Asia-Pacific Allies Sign Huge Trade Deal With China While U.S. Sits It Out

President-elect Joe Biden said Monday the United States must align itself with other democracies so that they write the rules governing global trade — and not China.

He was replying to a reporter's question on whether the U.S. should join a major trade deal, the Regional Comprehensive Economic Partnership, that 15 Asia-Pacific countries signed on Sunday.

RCEP unites China, Japan and South Korea in a trade deal for the first time and includes 10 Southeast Asian countries plus Australia and New Zealand.

That leaves the U.S., with the largest economy, and India, the largest democracy, on the sidelines of one of the world's biggest trading blocs — even as China deepens trade and investment partnerships in the region and worldwide.

RCEP members' combined 2.2 billion people make up almost a third of the world's population, and a similar share of the global economy and trade, according to the Association of Southeast Asian Nations or ASEAN. The Peterson Institute for International Economics estimates the new deal could potentially grow the global economy by an annual $186 billion.

After eight years of tricky negotiations, RCEP arrives as the coronavirus pandemic is battering member countries' economies. In Indonesia and the Philippines, for example, the combined number of confirmed coronavirus infections has reached nearly 900,000 cases, and lockdowns to contain the virus have forced millions of people out of work.

In a joint statement, RCEP member leaders said signing the agreement "demonstrates our strong commitment to supporting economic recovery" from the pandemic downturn, with job creation and "open, inclusive, rules-based trade and investment."

The pact will facilitate investments and reduce already low tariffs among member countries over time. It will deliver modest benefits at the outset, according to Deborah Elms, founder and executive director of the Singapore-based Asian Trade Center. "Not everything will be cut. Not everything will go to zero. And the timelines are very long on some sensitive products," she says.

For example, Japan will maintain tariffs on rice, wheat, dairy products, sugar, and beef and pork to protect its farmers, Bloomberg reported.

The deal could have been "more ambitious," Elms says, "but this is a very diverse group of 15," which mixes wealthy nations like Japan and Australia with poor ones like Laos and Cambodia.

Some media have labeled RCEP a China-led effort, but analysts say that's inaccurate. "It was not even dominated by China for a long time, even though China is the largest economy in the agreement," says Michael Green, senior vice president for Asia at the Center for Strategic and International Studies. He named Japan and ASEAN members, including Singapore, as the drivers.

India had been a party to the talks but withdrew last year.

President-elect Joe Biden did not say specifically if the U.S. should join RCEP in his conference Monday in Delaware.

But he noted, the U.S. makes up 25% of the world's economy, and, "We need to be aligned with the other democracies, another 25% or more, so that we can set the rules of the road instead of having China and others dictate outcomes because they are the only game in town."

He also said, after he takes office, labor and environmentalists will be "at the table in any trade deals we make."

RCEP doesn't address labor standards or environmental protections. Nor does it prevent state-owned enterprises from gaining a competitive edge with government subsidies.

"It really doesn't provide any kinds of disciplines or constraints that would change China's economic model at all," says Chad Bown, a trade economist with the Peterson Institute for International Economics.

Analysts say another pact originally known as the Trans-Pacific Partnership is more comprehensive than RCEP. The trans-Pacific deal — which rebranded with "Comprehensive and Progressive" at the front of its name after the U.S. withdrew and 11 remaining nations signed on — set a high standard for rules, placing some restrictions on state-owned enterprises, slashing tariffs, promoting innovation and developing the digital economy, says Green of CSIS.

President Barack Obama championed the trans-Pacific trade pact as a hedge against China writing the global trade rules for the 21st century. But within days of taking office, President Trump pulled the U.S. out of the deal, and went on to impose tariffs on trading partners and kick off a trade war with China.

A Brookings Institution blog analysis says the trans-Pacific deal and the new RCEP "together will offset global losses from the U.S.-China trade war, although not for China and the United States."

Green says the U.S. "will regret" being on the sidelines of two major multilateral agreements. He says this will give China two advantages: "One is it will create a narrative within the region that China is the new leader with the most influence on trade and rules making. And the second is it's going to reduce barriers to trade with China at a time when the U.S. is not doing anything to reduce barriers to trade with the United States."

Former U.S. Trade Representative Wendy Cutler pointed to another takeaway, writing in a recent commentary, "RCEP is another reminder that our Asian trading partners have developed a confidence about working together without the United States."

All this poses stiff challenges for the incoming Biden administration.

China, meanwhile, hailed RCEP as a win. "The signing of the RCEP is not only a monumental achievement in East Asian regional cooperation, but more important, a victory of multilateralism and free trade," Premier Li Keqiang said, according to Chinese state media.

However, CSIS' Green says the "critical game" historians might look back on "is not over 20th century reduction of tariffs, but 21st century definition of rules about data, reciprocity, digital trade, where the U.S. is a critical player."

"So, we're not out of the game completely."

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