While the US-China trade war often captures headlines, a potentially more important trend is taking shape: East Asia is adopting a regional approach to economic integration. American isolationism and Covid-19 are accelerating this trend. US-China tensions are becoming ever more toxic and businesses are backing away from trans-Pacific supply chains.
Two trade agreements are defining this regional turn: the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) signed in 2018, and the Regional Comprehensive Economic Partnership (RCEP) to be signed this year. They will lower regional trade costs and establish regionally focused rules and institutions.
They are likely to be dominated by China, Japan and South Korea – the United States and India were initially partners in the CPTPP and RCEP, respectively, but withdrew from them before they were finalised. The agreements are large even without them; the RCEP, for example, has a combined GDP as large as that of the US or Europe.
These regional trends would have felt confining in the past, but in today’s global environment they offer substantial benefits. In computer simulations published by the Peterson Institute for International Economics, we examined the long-term economics of the US-China trade war and the two regional accords. We found that China has the most to lose from the trade war – and the most to gain from the new agreements, economically and strategically. China is a member of the RCEP and, in a surprise announcement following the 2020 National People’s Congress, Premier Li Keqiang expressed interest in joining the CPTPP.
The US-China trade war, according to our study, will not only harm China and the US but also depress world GDP by US$301 billion and world trade by US$1 trillion annually by 2030. These large numbers result from a partial destruction of the huge US-China relationship. The US will replace much, but not all, of its trade with China by buying more from Mexico and South Asia. China will replace much, but not all, US trade by doing more business with Japan, Korea and Taiwan. The common denominator is a retreat from efficient international supply chains.
But the new regional agreements will repair some of this damage. The CPTPP will forge stronger connections among its 11 members in Asia and the Americas, while establishing state-of-the-art provisions for digital trade. It will especially benefit Japan, Mexico and Malaysia. The RCEP will connect China, Japan and Korea with each other and smaller East Asian economies – it will be the first free-trade agreement connecting the three giants. Together, the CPTPP and RCEP offset the negative effects of the trade war for the world as a whole, but not entirely for China and the US.
Yet relations between China and its East Asian neighbours are strained: many fear China’s assertive economic and security policies. It may be tempting – but counterproductive – for China to use its new regional leverage to seek “China first” economic concessions and full political support in exchange for lucrative economic ties.
The opposite approach – building an open, mutually advantageous framework – would go much further in driving the region’s post-Covid-19 recovery and long-term dynamism. It would consolidate diverse economic and technological assets and make regional competition more productive and less contentious.
By adopting such a strategy, China could also shape the future global trading system more effectively. The CPTPP is an advanced agreement, featuring cutting-edge provisions for intellectual property protection, digital commerce, state-owned enterprises, and other aspects of trade. Joining such an agreement would challenge China, since many of its rules are inconsistent with the agreement now. But this must have been understood by Premier Li, suggesting room for compromise.
The gains from finding middle ground on global norms would be large. In an earlier study, we estimated that China’s participation in the CPTPP would add US$455 billion to global real incomes, of which China itself would gain US$298 billion. China could adopt CPTPP rules, perhaps with adjustments that leave room for justifiable industrial policies many other countries also pursue. These steps would ease suspicion of Chinese intentions. In time, they could improve relations with the European Union and Japan, and even a less ideological US.
Meanwhile, US relations with China have fallen to their lowest ebb since Richard Nixon visited there in 1972. The Phase 1 trade agreement reached on January 15 offered hope that the trade war could de-escalate. But the deal left most tariffs in place and added new targets – US$200 billion in additional Chinese purchases of US goods over two years – that were unrealistic even before Covid-19 disrupted trade flows. In January, the Phase 1 deal seemed to define the upper bound of the trade war; today, in the wake of Covid-19, it suggests a lower bound.
As the US presidential election approaches, the Trump administration is ratcheting up sanctions on Chinese firms, universities and individuals, imposing high costs on China and the US. China also seems to be preparing for a long economic war and is responding to US attacks in kind. In contrast to tit-for-tat escalation, the economic cooperation framework emerging in East Asia – a region long committed to seeing trade as an engine of progress – will keep vital institutions alive.
The RCEP and CPTPP offer hope in a dangerously divided world. They partly offset the damage of the US-China conflict, encourage cooperation in the Asia-Pacific, and suggest viable directions for the world trading system. China has an opportunity to demonstrate its commitment to openness and trade – it is already a champion of the RCEP and by joining the CPTPP it can show its willingness to embrace global norms.
These steps address issues that now separate China from OECD countries. They will not end the trade war but could ease the polarised debate around it.
Source: South China Morning Post
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