoi to go the extra mile.

Apart from the need to assert strong leadership in a challenging geopolitical environment, Hanoi needed a spotless performance for the sake of its own legitimacy as the congress of the ruling communist party approaches next year. Strong international performance, and even leadership, are among the conditions for domestic political support.

While Vietnam’s chairmanship has been instrumental in steering ASEAN through challenging times for the region’s economic and health security, it is the developmental agenda that can truly unite this diverse group. Among other summits, Hanoi hosted the ASEAN – United Nations dialogue, which acquired special prominence given the setbacks Covid has caused to efforts to meet the UN Sustainable Development Goals. The Asian Development Bank estimated that some 15 million people in Southeast Asia could fall back under the poverty line. With most economies in the region expected to contract (Indonesia and the Philippines have already officially fallen into recession), any conversation about a post-Covid recovery needs to be a collective one. In that regard, ASEAN’s continuous efforts to sustain the cooperation framework in spite of the geopolitical climate are both pragmatic and useful.

By that token, Australia’s pledged contribution to ASEAN’s recovery was well received. The regional grouping’s oldest dialogue partner has already pledged to support equitable access to vaccines under the Gavi initiatives to the Pacific and Southeast Asia. This is on top of offering Indonesia a special loan of $1.2 billion. At the East Asia Summit, Prime Minister Scott Morrison unveiled another development and aid package of $550 million to ASEAN. Notwithstanding the continuing decline in real terms of Australia’s overseas development aid, the Morrison government’s latest initiatives signal its willingness to support the region at a critical time.

Vietnam can draw satisfaction from all this ASEAN-centred activity. Despite ASEAN’s worries of becoming beholden to great-power competition, Vietnam, while well aware of the gravity of geopolitics, has managed to steer ASEAN back to the zone of cooperation. As the November summits showed, there are no shortage of issues that require collective commitment.

Vietnam’s chairmanship allowed ASEAN to surmount some of the challenges created by Covid and set the region on the right path towards recovery. But the ASEAN process is a continuous one. The next two chairs in succession, Brunei Darussalam and Cambodia, face challenges of post-pandemic recovery for the region, and most likely an even more complex external environment, as the great-power competition is not going away.

Free trade isn’t dead yet

Conflict over trade dominated the economic headlines in 2019, so it’s surprising that the year ended with significant progress on three trade agreements. Each tells a different story about the outlook both for the global economy and for relations between nations.

As well as the deal struck between the United States and China last week, the Trump administration won agreement from the Democrats for changes to the revised trade deal with Mexico and Canada that is now almost certain to be legislated.

On the other side of the world, a meeting of ASEAN officials set a date of 13 March 2020 for signing the Regional Comprehensive Economic Partnership agreement, whether recalcitrant member India decides to participate or not.

RCEP, which was intended to include the 10 ASEAN nations plus China, India, South Korea, Japan, New Zealand and Australia, was originally conceived as a fairly limited agreement lowering tariffs on non-controversial items, but has been transformed since negotiations began in 2012 into a sweeping economic agreement that includes services, the digital economy, foreign investment, intellectual property and supply-chain management.

The ‘phase one’ deal between the US and China gives the lie to President Donald Trump’s bold tweet in early 2018 that ‘trade wars are good, and easy to win’. The US agreed to this partial settlement because the trade war was imposing an unacceptably high cost on the farmers who were crucial to Trump’s 2016 victory.

China’s share of US soybean exports, for example, had plunged from a peak of more than 70% to just 5%.

The deal delivers the US farm sector some gains, potentially at the cost of other suppliers including Australia and Brazil. It also halts what threatened to be a major escalation in the tariff war and includes the partial rolling back of some tariffs.

The motives for the US-led trade war were always mixed, including a desire to narrow the US trade deficit, a belief that China was competing unfairly because of the role of the state in its economy, China’s appropriation of US technology, and a more general strategic competition between the long established and the newly rising powers.

The deal includes some additional (as yet unspecified) technology protections, but otherwise leaves these issues untouched. While failing to address the underlying US concerns, the deal is entirely one-sided, with all the concessions being made by China. It reflects the US administration’s belief that it will win a better deal exercising its muscle over trading partners on a bilateral basis, rather than through the World Trade Organization.

The deal includes a dispute-resolution mechanism, which is ironic given that the US forced the WTO’s trade dispute appellate body to shut down last week by vetoing all appointments of new judges as the terms of existing judges expired.

The new replacement for the North American Free Trade Agreement, by contrast, is consistent with WTO rules. While Trump damned NAFTA during the election campaign, describing it as the worst trade deal the US had ever signed, the updated deal reached with Canada and Mexico in May was more of a tweak than a rewrite.

Canada and the US agreed to some opening of their dairy markets, while motor vehicles are required to have 75% of their content made in the trade zone to qualify for tariff-free trade, up from 62%. A new requirement is that between 40% and 45% of a vehicle’s components must be made by workers earning at least US$16 an hour, which is about three times the going rate in Mexico. There are new chapters on intellectual property and digital commerce, which are broadly similar to those in the original Trans-Pacific Partnership agreement that the Trump administration rejected. These chapters largely reflect the interests of US technology firms.

The Democrats and US unions were persuaded to support the deal by the creation of a panel to vet Mexico’s adherence to labour standards and by strengthened environmental standards. Mexico’s objections to the monitoring of its labour standards may yet undo the deal.

While the labour clauses reflect a new US protectionism, the deal shows that the Trump administration, the Democrats and the US labour movement all accept that WTO-consistent agreements which make it easier to trade can be in America’s national interest.

The RCEP trade agreement, which doesn’t include the US, shows that the flame of free trade remains ablaze in the Asian region.

Details have not yet been released, but it’s understood that 95% of goods traded across a region representing almost a third of the world economy would eventually be tariff free.

The investment chapter originally asked members to state which sectors of their economies would be open to foreign investment, with everything else assumed to be restricted. The latest version requires countries to specify which sectors are restricted, with everything else assumed to be open to foreign investment.

The chapters on trade facilitation and services are designed to reduce the bureaucratic barriers to businesses trading and operating across borders.

India’s decision in November to withdraw from the agreement was a blow to the aspirations of its advocates, who had hoped that it would gather enough momentum to offset the rise of protectionism in the US and elsewhere.

India, which has had a formal ‘Look East’ policy to strengthen relations with Asia, was close to concluding the RCEP deal, but got cold feet over fears that Chinese firms would prove too competitive for their Indian counterparts. Despite postponing a visit to India, Japanese Prime Minister Shinzo Abe is still working to persuade Indian Prime Minister Narendra Modi to change his mind.

The growth of trade has been fundamental to the dynamism of Asian economies over the past two decades, and RCEP is calculated to bring fresh energy to regional commerce at a time when trade flows globally have been flagging.

Besides its purely economic significance, RCEP has strategic importance. Japan and South Korea have been using trade restrictions as weapons in their dispute over the extent of Japanese contrition for wartime atrocities; RCEP would put a stop to that by binding both to a new open trading framework. A formal regional trade agreement that ties Japan and China also strengthens economic bonds otherwise vulnerable to nationalist disruption.

Above all, RCEP shows that ASEAN is not simply a marriage of convenience among disparate but geographically proximate nations. ASEAN has been the driving force behind RCEP, forging what is likely to become an important component of the institutional architecture of global trade. This is being achieved at a time when trade liberalisation has been confronting its greatest threat in 80 years.