The Largest Trade Agreement in History Just Got Signed — With China at the Center
If you thought globalization was dead, think again. In some ways, it is stronger than ever.
There are certainly factors that favor protectionism, and trade wars, and a withdrawal from partnerships and agreements. But there are also powerful forces pushing in the other direction.
These counterforces have the potential to produce more globalization over time, not less, with greater cooperation between nations.
One important factor is the growing rift between the United States and China. With each passing day, it seems, the U.S.-China relationship grows colder. As we explained on Sept. 21, the U.S. and China are falling into “the Thucydides trap” — the dangerous scenario that unfolds when an established superpower fears an up-and-coming one.
The U.S. and China have too many cultural and commercial ties to simply break off the relationship completely. In some ways, the relationship is like a bad marriage. Each tires of the other, but there is no easy way to split up the assets.
When a marriage breaks up, the ex-couple also tends to divide up its pool of friends. Some friends go with one spouse and some with the other.
When two superpowers have a falling out, to the point of going cold or severing most ties, the split-up effect on friends and allies is even more pronounced. For other nations the question increasingly becomes, “Whose side are you on?”
This is a force pushing in favor of globalization and free trade, rather than against it.
As the U.S. and China head for break-up, and a full-blown superpower rivalry, each nation will want to cement the allegiance of as many allies as it can, to increase its sphere of influence on the global stage, while denying that same influence to the other side.
In that respect, China scored a major strategic victory on Nov. 15, by way of securing the largest free trade agreement in the history of the world.
The Regional Comprehensive Economic Partnership, or RCEP for short, is a trade pact between 15 nations in the Asia-Pacific region. In total it covers more than 2 billion people — about 30% of the world’s population — and a combined gross domestic product (GDP) worth $26.2 trillion.
The RCEP was eight years in the making, with the earliest efforts starting in 2012. It includes the 10 nations that are part of the Association of Southeast Asian Nations (ASEAN), along with the non-ASEAN nations China, Japan, South Korea, New Zealand, and Australia.
China will dominate the RCEP, but that was not always the plan. India was originally included, and would have acted as a powerful counterweight to China within the RCEP trade network. But India dropped out of negotiations last year, due to concerns of exposing India’s emerging economy to cheap Chinese exports. The RCEP agreement has a clause that allows India to rejoin if it chooses.
In addition to being the largest free trade agreement ever conceived, the RCEP is the first ever trade pact that includes China, Japan, and South Korea within the same framework.
The main goal of the RCEP is to smooth the path of trade among the 15 Asia-Pacific nations, eventually paving the way for a comprehensive free-trade zone, in the style of the European Union or the old North American Free Trade Agreement (NAFTA).
As a result of the agreement, more than 90% of tariffs will be dropped between RCEP members. Japan, for example, expects to see $50 billion per year worth of automotive tariffs eliminated in its trade with China.
The agreement will also standardize “rules of origin” guidelines for all 15 nations, and smooth out the process for building multi-country supply chains within RCEP. This, in turn, will make it easier for multinational companies to keep their goods production in the Asia-Pacific region. If, say, the United States puts tariffs on a certain product coming from China, RCEP will make it easier to shift the production to, say, Vietnam, with the Vietnamese plants importing parts from China.
RCEP took eight years to negotiate — with India dropping out toward the final rounds — because large-scale trade agreements are intensely tricky and complex.
But that is also why such agreements can be incredibly valuable if done right: By working through the details on hundreds or even thousands of trade items, and reducing friction and tariff barriers on the flow of raw materials and goods between trading partners, the whole system can work more smoothly.
In addition to being the largest free trade agreement in history, RCEP was the first major international effort to be executed via Zoom, against the backdrop of a pandemic.
Rather than have the heads of state and trade ministers gather in a single place, as would normally happen for a deal this historic, the RCEP signing ceremony was carried out by videoconference.
On Sunday, Nov. 15, each of the 15 countries made a show of the country’s trade minister signing a copy of the pact on camera — the president, prime minister, or head of state alongside — and then showing the signature to the camera.
RCEP is a significant win for China, both economically and geopolitically, because China has taken a significant step toward deeper commerce and friendship ties in the Asia-Pacific region.
This step could prove especially valuable in the coming age of central bank digital currencies (CBDCs), as technology enables the bypassing of an intermediary currency for trade transactions.
One of the reasons the U.S. dollar dominates international finance and trade transactions is because, with the 20th century way of doing trade, there was almost always a time lag between the start of a transaction and the completion of it, and that lag favored using third-party U.S. dollars.
But as new technology makes instant peer-to-peer transactions possible, even at the scale of hundreds of millions or billions, it will become even easier to cut out the middleman currency — which has typically been the U.S. dollar — or replace it with a CBDC like the digital yuan.
With the signing of RCEP, the United States and India will have to think hard about how to counter China’s stepped-up influence on the global stage. Otherwise, if the balance of commerce and trade tilts too far in China’s favor, the global playing field threatens to become a national security threat.
In addition to that concern, if RCEP nations deepen their links with each other over time, exporting firms in the U.S. and India could gradually find themselves getting shut out.
The United States in particular has two ways to counter RCEP. It can deepen and strengthen its trade ties and strategic relationships with Europe and South America, creating a kind of “West versus East” dynamic, or it can attempt to rejoin other Asia-Pacific trade agreements, or both. Building relationships with Africa and Central Asia will also become a priority.
However the chessboard takes shape over the next decade or so, the forces of globalization have been newly invigorated by the realities of geopolitics.
If a superpower is going to face off against a comparable superpower, that superpower will need friends and allies — and ties between nations are built, in part, by mutual trust and a free flow of goods and raw materials.
China knows this, and has taken a big step toward improving its geopolitical chessboard position via RCEP. The United States will have to respond, and figure out how to deepen and strengthen its own position in doing so.
By Justice Clark Litle for Tradesmith.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.