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What does Australia's trade rift with China mean for RCEP

Posted on: November 25, 2020 | Tjeerd S. Ritmeester | Asia

Date modified: February 28, 2021

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"If you make China the enemy, China will be the enemy"

What is going on: China launched an extraordinary attack on the Australian government in a deliberately leaked document. In the file Beijing accuses Canberra of poisoning bilateral relations.

Why does it matter: The attack comes just a few days after Australia, China, and 13 other countries in the Asia Pacific signed the 'Regional Comprehensive Economic Partnership' (RCEP). The deal is the biggest regional trade agreement ever signed and represents a total GDP of $26.2 trillion and about 1/3 of the world population. The trade deal comes after almost almost a decade of difficult negotiations and growing geopolitical tensions.

Signatories praised the signing of the deal in a context of a pandemic, protectionism, trade conflicts and economic crisises. The Asia Times even describes it as the possible dawn of the long expected Asian Century. Although analysts warn that many obstacles still need to be overcome and we have to wait how governments implement the measures in 2021, it is still a major symbolic step in laying the base for future economic integration and cooperation in the Asia Pacific region.

So what do the problems between China and Australia say about RCEP?

Hyped up:

RCEP is unambitious in its core. The talks were initiated in late 2012 by the 10 member states of ASEAN with 6 dialogue partners they had free trade agreements (FTA) with. The objective was bringing the FTA's together in one bigger trade agreement. RCEP became much bigger in scope but also more complex. The end result is a hollowed out compromise with a lot of potential but not much meat on the bones.
The trade deal elimates 90% of tariffs but in an unambitious time frame of 20 years. A significant sector like agriculture is not part of the deal. Financial Times also report that the coverage of services is mixed, e-commerce is largely disappointing, and RCEP does not do enough to set common standards for products. Also environmental and labour standards are largely left out of the deal. India, a country with few free trade agreements, would have made a big difference for most member states but pulled out of the negotiations. RCEP also limits Canberra's capabilities to support national industries in times of economic trouble.
There are also doubts about the sustainability of RCEP due to tensions in the Asia Pacific region. The Australia-China relationship is highly symbolic for that. Mistrust between both countries is not new and has been on the rise for years. Australia governments and intelligence services warned for Chinese attempts to influence decision making processes. In 2018, Australia was the first country to prevent the Chinese tech firm Huawei from building a 5G network over security concerns. For most of the time, trade was not affected but this changed in 2020. Australia called for an investigation into the origins of Covid-19. China reacted by imposing a 80.5% tariff on Australian barley, by suspending a part of beef imports, delaying imports of Australian coal and by launching an anti-dumping probe into Australian wine imports. China also warned students and tourists to not visit Australia.
Although RCEP can be a platform for cooperation, the recent fallout doesn't offer much hope. RCEP is too weak to make a meaningful difference for Australian companies and tensions with China don't offer much hope for the future.

Not hyped up:

China has been vocal in claiming leadership over RCEP but the trade deal brings together 14 other countries who dont necessarily agree with China's stance. Think about ASEAN, the 10 member bloc of Southeast Asian countries. It was ASEAN that initiated RCEP talks and that wanted to use it as a platform for further internal and regional integration. RCEP exists out of very diverse countries but offers a framework that could convince investors and governments to invest in all member states including poorer states like Myanmar, Cambodia and Laos.
Relations between China and Australia might have hit a rocky road but there are more potential partners. Australia is vocal about using RCEP in improving relations with ASEAN. Trade Minister Simon Birmingham referred not once but two times to ASEAN when discussing benefits for Australia. Australian Prime Minister Scott Morrison has already promised $21m for a new public health emergency centre at the virtual Asean summit. "Other commitments include a new office in Myanmar's capital Naypyitaw, an expansion of the defence network across all countries within ASEAN and $104m towards the region's security needs, including military education."
Australia has free trade agreements with many RCEP signatories so gets most value out of the few common standards set by the deal. It also includes improved mechanisms for tackling non-tariff barriers and offers room for trade in services including healthcare, telecommunications, professional and financial services. This will also offer opportunities for Australian companies who want to invest in China. Barley, beef and wine are minor industries compared to Australia's healthcare and financial services.
Minister Birmingham also decribed RCEP as a new channel to discuss trade tensions with China. That might be seen as wishful thinking but maybe not too unrealistic. China sees itself as leader of RCEP and lauded the signing as a victory for free trade and multilateralism. That means China actually has to cooperate with partner state to make the trade framework work, not just by bullying, but also by making compromises.

In short: Even as RCEP is perceived by some as mostly a symbolic first step, it does offer a base for cooperation and integration. Australia gets improved access to 14 other economies, not just China but also rising tigers like the member states of ASEAN. Tense relations with China will be a major obstacle moving ahead but is definitively not he whole story of RCEP.

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