A season of trade agreements aligns ‘winners’ in emerging global order
The signing of the world’s largest free trade deal, the Regional Comprehensive Economic Partnership (RCEP), has given China significant influence in Asia Pacific, which could shape the region’s economic and political landscape for years to come. A group of 15 Countries generating nearly a third (1/3) of global economic output signed the historic agreement that would have economic implications far beyond the regions’ borders and signals a seismic geopolitical shift, not only for the countries that are part of the deal, but also for the ones that aren’t.
When ratified, RCEP would create a trading block rivalling the European Union (EU) and the Us-mexico-canada agreement. Ten (10) of its members make up the Association of South East Asian Nations (ASEAN) which include Singapore and Malaysia, the remaining 5 countries are Australia, New Zealand, Japan, South Korea and most notably China. The world’s largest free trade deal covers a market of 2.2 billion people, about a third (1/3) of the world’s population. Its members are responsible for $26.2 trillion of economic output accounting for roughly 30% of global GDP.
While the RCEP is the latest in a long line of trade agreements coming out of Asia, it however was not supposed to be the biggest. Negotiations for the RCEP trade deal started back in 2013, but it attracted renewed interest in 2017 when President Donald Trump pulled the US out of a rival Asia Pacific grouping that excluded China.
The Trans-pacific Partnership (TPP), would have involved 12 countries covering 40% of the world economy. While both the RCEP and the TPP were intended to create free and open market, the TPP had more ambitious goals; covering stricter common standards on labour issues, human rights and environmental protection. The scuttled TPP pact was revised under a new guise involving the 11 remaining countries (Comprehensive and Progressive Agreement for Trans-pacific Partnership (CPTPP)) in 2018.
As a result of China being excluded from the US led TPP, observers described the RCEP as a way for China to counter American influence in the region while writing the rules that govern trade in the 21st Century. However, some analysts feel that the economic benefits of the RCEP are limited and could take decades to fully materialize. That is because many members of RCEP already have bilateral trade deals and benefit from reduced tariffs. Critics include Australia’s former Prime Minister Malcolm Turnbull who stated, “the RCEP is a really low ambition, we shouldn’t kid ourselves”.
The biggest impact could be the new Rules of Origin, which officially determine where a product was made. This essentially eliminate tariffs on goods traded between member states providing greater simplicity than a series of bilateral free trade agreements especially for companies with global supply chains. Take for example a company in Thailand building tractors for a client in Indonesia. The two (2) countries are part of the ASEAN free trade zone, but because some parts of the tractor are made in Australia, Indonesia may charge a tariff on the finished machine. This creates an incentive for members to look within the block for suppliers. The trade deal could also lay the foundation for stronger economic partnerships in the future, particularly between members that don’t already have free trade deals as is the case with China, Japan and South Korea.
The three (3) East Asia Nations have been in negotiations over a free trade deal since 2002 without reaching an agreement. Both Japan and South Korea have close economic and security ties with the US, unlike their contentious diplomatic relationship with China; and despite rocky political relations between the communist state and Australia, the two have signed up to the deal.
The RCEP is China’s first multi-lateral free trade agreement, which analysts say is a political victory as much as an economic one. The deal came at a time when the US and China locked horns over a number of issues including the south-china sea, supply chains and 5G networks. Without US involvement in the agreement, China could side-step pressure from major economic reforms of intellectual property rights. Companies already shifting supply chains away from China due to the country’s trade wars with the US may still be able to source products from the country under the new agreement. The RCEP could also strengthen China’s global infrastructure strategy known as the Belt and Road Initiative while reducing US commercial activity in the region.
While the deal was originally conceived by ASEAN, China is set to gain the most financially from RCEP; followed by Japan and South Korea. The direct economic benefits for the ten (10) South East Asian Nations may be limited due to their existing free trade accords with more than 70% of trade inside the block already conducted with zero (0) tariffs. Not only is the deal likely to diminish the US influence in the region but it could also cause it to miss out on over a $100billion worth of trade. Another country expected to forego a large amount of income is India. The south Asian nation was initially involved in the RCEP’S negotiations but dropped out in 2019 over concerns that the deal would result in flooded cheap imports that would hurt Indian businesses across many industries.
There are concerns among members that without India, the smaller Asian countries would be more reliant on China and in turn Beijing would have more leverage in the region. How Chinese President Xi Jin Ping stares the world’s second (2nd) largest economy in the trade block would be watched closely. The adverse effects of the South China sea dispute and the COVID-19 pandemic may lead to a more amicable approach to diplomacy that re-assures its neighbours. However, a Chinafirst strategy cannot be ruled out; for the US, its trade policies are affected by the shifting tides of domestic politics. Trumps America-first policy saw the omission of the US from two of the world’s largest trade deals leaving an economic and political vacuum in the Asia Pacific region.
It may take may years for the benefits of the RCEP to be fully realized. But the announcement of the deal signals that although several leading western countries have adopted isolationist policies, many Asian Nations and China in particular are increasingly committed to better trade links which could shape the economic and political landscape for years to come.
Africa is no exception to the trend of trade agreements as AFCFTA is envisaged to progressively reduce trade tariffs by over 90% by 2022 and by extension address the increasing inflation and infrastructural deficits within the continent. Nigeria, being the largest economy in the continent with strong service sector should position itself to benefit from the economies of scale that will follow the localization of industries. Oil refineries, cement, agriculture, food processing, minerals, banking and financial services, aviation, information technology and legal services have been identified as some of the critical sectors where Nigeria has competitive advantage.
The fears around the issue of dumping and border security should not outweigh the huge benefits that AFCFTA offers to the member States. Rather, this should be a wake-up call for Nigeria to invest heavily in rail and road transport, port infrastructure, border security, internal security, electricity, education, and other enabling infrastructures. The last border closure was largely attributed to the issue of dumping and security as it was alleged that Nigeria was amongst other things being swamped with fake and substandard goods mostly from Asian countries through the Benin Republic.
The AFCFTA Rules of Origin provision is meant to address this, and it is hoped that the AFCFTA member States should demonstrate the political will to ensure strict compliance. While the regime of Trade in Goods appears to be taking shape, particularly with the commencement of trading early this year, the progressive framework for the negotiations of specific commitments by the member-states in the area of trade in Services, should afford Nigeria the platform to ensure that the service sectors benefit from the huge opportunities provided under the AFCFTA agreement.