On November 15, China and 14 other countries signed an agreement to establish the world’s largest free trade circle, called the Regional Comprehensive Economic Partnership Agreement, or RCEP. The signing of the RCEP is, first of all, a diplomatic victory for China. Secondly, on an economic level, it seems that the agreement could be a pivot point in the external cycle that the Xi Jinping administration is currently pushing, giving new impetus to China’s economic development. But are things really so rosy? We are afraid that there are many question marks.
The first question mark is that, according to international practice, a true free trade area should be supported by some basic institutional framework, including an independent judicial system, complete openness and free dissemination of information, as well as free movement of capital and free currency exchange. Does China really have these conditions? Not to mention, the Hebei Da Wu Group has recently been suddenly wiped out with the arrest of Sun Da Wu’s entire family; not long ago, Jack Ma’s Ant Group was directly blocked by the government from going public simply because it made a big fuss. As even free trade within one’s own country can be affected by political factors at any time, any risk-conscious investor should ask themselves: is this a good and reassuring trading environment?
The second question mark: The RCEP agreement seems to lower tariffs in favor of Chinese export dumping. In the case of U.S. trade sanctions against China, this would open up a larger market for surplus industrial goods that China cannot sell to compensate for the U.S. trade war. But if you look at the list of RCEP members, how many Chinese products can the other developing countries buy, except for Japan and Australia, which have a certain amount of spending power? Those looking to expand Chinese exports should not forget that most RCEP members are willing to participate in the agreement in order to share in the benefits of zero tariffs on Chinese imports, and that it is not optimistic to expect significant growth in Chinese exports as a result.
The third question mark: The healthy functioning of a free trade agreement depends largely on two things: first, the willingness of the countries involved to abide by the rules. Can China abide by the international rules of the WTO, which include the United States and the European Union, and will China be even more brazen in its own trade circle, where it is the leader, in defiance of the rules? Second, a strong penalty mechanism is needed. But in the RCEP agreement, we don’t seem to see a strong enough penalty mechanism, not even a dispute resolution mechanism. Without these mechanisms, wouldn’t any trade agreement or multilateral agreement be a waste of paper?
The fourth question mark: Does the RCEP agreement really mean that China has become an ally in the Asia-Pacific region? Economic agreements are one thing, but the relationship between nations and the international community involves many other aspects, including sovereignty disputes, national security, and even ideological conflicts. From these perspectives, not to mention the fact that it is impossible for Japan to identify with China’s leadership because of this agreement, the Australian Prime Minister shouted to China just after the agreement was signed, hoping that China would abide by the spirit of the agreement and not just the terms, the distrust is self-evident. Is it really the case that the ASEAN countries, in their hearts, recognize China’s leadership? A friend of mine said that the RCEP “looks more like a polite gesture”. In my opinion, this analysis is more realistic. Not to mention that India, as one of the major powers in the Asia-Pacific region, strongly resists RCEP, and it is more than a little bragging to say that such a trade agreement is a major diplomatic victory for China.
RCEP does look like a big pie on the surface, as it involves a population of 2.3 billion people and affects an output of $25 trillion. But in all respects, it’s just a pie. It’s a pretty picture, but time will tell if it will feed the hungry.
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