Media  Global Economy  2018.07.11

Expand TPP rather than RCEP without being misled by China - The Japanese government emphasizes the size of combined GDP of participating countries; what is important is not "size" but "discipline"

The article was originally posted on Webronza on June 27, 2018

RCEP was born out of a battle for leadership between Japan and China

On July 1, a ministerial meeting of the Regional Comprehensive Economic Partnership (RCEP) is held in Tokyo. RCEP is an agreement among 16 countries, including ten ASEAN and six other Asian and Oceanian countries (Japan, China, South Korea, India, Australia, and New Zealand), to promote trade liberalization and investment protection, and negotiations have continued since 2012.

Since the negotiations led by the World Trade Organization (WTO) for trade liberalization and so forth came to a standstill, many mega free trade agreements (FTA) such as the Trans-Pacific Partnership (TPP) as well as the Japan-EU Economic Partnership Agreement and the Transatlantic Trade and Investment Partnership (TTIP) which involve many countries or big economies, are being concluded or negotiated around the world. RCEP is one of them. Together with the TPP, Asia-Pacific Economic Cooperation (APEC) positions RCEP as one of the ways to realize a Free Trade Area of the Asia-Pacific (FTAAP) which promotes economic integration such as trade liberalization in the Asia-Pacific region.

Officially, it is said that RCEP was proposed by ASEAN. But from the viewpoint of promoting economic integration in East Asia, Japan, which was concerned that the effects of China were becoming too large as it advocated ASEAN+3 (Japan, China, and South Korea), has argued since early on that ASEAN+6, including India, Australia, and New Zealand as well as Japan, China, and South Korea, should be realized, and this has set Japan against China.

The truth is that as TPP negotiations, including the US, began in 2010, with Japan moving to join them, China, which was anxious lest it should be excluded from economic integration in the East Asian region, accepted Japan's ASEAN+6 plan and this was what got RCEP negotiations started in 2012.

Thirty percent of the world's GDP

On June 20 and 21, as the ministerial meeting scheduled to begin on July 1 drew near, the Nihon Keizai Shimbun carried a series of articles in the Keizai Kyoshitsu (Economics Class) column in which university professors argued that Japan should promote RCEP.

As the US takes to protectionism, it is significant to promote a free trade system through RCEP. TPP11 without America accounts for only 13% of the world's GDP, but the combined GDP of countries participating in RCEP negotiations represents 30%. While only four ASEAN countries take part in TPP11, RCEP encompasses all ASEAN countries, and this will help deepen the network of producers in East Asia.

I do not deny all these arguments. However, there are negative aspects to promoting RCEP even if they are limited to the economic side alone.

The existence of China sidetracks "discipline"

First, RCEP negotiations themselves have not proceeded smoothly. Six years have already passed since the negotiations began.

In terms of the liberalization of trade of goods, India takes an extremely backward-looking stance on the reduction and elimination of tariffs. China and India object to Japan, South Korea, and Australia, which seek high-level rules in the negotiations to establish rules for intellectual property, electronic commerce, etc.

The principal reason WTO negotiations for the Doha Round came to a standstill is that China and India, both of which look upon themselves as major developing countries, continued to take a negative attitude to ambitious goals while advanced countries strove to further promote trade liberalization and adapt the rules agreed on 25 years earlier, in 1993, to the needs of the current times. Rules comparable to those of the TPP which resulted from the negotiations by the nations such as Japan, the US, Canada, Australia which tried to establish the 21st-century FTA could not be expected of RCEP, which is joined by these two countries.

Furthermore, RCEP negotiations do not cover the important items which were not taken up in the WTO talks but were agreed on in the TPP negotiations. One example of such items concerns "trade and labor" and "trade and the environment" where the TPP participating countries try to impose discipline on the so-called "race to the bottom" for fear that some countries may enhance the competitiveness of their own industries by relaxing the labor and environmental standards in their own countries. Others relate to the rules and disciplines for state-owned enterprises which can compete more favorably than foreign-affiliated ones as they are protected by subsidies and regulations. The reason is that China would be faced with considerable difficulties if they were to negotiate these items.

Both the Japanese government and the mass media have emphasized the huge size of mega FTA participants' GDP. It is true that an FTA covers a huge market, but GDP is not the only factor that determines the value of an FTA. An FTA that lacks in substance, failing to reduce tariffs drastically and failing to set stricter rules and disciplines than those of the WTO, would not improve or enhance the economic performance or welfare of its participating countries or the region as a whole no matter how large their combined GDP is.

Spaghetti bowl effect

Another problem is the "spaghetti bowl effect," which refers to several FTAs crisscrossing each other, complicating tariffs, rules, and regulations, and thus confusing trade as the spaghetti gets tangled.

Such a problem does not occur with TPP11 and the Japan-EU FTA because they cover two different regions. However, some participating counties of TPP11 do overlap those of RCEP. In order to avoid the spaghetti bowl phenomenon, it is desirable to ensure that all related countries participate in a single large FTA.

The TPP has reached a high-level agreement in terms of both promoting free trade and setting new rules. All those economies in the Asia-Pacific region should be integrated into this TPP.

Expanding TPP is the right way to act

The Obama administration of the US proudly talked about the TPP, claiming that it was a 21st-century free trade agreement laying down new rules of trade and investment. Moreover, unlike reports by the mass media, it was a system devised by the administration which was intended not to exclude China but to bring the country over to an Asia-Pacific free trade area in which this high-level discipline was applied.

Through the TPP, the US attempted to establish high-level discipline for state-owned enterprises by negotiating with Vietnam, a socialist country with many state-owned enterprises just like China. If the TPP was expanded in the future, China would be forced to join it. Then such discipline could be applied to Chinese state-owned enterprises.

The protection of intellectual property is also an example of the discipline the US tried to impose. Unfortunately, the Trump administration, which does not understand this grand plan of the former administration, announced its withdrawal from the TPP. However, it seems to have finally realized the importance of the TPP from the perspective of urging China to protect intellectual property.

Many countries show interest in the TPP. The reason is that the domino effect works, forcing countries to join a mega FTA because they would otherwise suffer a disadvantage.

In addition to Asian countries such as South Korea, Taiwan, the Philippines, Indonesia, and Thailand, Columbia expressed its intention to participate in the TPP, and the United Kingdom is also displaying interest in the TPP. The Japanese government should concentrate its ability and resources on expanding the TPP rather than assigning valuable human resources to RCEP negotiations, which have little prospect of agreement and are unlikely to create a high-quality FTA even if an agreement is ever concluded.

It took 15 years before China, a socialist economy, completed negotiations to join the WTO. Though it will not take so long to complete the accession negotiation to TPP, the reason the Japanese government should focus on expanding the TPP is that it needs to spend a lot of time and human resources on not only calling for prospective countries to join the TPP but also on the negotiating the terms and conditions under which prospective member countries, which have different levels of trade liberalization and regulations, are allowed to join the TPP.

The more a mega FTA is expanded, the greater its domino effect becomes. If the TPP expands, involving countries in the Asia-Pacific region, not only the US but also China would be forced to consider participation in it. We would be able to achieve much more than what we attempted through RCEP.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on June 27, 2018.)