China–Japan relations after RCEP

05/05/2022    58

On 1 January 2022, the Regional Comprehensive Economic Partnership (RCEP) came into effect. RCEP has significant economic importance because it is the first comprehensive economic partnership in East Asia to include the three major countries in the region: China, Japan and South Korea.

RCEP is expected to deepen economic interdependence in East Asia by creating more integrated supply chains. Although RCEP’s 91 per cent reduction in tariffs is a lower level of liberalisation than the estimated 98 per cent tariff reduction in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), RCEP more than makes up for this in volume. Encompassing around 2.3 billion people and a combined GDP of about US$29 trillion, RCEP is the world’s largest free trade agreement and accounts for approximately 30 per cent of global population and GDP.

RCEP could encourage China and Japan to cooperate in their investments and achieve win-win situations in the region, such as in Southeast Asia. Japan’s most influential business association, Keidanren (the Japan Business Federation), has sought to expand the operations of Japanese companies in the huge Chinese market and RCEP is likely to provide more opportunities.

But integration is also likely to intensify Sino–Japanese competition for economic leadership in the region, especially after the US withdrawal from the CPTPP. China has already invested a considerable amount of money in infrastructure building through the Belt and Road Initiative (BRI) and promoted its economic and political interests in Southeast Asia and other regions. Economic integration through RCEP is likely to enhance China’s influence in these regions, with greater opportunities to engage in investment and other related activities under the BRI.

After the US withdrawal, China surprisingly applied for CPTPP membership. Its accession would tilt the economic balance of power in the Asia Pacific towards China. But there are still several obstacles. The Chinese government provides large subsidies to state-owned enterprises (SOEs), which maintain deep political relationships with the government. It may be difficult for China to satisfy CPTPP entry conditions by reducing these subsidies. China’s forced labour conditions are another hurdle, along with the requirements for free data flow and environmental protection. It is unclear how the authoritarian Chinese government can address these issues in a way CPTPP members find acceptable.

But original member states like Vietnam also had the problem of large subsidies to SOEs and were provided exemptions to join the CPTPP. In this sense, China’s entry is not impossible. Also, China has previously conducted skilful negotiations with some CPTPP member states and may win concessions that allow it to join the CPTPP.

Whether there is a real prospect for China joining the CPTPP or not, China’s application for membership provides a way to assess US intentions to regain a leadership role in the Asia Pacific. Although the United States has aimed to promote the Free and Open Indo-Pacific to contain a rising China and proposed an economic framework called the Indo-Pacific Economic Framework (IPEF), the IPEF is not a binding free trade agreement and does not provide a sufficient economic framework for US-led engagement in the region. Also, the Blue Dot Network launched by the United States, Japan and Australia to promote ‘quality’ infrastructure investment has seen much less progress than the BRI.

Without significant US engagement in regional economic integration, Japan has responded to the rise of China by playing a leadership role in the creation of the CPTPP. But Japan’s leadership position may be threatened if China’s membership application is accepted. India’s withdrawal from RCEP may also undermine Japan’s efforts to maintain leadership. In the end, China may become the dominant economic power in the region by establishing trade and investment rules beneficial to it.

While Japan tends to consider competition with China when promoting regional economic integration, Japan could also achieve significant benefits. In addition to acquiring easier access to the enormous Chinese market with reduced or no tariffs on its exports, Japan may also be able to induce China to observe more liberal international trade and investment rules. Ultimately, economic cooperation with China may strengthen security in the region.

Source: East Asia Forum