China Watch Vol. 2, No. 6, February 2022
RCEP’s Impact on China and Its Future Options
SU Qingyi[1]
Deputy Director of the International Trade Division of the Institute of World Economics and Politics, Chinese Academy of Social Sciences
The Regional Comprehensive Economic Partnership (RCEP) agreement has been signed and is expected to come into force next year. Considering the rather large differences of development level among the RCEP parties and the turbulent background to the negotiations, it was not easy to achieve an agreement up to the current standard level. RCEP can bring great economic and strategic benefits to China, but the benefits in terms of reform and opening up will be limited. While it should actively stabilize RCEP, China should also take the initiative to resolve various difficulties in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) as soon as possible. China’s ultimate goal is to have the ability to dominate the world trading system in 15 to 20 years and promote the establishment of a system that is beneficial to itself.
- The Impact of RCEP on China: A Four-dimensional Perspective
First of all, it should be affirmed that the RCEP is already the highest-standard free trade agreement (FTA) that China has signed. Considering the rather large differences of development level among the RCEP parties and the turbulent background to the negotiations, it was not easy to achieve an agreement up to the current standard level. When analyzing the impact of a trade agreement, we cannot just look at the impact on GDP, trade investment, or well-being based on the results of numerical simulations, which are actually just an analysis of economic benefits. It is necessary to look at the impact of the agreement in its entirety. We believe that the impact of RCEP on China can be analyzed from four dimensions: trade in goods, market opening, institutional rules, and strategic impact. These four dimensions correspond respectively to economic benefits, opening benefits, reform benefits, and strategic benefits.
The first dimension is trade in goods, which can be further divided into three areas: tariff reductions, reductions of trade barriers, and rules of origin. Whether tariff barriers or non-tariff barriers are lowered, the purpose of doing so is to promote the freer movement of goods. On the one hand, it promotes exports for the parties to the agreement, which is conducive to the growth of GDP, and on the other hand, by expanding imports, the needs of consumption and production can be better met. Rules of origin actually affect trade costs as well. More uniform rules of origin would facilitate the free movement of goods within the region. Goods that would not otherwise be recognized as originating goods are more likely to be recognized as originating goods after the agreement takes effect, and as a result they will enjoy the benefits of tariff reductions.
The second dimension is market opening. The first dimension is actually the opening of the goods market. But to distinguish the second dimension from this traditional opening, we take market opening in the areas of trade in services, investment, and government procurement as the second dimension. There are special market access lists in the agreement for these three areas, and each can be divided into the positive, negative, and mixed list models. If we say that the extent of the tariff reductions and the relative length of the transition periods in the tariff reduction schedules reflect the opening up of the goods market, then these lists actually reflect the opening up of the service, investment, and government procurement markets.
The third dimension is institutional rules. International economic and trade rules have been constantly evolving, from traditional rules to the current high-standard ones. What are we to call some of the rules that the United States has promoted in recent years targeting China? Actually, they are institutional rules, and their impact on our national trade and investment is mostly indirect. In essence they aim to constrain a country’s own laws, regulations, and institutions in order to achieve the goal of institutional convergence among all countries. Of course, the convergence here refers to convergence with American institutions. In fact, institutional convergence is controversial in the international academic community. Why can’t the diversity of institutions be allowed? Institutional rules are difficult for a country to accept, because they require it to make reforms, instead of simply being open, as required in the first and second dimensions. Compared with opening, reform faces greater resistance; the risk assessment of reform is also more difficult, and the beneficial effects of reform do not appear as quickly.
The fourth dimension is strategic impact. The impact of signing an agreement is not limited to the agreement itself—there are broader strategic implications, too. One is that it affects a country’s external environment, since the signing sends a strong signal to other countries about its determination to open up. Also, through the closer economic and trade relations with the other parties to the agreement, a country can enhance the stability of its own development. Another one is strengthened political relations with the parties to the agreement. When the economic and trade relations are close, the political relations will also solidify.
Through these four dimensions, we can not only examine the signing of trade agreements in general, but also review the impact of China’s entry into the WTO. China’s WTO accession marked the first time it integrated into the world trade and international division of labor system. The opening up of trade in goods, trade in services, and investment has brought huge economic benefits. Its strategic significance is also self-evident. China’s successful integration into the system established by the United States has not only strengthened China-US relations, but has also made the entire West accept China. China has also developed political relations with many countries through the strengthening of economic and trade relations. Although the WTO’s international economic and trade rules still seldom involved institutional rules when China entered the WTO, for China at the time, it also meant that we had to change many of our own laws, regulations, and institutions. These were actually high-standard rules for China, so in terms of the rules dimension discussed above, China has also benefited enormously. In short, China has benefited enormously in the four areas of the economy, opening up, reform, and strategy since its WTO accession.
Let’s use the four dimensions again to look at the RCEP’s impact on China. In general, the RCEP will have a greater impact on China mainly through the trade in goods and strategic impact dimensions, while the impact in the market opening and institutional rules dimensions will be limited. If we compare the gaps between RCEP and CPTPP in terms of trade in goods, market opening, and institutional rules, we can see that, despite the gaps in trade in goods, they are still relatively small. As for zero tariffs, the gap between RCEP and CPTPP is that, on the one hand, the RCEP’s final zero tariff ratio is seven or eight percentage points lower than that of the CPTPP, and on the other hand, the zero tariff ratio immediately after the agreement takes effect is much lower than that of the CPTPP. However, the RCEP’s final zero tariff ratio also exceeds 90%. Meanwhile, the RCEP will also significantly reduce non-tariff barriers, and what cannot be ignored is that, after the RCEP implements the unified rules of origin, it will make it easier for products that could not enjoy tariff reduction treatment before to be defined as originating goods, so as to enjoy tariff reduction. Regardless of institution or the method adopted, the reduction in the cost of trade in goods will bring huge economic benefits to the RCEP parties, including China. The RCEP’s advantage over the CPTPP in terms of production is that there is the sense of a hierarchy in levels of development among the RCEP parties, and that the technology, capital, and labor within the region are all sufficient. The RCEP’s advantage in terms of consumption is that it is backed by China’s huge consumer market. The promotional effect of the RCEP on trade in goods is far beyond that of the CPTPP.
If we look at the RCEP from the perspective of China-Japan-Korea economic and trade relations and China’s construction of a new development pattern, the agreement’s benefits will also be considerable. China is a closer neighbor to Japan and Korea than to the United States, Mexico, and Canada, but the economic and trade potential of the former is far from being released. The negotiation of the China-Japan-Korea Free Trade Agreement has been very difficult due to historical and political reasons, but the establishment of an agreement through the RCEP is actually a plan acceptable to all three parties, since it will effectively promote the economic and trade ties among them. The RCEP is also obviously beneficial for China’s domestic and international circulation. Many of the RCEP countries are close neighbors to China, so it will facilitate economic and trade ties between these countries and the provinces bordering them, thereby driving domestic circulation. Meanwhile, the RCEP will be able to generate fuller infraregional circulation, which will further benefit the international circulation between China and its neighbors. The cooperation among RCEP countries along industrial and supply chains will be conducive to China’s construction of a more secure industrial and supply chain system. Security and efficiency cannot be simultaneously optimal—for any big country, it is impossible to act as producer for all the links in these chains because of security concerns, since this would greatly sacrifice efficiency. This means that it is necessary to strengthen political relations, so that the possibility of sanctions against China by external countries is reduced. Another RCEP benefit is that the other RCEP countries will not dare to sanction China, even if their political relations with China have some ups and downs, because they are not large enough.
The RCEP can also bring huge strategic benefits to China. In the context of qualitative changes in China-US relations, the United States will seek to compress China’s room for action no matter who the US president is. In the realm of international economy and trade, the pressure from the United States will be manifested in the area of the high-standard rules that it formulates and wants China to accept. Meanwhile, in terms of spatial configuration, in the short and medium term, it has been trying to establish trade agreements that exclude China. In addition, while the multilateral trading system has run stuck, unable to make any further progress, giant FTAs have indeed become an aspect of the future. A giant FTA can be defined as an agreement has the participation of at least two of the four major economies—the United States, China, the European Union, and Japan. By signing the RCEP, China has successfully established a trade agreement with Japan, thus having its own first giant FTA. The RCEP’s strategic significance for China lies not only in that it would be able to deal with a decoupling between China and the United States and a US attempt to establish a parallel system, but also in that China can use RCEP to stabilize its relationship with neighboring countries. The rise of any big country is bound to be accompanied by a stable periphery.
After it had its free trade agreement, the United States put the arrangements of its agreement with Mexico and Canada in first place.
However, the RCEP brings limited benefits to China in terms of market opening and institutional rules. After all, the CPTPP is dominated by the United States, and the openness of the services sector and investment is inevitably highest. RCEP, however, includes many of ASEAN’s low-development countries, so its degree of openness cannot be very high, which is quite understandable. For China, the RCEP is the first agreement it has signed that adopts the negative list model in the investment chapter, but this is really only of symbolic significance. For a long time now, there has not been any difficulty in adopting the negative list, whether in services or investment, since China in recent years has opened up more and more in the services sector and investment. What China most needs to solve is the opening up of more sensitive industries—and this is exactly what the CPTPP requires. It should also be emphasized that the content of RCEP’s government procurement chapter is mainly “in principle,” and there is no market access list, so in this area, RCEP is still far from opening markets. It mainly attempts to make procurement fairer and more transparent. The reason for this is that most of the RCEP parties are not yet members of the WTO’s Government Procurement Agreement (GPA).
In institutional rules, it brings the least benefits. Although the RCEP has indeed taken important steps in e-commerce, intellectual property, and other rules, it is lacking in high-standard rules in areas such as state-owned enterprises, the environment, and labor, which are precisely the kinds of rules being emphasized by the United States. It goes without saying that rules on state-owned enterprises, whether through FTAs or WTO reform, are part of what the United States is vigorously promoting, and an area that Western countries in general are concerned about. For China, this is thorny but unavoidable issue. Meanwhile, the environment and labor are what Biden emphasized during his campaign; he pointed to a carbon adjustment fee on goods exported to the United States from countries that do not care about the environment, while arguing that any agreement should include a labor component. Even though the RCEP agreement has chapters on these issues, there is still a big gap between them and their CPTPP counterparts. This means that China has relatively little reform work to do in order to implement the RCEP—the benefits brought by the RCEP’s institutional rules are naturally smaller.
- China’s Future Options
Market opening and institutional rules correspond to the opening of services and investment, respectively, as well as domestic reforms. The RCEP along these dimensions will be limited in what they bring to China, which means that the concerns of Western governments and businesses have not yet been resolved through the RCEP. The RCEP will serve adequately for China’s defense, but it does not sufficiently allow China to take the initiative. China’s next step, then, is that it needs to focus on joining the CPTPP. In fact, if China’s WTO accession was the first step in its own integration into the world trade system and the international division of labor, and its entry into the RCEP was the second step, then China’s entry into the CPTPP will be the future third step. The fourth step will be when China can truly dominate the world trading system. China’s WTO accession was actually an attempt to integrate into the world trading system led by the United States. China’s participation in completing the RCEP negotiations and signing the agreement is China’s attempt to defend itself against future efforts by the United States to exclude it, but China will need to join the CPTPP to prepare to dominate the world trading system in the future.
The United States has been the dominant player in the world trading system from World War II to the present, as shown by its role in leading the establishment of the General Agreement on Tariffs and Trade (GATT). The North American Free Trade Agreement (NAFTA), which was negotiated in the 1990s, was the highest-standard FTA at the time, and it remained so for 15 to 20 years, until the success of the Trans-Pacific Partnership (TPP) negotiation. Based on the NAFTA experience, the CPTPP will be the highest-standard FTA in the next 15 to 20 years. Although the United States led the negotiation of the TPP at the time with the consideration of containing China, objectively speaking, the TPP rules are a public product that the United States provided to the whole world. Other countries can use it as a foundation that they can add to, subtract from, or modify. Most of the TPP rules are in line with the direction of China’s reform and opening up. A small part will require China to use wisdom to resolve, but China should have enough confidence in this regard. China’s successful development since its WTO accession has shown that China has the ability to use the rules established by the United States to develop itself. There is no doubt that the TPP was another attempt by the United States to constrain China with rules, but China can naturally resolve it and use it as a driving force for its own development.
If we describe the TPP as the last public product that the United States has provided to the world trade system, then we anticipate that in 15 to 20 years, China will become the world’s largest economy, and it will be able to establish a new multilateral system (if the United States is willing to cooperate), or create a parallel system that is beneficial to itself (if the United States is unwilling to cooperate). At that time, China will be able to take the fourth step in accordance with its own interests, which is to lead the establishment of the world trade system.
China has applied to join the CPTPP. Of course, it is necessary to consider the possibility that the United States will join the CPTPP after the Biden administration takes office. The latest move in the CPTPP is that the United Kingdom government has publicly stated its position on joining the CPTPP and has obtained the consent of the CPTPP parties. If the United Kingdom joins, it will mean that the CPTPP will no longer be a regional trade agreement, but a cross-regional trade agreement. If the United States rejoins, it is very likely to establish a trade system that excludes China. However, it is worth mentioning that the establishment of a system that excludes China is not the United States’ ultimate goal. Its strategy is rather to exclude China first and then integrate it later—and the longer it takes China to integrate, the more the United States can profit the more by asking a higher price. Although the Biden administration has not decided whether to join the CPTPP, it is very likely to restart the Transatlantic Trade and Investment (TTIP) talks with Europe, which would mean that the United States joins hands with Europe again. Whether the United States joins the CPTPP or not, China can only join the CPTPP sooner rather than later. Moreover, China can entirely consider proposing to join the CPTPP together with the United States.
China’s entry into the CPTPP is a grand strategy. From the regional (China’s neighboring regions, Europe, and the United States) and individual country perspectives, what needs to be done now is to promote the entry into force and implementation of the RCEP, complete the negotiations on the China-Japan-Korea FTA and the China-EU Comprehensive Agreement on Investment (CAI), and continue to actively cooperate with the United States. The final effect of an agreement depends not only on the standard level of its text, but also on the strength of its implementation and the rate of its utilization by business. Therefore, China can do a lot of work in the future to promote the RCEP’s effective implementation and help businesses make better use of the agreement. In the negotiation of the China-Japan-Korea FTA, the three parties have reached a consensus to continue negotiating on the basis of the RCEP. However, the difficulty of the negotiation is not insignificant, and even if its standards are much higher than those of RCEP, the marginal benefit will be limited. Relatively speaking, the urgency of the China-Japan-Korea FTA should decrease somewhat. The China-EU CAI negotiation is the top priority at present. China must maintain a grasp on the pace of negotiations from a strategic height and complete the negotiations as soon as possible. There is also the possibility of cooperation between China and the United States. Compared with the Trump administration, the Biden administration gives greater support to the multilateral system, and the two countries can fully cooperate on maintaining the WTO’s basic operations.
In short, the signing of the RCEP is indeed of great significance to China, but China still has a long way to go. Our immediate task is to complete the negotiations on the China-EU CAI and promote the entry into force and implementation of the RCEP. In the long run, China should focus on joining the CPTPP. In 15 to 20 years, China will be able to lead the establishment of a world trade system that is beneficial to itself.
Translated by Thomas E. Smith
[1] This article was originally published in Xin jinrong pinglun (New Finance Review) 46 (2020.4): 120-126.