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End of the Spaghetti Bowl: RCEP Does Not Create an Asia-Pacific Trade Bloc

Thursday, November 19, 2020

The signing of the Regional Comprehensive Economic Partnership trade agreement by 15 Asia-Pacific nations has been hailed in the region as a major economic advancement. The largest free-trade agreement ever concluded, writes Heribert Dieter of the Asia Global Institute, changes the perception that increasing protectionism is the only option for trade policy in the third decade of the 21st century. While RCEP is useful and highlights the benefits of lower trade restrictions, it is not a major breakthrough. The deal is a relatively weak agreement that will not result in the emergence of a monolithic Asia-Pacific trade bloc.

End of the Spaghetti Bowl: RCEP Does Not Create an Asia-Pacific Trade Bloc

The signing of the Regional Comprehensive Economic Partnership, November 15, 2020: The spaghetti bowl may get unwound but this is not a China-led trading bloc (Credit: ASEAN Secretariat)

The major achievement of the Regional Comprehensive Economic Partnership (RCEP), which was signed by 15 Asia-Pacific countries including China and the ten ASEAN member nations on November 15, 2020, is that it ends the opacity of trade agreements in the Asia-Pacific. For years, trade economists have lamented that the economic benefits of the numerous trade agreements in the region are limited because they result in more, rather than less, complexity in international trade. Free-trade advocate Jagdish Bhagwati of Columbia University famously labeled those crisscrossing bilateral trade agreements a “spaghetti bowl”. For companies, the reduction of tariffs in bilateral trade resulted in increased administrative costs. Companies had to spend a lot of money to document the origin of a product. Without a valid certificate of origin, a product does not qualify for any benefits or tariff exemptions in any free-trade arrangement.

The effects of these trade policies were disappointing. According to a study by the Pacific Economic Cooperation Council (PECC) in 2015, a large majority of companies did not utilize existing free-trade agreements. Then, a mere 22 percent of Asia-Pacific trade (counting only trade between countries in an FTA) was conducted using the regulations of the trade agreements. Meanwhile, 78 percent of trade was done by applying the standard rules and tariff schedules of the World Trade Organization (WTO). In other words, existing free trade agreements did not contribute very much to trade liberalization.

RCEP has contributed to limiting the administrative burden on trading companies. Once implemented, there will be a single set of rules of origin for all participating economies. Companies will still have to calculate whether the cost of documenting origin will be lower than the tariff they would otherwise have to pay. But it appears plausible to expect that the utilization rate of RCEP will be considerably higher than with the numerous previous trade agreements.

A violation of WTO rules

Nevertheless, RCEP is contributing to the further erosion of the multilateral trading system. Any free-trade agreement constitutes an exception from the Article 1 of the General Agreement on Tariffs and Trade (GATT), the legal foundation of the WTO. That “most favored nation clause” – all measures of trade liberalization are automatically granted to all WTO member countries – is not applicable in free-trade agreements. The exception is codified in Article 24 of the GATT. But to qualify, free-trade deals should cover “substantially all the trade”. RCEP does not. Agriculture is partly exempted, and so are fisheries. The regulations on trade in services are weak.

Thus, RCEP does not constitute a return to the trade-liberalization spirit of the 1980s and 1990s. It further weakens, rather than strengthens, the multilateral trading system. It may be beneficial to the participating economies but not for the world economy. Even for member countries, the effects will be marginal. According to a study by the Peterson Institute for International Economics (PIIE), RCEP countries will accrue up to an additional US$174 billion in GDP by 2030. Since the population of RCEP countries is well north of 2.5 billion people, the economic benefit for each individual will not be large.

A shallow deal

Some commentators have suggested that RCEP has created a China-led economic bloc. Those assessments are a misreading of the situation. RCEP is a shallow project. It does not contain rules for the protection of either the environment or workers. Compared to the other big trade agreement in the region, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), RCEP is much less ambitious and covers fewer contested areas. For instance, CPTPP has resulted in lower levels of protection for agricultural products in Japan. Since Australia and New Zealand, key exporters of agricultural products, are already members of CPTPP, there is no additional benefit for them in RCEP, at least with regard to trade in agricultural products.

More importantly, RCEP does not restrict the participating economies in their future trade policymaking. Unlike the European Union, which is a customs union that results in a unified trade policy of all European countries, RCEP continues to permit the participating economies to conduct their own trade strategy. Australia, for example, can conclude a free-trade agreement with the European Union if it wishes to do so. If RCEP constituted a customs union, the picture would be different. But in today’s political climate, it is hard to envisage that countries such as Australia or Japan would enter a customs union with the People’s Republic of China. RCEP is as close to Beijing as negotiators were willing to get.

High level of support for globalization

It is striking, nevertheless, that RCEP faced little, if any, political opposition in the participating economies. The main reason for the silence of civil society is that RCEP comprises what, at the risk of over-simplification, could be described as a coalition of “winners of globalization”. Today, societies in the Asia Pacific continue to demonstrate a high level of support for trade liberalization and a deep international division of labor. Whereas the old champions of globalization – primarily most of the developing countries in the West – are tired and wary, many Asian societies show a remarkable desire for more, rather than less globalization. In polls, Vietnam and the Philippines have continuously recorded the highest levels of support for globalization. For the populations in most RCEP countries, more trade is not a threat but an opportunity.

Thus, the often heard claim that the EU and the USA must now act and liberalize their own trade policies is a false and apolitical demand. Donald Trump won the 2016 election because he emphasized the negative effects of globalization for American blue-collar workers. In 2020, the support for a protectionist US trade policy may have risen further. President Joe Biden will not enjoy a lot of support for any free-trade policies, both within his Democratic Party and among US voters.

Europeans often assume that their countries are the champions of free trade. But of course, the EU is every bit as protectionist as the US. Trade in agriculture is severely restricted in Europe, and so is trade in some selected sectors, for instance in the automotive industry. Once the Covid-19 crisis is over, it is likely that the EU will further tighten its trade policy, for example, by introducing tariffs that penalize the importation of products that are not produced in a climate-friendly way. Needless to say, the supporters of that approach do not consider those policies as protectionist but rather as inevitable for saving the planet.

The signing of RCEP is a positive signal – that many societies continue to support trade liberalization. But RCEP will not change the future of international trade. It will provide some much needed administrative relief for companies and will facilitate trade in the region. All the political issues that have made deeper economic and political integration in the Asia Pacific difficult if not impossible continue to exist. RCEP will probably mark the high-water mark of integration in the region but it will not represent the emergence of an Asia-Pacific economic and (much less so) a political union.

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute

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