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RCEP 'no substitute for the TPP'

December 2, 2016

As the Trans-Pacific Partnership (TPP) trade pact is on the verge of failure, Asian nations are pinning their hopes on the China-endorsed RCEP agreement. DW examines how the deal might affect trade ties in the region.

China Symbolbild Einbruch Wirtschaft Export Börse
Image: picture-alliance/dpa/Wang Chun

Representatives of the countries negotiating the Regional Comprehensive Economic Partnership (RCEP) agreement are meeting in Indonesia from December 2-10 for the 16th round of talks. The deal brings together the 10 members of the Southeast Asian grouping ASEAN plus China, India, Japan, South Korea, Australia and New Zealand, but notably excludes the US.

The RCEP pact has gained increased prominence following the US President-elect Donald Trump's announcement to pull his country out of the Trans-Pacific Partnership, a 12-nation mega free trade deal that was meant to be a key plank of President Barack Obama's "pivot" to Asia policy.

In this context, DW spoke to analyst Jacob Funk Kirkegaard about the significance of the RCEP pact and the main sticking points that have to be overcome by the negotiating countries to reach an agreement on the deal. 

DW: What are the key aims of the RCEP?

Jacob Funk Kirkegaard: The key aim of the RCEP free trade agreement is to lower tariffs among the participating countries. And that's a significant difference between this deal and the TPP pact, which has provisions covering foreign investment, public procurement and a host of other important elements. So, the RCEP is a much more narrowly conceived trade agreement.

Jacob Funk Kirkegaard
Kirkegaard: 'The RCEP is a much more narrowly conceived trade agreement'Image: PIIE

If the deal is narrowly conceived, then will it lead to a deepening of trade ties among the member countries?

There could be some increased trade, but it should be clear from the very beginning that the RCEP deal will not be as beneficial as the TPP because it's a much less ambitious and less comprehensive agreement.

However, one could expect some increase in trade among the countries that lower their tariffs.

Still, there is probably an increased risk that the rise in trade will come mostly in the form of trade diversion. So the RCEP, in my opinion, will clearly be a suboptimal deal. It's not a good replacement of or substitute for the TPP. Although it might give some impetus to trade, I would say that the increase in commerce would be relatively shallow as the scope of the agreement being negotiated remains quite limited.  

In terms of the negotiations, what are the key sticking points that have to be overcome?

The main sticking points are disagreements between various countries on tariff reduction, as many of them have significant protections in place when it comes to particular sectors of the economy.

China, which is the leading country among them, wants to see more liberalization in sectors like manufacturing and light industry, and others are hesitant to do it. Another problem for many of the other countries participating in the RCEP talks is related to China's trade surplus with the rest of Asia. This is a different situation from what it was a few years ago when China ran significant surpluses with the US and many countries of Europe, but ran deficits with other Asian countries. Back then these Asian nations were exporting intermediate inputs and other materials to China, from where they were then re-exported to the advanced economies.

But that flow of trade has changed now and Asian nations now run significant deficits with China. In this context, the main sticking points relate to the desire of many of the negotiating countries to protect their domestic industries from increased Chinese competition. There will therefore be significant resistance to tariff reduction in many manufacturing sectors.

Which countries are likely to benefit the least from RCEP?

I think countries like Singapore, Japan and South Korea are the ones that are likely to benefit the least, as the RCEP does not cover aspects such as foreign direct investment that are of most importance for them. Also, nations such as Indonesia that export predominantly commodities to China are unlikely to benefit much from the pact.

Basically, my broader fear here is that with the TPP now being off the table, a lot of countries in Asia will feel that they for political reasons will need to join this Chinese-led trade agreement, even if the actual economics of the deal may be more beneficial to China than to them.

How do you see India's role in the negotiations as the country is considered to be a perennial skeptic of free trade deals?

I would certainly be very surprised if India were to ultimately join the RCEP. That's because if India did that, many Indian manufacturers and businesses would face very intense competition from Chinese exporters. And since India is a country that already runs a significant trade deficit with China, I do not believe that the Indian government would be interested in this deal, quite frankly.

Moreover, if India ultimately joins the RCEP, then it's likely to be a very shallow trade agreement and will not cover many sectors. The deal's economic impact therefore will be very limited.

I also don't believe that India will, for the foreseeable future, join a deep and comprehensive free trade agreement with China and the rest of the Asian region, as it would be potentially devastating for many sectors of the Indian economy.

Trump tramples TPP

If the economic benefits are so limited from the RCEP, why do these countries feel compelled to join a China-led free trade deal?

That's because China is in many ways already their biggest trading partner. And with the demise of the TPP, these countries feel that they will need to accommodate China more than they did in the past, because the United States is no longer an active economic participant in the free trade structure of Asia.

How is the RCEP likely to affect the US' economic position in the region?

The real damage to the US' position from the RCEP is going to be political, rather than economic. That's because the demise of the TPP signals the US is withdrawing from Asia de facto. In that sense, the demise of the TPP is a huge wasted opportunity for the US in Asia. The biggest loss is the foregone or abandoned economic benefits.

In terms of the actual negative economic impact on the US in the region, I think it will be relatively limited, partly because I think the scope of the RCEP itself would be fairly limited, and also because the US does not trade intensely with the countries in the region in many of the sectors that are likely to be covered by the deal.

The one exception for that might be Japan, where I think US firms would be at a disadvantage relative to Chinese firms on the Japanese market. But overall, the economic effects will be small and the big impact will be in political terms. 

Jacob Funk Kirkegaard is a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

The interview was conducted by Srinivas Mazumdaru.