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RCEP vs. TPP

Jianmin Jin, Senior Fellow

February 22, 2013 (Friday)

It was announced at the November 20, 2012 East Asian Summit in Cambodia that negotiations would begin on a Regional Comprehensive Economic Partnership (RCEP). Although this announcement impacts heavily on Japan’s growth strategy, Japan’s politicians and media talked only about the TPP during the country’s national election. In Japan, information on the TPP is tangled and confused, and popular opinion is split; in contrast, not much information is available on the RCEP, but voices of opposition are few. The “elimination of all exemptions on tariffs” approach of the US-led TPP has thrown Japanese society into turmoil, but the ASEAN-led RCEP is assumed to take a more Asian approach of gradual liberalization, which may be seen as safer by Japanese society.

The sudden rise of the RCEP is in fact due to the many concerns Asia has about the TPP.

1. ASEAN Worried about Marginalization

ASEAN, a group made up of relatively small countries, entered into the ASEAN Free Trade Area (AFTA) in 1992 and began a step-by-step liberalization of trade. ASEAN furthermore adopted a consensus statement in 2007 which aimed to form an ASEAN Economic Community (AEC) in 2015. The group has signed and put into effect external FTAs with China (Nov 2002), Korea (Jun 2007), Japan (Dec 2008), India (Jan 2010), and Australia and New Zealand (Jan 2010). Essentially, ASEAN has built a FTA network (ASEAN+1 FTA) throughout greater Asia with itself occupying the pivotal position. Given the current dearth of FTAs among other countries in the region, ASEAN does in fact occupy a core position in the economic integration of East Asia. ASEAN was most likely able to take the helm of the region because it was put forward for the role in an effort to avoid Japan and China vying for control and because its stable economic growth makes it an attractive candidate.

ASEAN was worried that some of its countries moving to join the TPP would weaken the ties in the area. Furthermore, ASEAN’s concerns of weakening were amplified by the US pushing the TPP, which might take away the leadership of Asian economic integration and marginalize the association. In fact, four of the ASEAN 10 (Singapore, Brunei, Vietnam, and Malaysia) have joined the TPP, and, at the US’s urging, Thailand has also expressed its intent to join. The ASEAN administration and Indonesia, a major player in the region, have become concerned that the TPP could cleave the association in twain. The option of ASEAN joining the TPP as a region would be possible, but the “elimination of all exemptions on tariffs” called for by the TPP has riven the countries down the middle. Those countries whose growth is lagging behind, such as Indonesia, Cambodia, Laos, and Myanmar, did not approve of the TPP’s method of approach. Moreover, Thailand and the Philippines have not necessarily shown a willingness to join independently. Finally, in addition to the US-backed TPP, the fact that preparations are underway for negotiations in the China, Japan, Korea FTA has caused ASEAN to move up its proposal for forming the RCEP.

2. RCEP Proposal

Worried that intra-regional ties would unravel, ASEAN secured its middle of the road position between China’s proposed ASEAN+3 (East Asia FTA (EAFTA)) and Japan’s proposed ASEAN+6 (Comprehensive Economic Partnership in East Asia (CEPEA)), bundled together the five extant ASEAN+1 FTAs it had built, and proposed the RCEP with itself at the helm.

 Figure 1: Region covered by RCEP (conceptual diagram)

Japan had in fact already proposed the idea of economically integrating the same area (ASEAN+6) covered in the RCEP. At the time, CEPEA was said to oppose the EAFTA and to “maintain and strengthen Japan’s economic and political influence in the region,” but in 2010 a movement to integrate the CEPEA and EAFTA began. Thereafter, the US began to accelerate the TPP, and China, wary of this, showed a stronger stance than ever in favor of economic integration within Asia. Talk in Japan, however, showed strong leanings towards the TPP, and, as a result, the CEPEA rapidly lost momentum. Japan’s change in attitude also caused ASEAN to push forward with the RCEP. In other words, it is likely that ASEAN promoted the RCEP in an effort to bring Japan back into the fold of Asian regional integration.

Furthermore, while ASEAN holds a pivotal position in the five ASEAN+1 FTAs it has already signed, the agreements all contain tariff cuts, country of origin regulations, and various other liberalization rules, which has caused much grumbling about inefficiency due to operational complexity on the ground. One might therefore conjecture that ASEAN has an ulterior motive of increasing efficiency by combining its five FTAs and unifying these rules within an integrated body.

Thus has ASEAN walked the middle road along the divide between giants. While remaining wary of the TPP, it deftly wove together the CEPEA and EAFTA, grasped the helm of Asian economic integration, proposed the RCEP at the East Asia Summit in Nov 2011, and gained consensus to start RCEP negotiations at the Nov 2012 EAS.

However, ASEAN was able to bring about these negotiations as planned thanks in large part to the support of China and Japan, the second and third largest economies in the world. China, in particular, was extremely active in its support.

 Figure 2: GDP shares of potential RCEP members

Data source: IMF

3. China Aims for “Three Birds with One Stone” Using RCEP

As the author has already stated in the Current Topics piece “China’s Concerns Regarding TPP No More than Empty Worries?” (Jan 11, 2012), China wants to actively promote the integration of Asia, and therefore it shares ASEAN’s concerns about “a centrifugal force arising to rip asunder the economic integration of East Asia.”

Moreover, China’s experts and popular opinion agree that “many conditions are being written into the TPP in order to make it difficult for China to join and thus exclude it from the agreement.” In fact, even the American media have suggested that the TPP is being used to counteract China’s economic sway in the region, and President Obama clearly stated in his election campaign that he would promote the TPP in order to pressure China into adhering to international trade rules. These statements have greatly increased China’s concerns.

Consequently, ASEAN’s promotion of the RCEP is a godsend for China, and it is only natural that China would choose to help ASEAN accelerate its progress. China’s strategy may be to avoid direct conflict with the US and prevent the US from sticking its nose in by having ASEAN take the lead. In fact, it is likely that at the Nov 2012 EAS, PM Wen Jiabao lent full support to the ASEAN-led RCEP and proactively announced China’s participation in negotiations for just these reasons.

Furthermore, Australia, Japan, and India are all on board with the RCEP. China has tried to sign bilateral FTAs with these countries in the past, but its efforts have yet to bear fruit. By entering into FTAs with these countries through the ASEAN-led RCEP, China would achieve its aims in one fell swoop.

Ultimately, the Guiding Principles and Objectives for Negotiating the RCEP, which states “…while considering each participating country’s unique and diverse circumstances…”, is aligned with China’s assertion regarding promoting Asian economic integration, and therefore China finds it easier to join negotiations.

Thus, China has supported ASEAN in order to “kill three birds with one stone” through the RCEP, and may be the unsung hero of the RCEP’s formation.

4. RCEP vs. TPP

Both the RCEP and the TPP are in the negotiation phase, and we must wait and see what compromises are reached on participating members and levels of liberalization. Based on predictions, however, it seems that both frameworks are evenly matched, as seen in Figure 3.

Figure 3: RCEP and TPP fact sheet

Source: IMF, JETRO
Pop (million) Global GDP Share (%) GDP Growth in 11-15 Years (%) Trade Share within Region (%) Target Year Market Regulation Leader
RCEP (16 countries) 3400 28.4 7.1 44.2 2015 Exceptions allowed ASEAN
TPP+Japan (12 countries) 800 38.2 4.2 41.6 2013 Abandoned in principle US

In an interview with JETRO, Indonesia’s trade policy officer said that “the RCEP will stand against the TPP.” The Wall Street Journal sounded alarms, saying that the rise of the RCEP “will slow down the process of the US-led TPP, and perhaps even destroy it altogether.” Because the US is not included in the RCEP and China in the TPP, the media in particular are wont to reflect the “RCEP vs. TPP” opposition as “China vs. the US” in the news. However, the Trade Minsters of both countries have commented that the two frameworks are complementary and both will contribute to the economic integration of the entire Pacific region.

Thus, while the RCEP was greatly stimulated by the TPP, the two are undeniably in competition. The author would rather hope that both frameworks can proceed, and the trans-Pacific regional economic integration which APEC strives for can be realized in the Asia-Pacific region.