Trilateral Cooperation Secretariat

ZHAO Jinping The Impact of RCEP and the Prospects of Trilateral Economic and Trade Cooperation 2023.02.13

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The Impact of RCEP and the Prospects of Trilateral Economic and Trade Cooperation

Zhao Jinping

As of January, it has been a year since the RCEP officially took effect. The economic integration in East Asia has entered a new phase with the entry into force of the RCEP which includes China, Japan, the Republic of Korea, Australia, and New Zealand.As the top three economies in East Asia, China, Japan, and the ROK have for the first time established institutional economic and trade cooperation with a high level of liberalization under the same regional agreement framework, which brings significant opportunities for the successive development of economy, trade, and investment among three countries. To date, it has been one year since the RCEP came into force, and what new changes have occurred in trilateral trade as a result of its impact? This article will discuss the author's observations.

I. The positive impact of RCEP has been initially apparent

According to Chinese customs, China's trade volume has mounted by 15% with ASEAN and by 7.5% with other RCEP members year-on-year in 2022 in RMB terms.

Based on the above statistical results, the foreign trade of China, Japan, and the ROK in 2022 has the following salient features. First, the trade growth of the three countries with other RCEP members such as ASEAN countries has accelerated significantly, whose share in their respective total foreign trade has increased, especially in exports. Second, the performance of mutual trade among the three countries is worse than that of trade with other RCEP members, and their mutual dependence on trade has decreased to different degrees. Third, both Japan and the ROK’s exports to China have distinctly decreased, which has become the main factor leading to the decline in the importance of mutual trade. On this basis, can we come to the conclusion that, against the backdrop of the RCEP coming into effect and the establishment of FTA relations between China and Japan as well as Japan and the ROK for the first time, the actual performance of trade between China, Japan, and the ROK has fallen short of expectations, and that the long-standing trend of China's continuous rise in importance in the export markets of Japan and ROK has been reversed? Combined with factors such as changes in exchange rates and inflation in 2022, the above judgments are difficult to hold at this point and remain to be seen on an ongoing basis. There are two main reasons for this. First, the COVID-19 pandemic has led to a decline in the production resumption rate of Chinese companies, continued low demand in the market, and an obvious slowdown in the growth rate of imports. Second, the considerable depreciation of the yen and Korean won makes the dollar-denominated Japanese and Korean exports to China undervalued. From January to November in 2022, the yen and Korean won depreciated by 16.3% and 11.4%, respectively, compared with the average exchange rate of the previous year, and if factors such as local currency slide and inflation differentials are excluded, China's physical quantity of imports from Japan and Korea respectively rose by 3.7% and 6.8% year-on-year.

II. The negative impacts of adverse factors are worthy of caution

Some adverse factors in the trade among China, Japan, and the ROK in 2022 deserve attention. First, the importance of intra-regional trade among the three countries has dropped. 2022 saw a decrease in the share of each country’s trade with the other two countries in their own total foreign trade, with the decrease in Japan and South Korea's exports to China being particularly pronounced. This is related to the orientation of some interest groups who claim to guarantee the security and stability of the supply chain by reducing dependence on the Chinese market. Second, in the context of Japan and South Korea's sluggish exports to China, export control measures involving high-tech goods such as mechanical and electrical equipment and its parts, optical instruments, etc. have been strengthening, further aggravating the severity of the decline in market demand.

Influenced by the outbreak of risks such as the COVID-19 pandemic and geopolitical conflicts since 2021, the international community has been discussing a lot about supply chain reorganization, including many advocates of “decoupling and severing” with China from the standpoint of maintaining their own competitive advantages. In order to avoid being punished by the relevant protectionist measures, some enterprises have to adopt a more cautious and conservative attitude in choosing partners, and their normal business activities have been repeatedly frustrated, which will eventually result in the declining dynamics of the regional economy and the squeezing of growth space for all countries.

III. Suggestions on continuously deepening trilateral economic and trade cooperation

For a long time, under the joint promotion of market forces and government cooperation, China, Japan, and the ROK have been keeping on strengthening their economic and trade relations and continuously expanding mutual trade and investment exchanges, which not only provide a strong impetus for the economic development of the three countries, but also become one of the most important regions and growth points in the global economy. Therefore, it is necessary to strengthen intra-regional cooperation on the industrial and supply chains and level up mutual trade and investment. As the world's most popular regional trade arrangement covering the largest economy, RCEP not only raises the standard of liberalization and facilitation of trade and investment to a new level, but also achieves a new breakthrough in high-level cooperation and rule-making in new economic fields such as trade in services and e-commerce.

Here are some suggestions which can be boiled down to the following four keywords.

First, oppose “decoupling and severing supply chains”. It is true that there are some international advocates of “decoupling” from the Chinese economy and using ideological criteria to restructure the supply chains. There is no doubt that “decoupling” cannot solve the structural problems of any country, and “severing supply chains” will bring great harm to the regional and world economy. China, Japan, and the ROK should enhance the sense of common community with a shared future, prioritize the safeguarding of long-term stability and continuous improvement of the industrial supply chains, deepen mutual economic cooperation and policy coordination, jointly resist the erosion of trade protectionist behaviors, and carry on guiding enterprises to expand mutual investment to provide strong support for enhancing the resilience of the supply chains.

Second, adhere to the multilateral rules. Multilateral rules are an important foundation for building mutually beneficial and win-win international cooperative relations, as well as a basic standard for regulating the competitive behaviors of all parties in the market. Trade measures based on unilateralism go against the spirit of true multilateralism. China, Japan, and the ROK should be committed to maintaining the authority and effectiveness of multilateral mechanisms, taking the initiative to participate in multilateral rule building, and promoting the reform of governance structures in the field of cross-border trade and investment. In particular, when participating in international economic activities, the human rights standards set by the UN should be better followed, and the common values advocated by the UN should be adhered to.

Third, regulate the export controls. More and more economies are implementing foreign investment security review and export control systems around the world, and these systems are justified by the need to maintain the economic security of each country. However, problems such as lacking transparency of the relevant systems, the generalization of security concepts, and discriminatory policies against specific economies have also become increasingly imminent, and normal corporate investments in China and some emerging economies have been severely constrained. Trade and investment protectionism and abusive national security means of abnormal competitive behaviors should be eliminated.

Fourth, liberalization and facilitation should be anchored. China is speeding up the negotiation of free trade agreements and investment agreements with its major partners in order to gradually build up a global network of high-standard FTAs, and after RCEP has officially entered into force, China has also started the negotiation of joining CPTPP and DEPA and other higher-level trade agreements. In the future, China, Japan, and the ROK should take further deepening the cooperation in liberalizing and facilitating trade and investment as an important policy direction. First, to accelerate the implementation of the liberalization and facilitation measures of RCEP. Second, to jointly promote the follow-up negotiations of RCEP. Third, to speed up the completion of the negotiations of higher-level trilateral free trade agreements. China and ROK have successively started the consultation process to join CPTPP. Referring to the provisions of the agreement on one-to-one prior consultation and formal negotiation for new members' accession, it can be suggested that bilateral negotiations among China, Japan, and the ROK should first be conducted according to the CPTPP standards, and eventually integrate to form a tripartite agreement above the CPTPP level, which can not only complete the negotiation of trilateral free trade agreements, but can also make a good preparation for joining the CPTPP, improving the level of regional economic integration among the three countries significantly.

Author: Zhao Jinping, master and doctor of economics of Rikkyo University, Tokyo, is a senior researcher of Chongyang Institute for Financial Studies, Renmin University of China, as well as a guest scholar of Trilateral Cooperation Secretariat.