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Talking Trade blog

Five obstacles to creating Asia’s new world order

Published 28 August 2019

Last week’s Talking Trade post highlighted the rapidly disintegrating economic order. Like the collapsing Berlin Wall, viewed from some angles, the situation appears the same. But viewed from others, nothing of the Wall remains intact.

In this new, changeable world it remains unclear what will happen next.  One certainty is that Asia will need a better platform for managing the fallout.

At the moment, Asia does not have a suitable institution capable of working through a global economic system of extreme turbulence. 

The closest options are the Association of Southeast Asian Nations (ASEAN), with 10 members, and the Asia Pacific Economic Cooperation (APEC) with 21 members spanning the Pacific Ocean.  Neither brings together sufficient members from across Asia.

The only other mechanism readily available is the Regional Comprehensive Economic Partnership (RCEP).  RCEP includes 16 countries spanning from Australia and New Zealand to India, China, South Korea and Japan with all 10 members of ASEAN. 

RCEP was certainly not launched in late 2012 with the intention of managing trade in a system of collapsing global rules.  It is struggling to get across the finish line in November after years of fraught negotiations. 

Getting RCEP done is imperative.  Asia needs RCEP more than it ever could have imagined at the outset.

There are at least five key challenges ahead in meeting the rapidly approaching November deadline for closure. 

1: Japan and South Korea are currently embroiled in a rapidly escalating trade and security dispute.  The original problem stems from long-simmering historical grievances that have typically been tempered by the intervention of the United States. 

However, the breakdown of the global order means that there is currently no handbrake stopping these two neighbors from continuing to intensify their disagreements.  It has already spilled over from trade to the security realm. 

To condense the story considerably, Japan placed South Korea on a list of countries that are subject to stronger export controls for the ostensible reason of ensuring that prohibited items do not enter North Korea. This will make it more difficult for trade to flow from Japan to Korea.  In response, South Korea has removed Japan from intelligence sharing.  Pulling back from the abyss is going to be hard.   

It is a bit like watching two passionate neighbors, standing in the driveway, arguing over who planted the tree that now straddles the property line. In the meantime, a forest fire is on the ridge line overhead. If the two don’t respond to larger events soon, this tree will be swept away with all the others.

Thus far, the two countries have managed to co-exist in RCEP.  While bilateral relationship tensions seem paramount, the larger regional and global dangers are much more significant for both parties.  Trade dependent countries ignore the wider context at their peril. 

2: India continues to struggle to the level of commitments needed to sign off on the RCEP agreement.  In particular, India remains deeply worried about manufacturing imports from China.  This specific impasse has stymied forward progress in RCEP for years. 

India will not achieve greater levels of domestic manufacturing without importing necessary raw materials, parts and components.  Nor can “Make in India” work without better integration into value chains which has seen Indian content stubbornly stuck at relatively low levels for some time. Opening to RCEP economies on the timetables currently envisaged manages this transition better than any other likely alternative on the horizon.

Stepping out of RCEP at a time of increasing destabilization in trade is not a solution to India’s challenges. 

3: India’s competitiveness concerns are mirrored to a lessor degree by many other RCEP countries—particularly in services.  Other RCEP economies are troubled by the idea that opening markets to 16 economies in Asia may result in short-term economic changes.

These concerns are pressing for political leaders, but are also importantly coming from outside RCEP at this time as well.  As the trade war spreads and the global regime breaks down, traditional trade lanes are going to be dramatically reshaped in the coming few years. 

The domestic level pressures from such a reorientation will be significant.  Keeping trade open within Asia for Asian firms can help buffer some of the turbulence.

4: Technology shifts are also driving disruption.  Such changes are not new, of course, yet they have combined with trade to form an often toxic brew in many economies around the world. 

Technological adjustments will happen with or without RCEP.  Having an Asian regional trade arrangement, however, should help Asia maintain economic growth in the face of strong headwinds from traditional final markets like the United States and Europe. 

Shutting off individual markets to one another in the face of rising trade tensions and technological disruption is a recipe for more trade and economic contraction.  The siren song of economic populism has to be resisted in a region that has seen trade and growth lift impressive numbers of people out of poverty with more work yet to be done.

5: Officials are understandably cautious when launching a new endeavor as large and complex as RCEP.  It is not always clear at the outset where such an exercise might eventually lead. 

Commitments in a trade agreement can narrow policy space in some areas while opening opportunities in others.  Calibrating the balance can seem tricky.

After years of talks, 27 full rounds of negotiations, nearly a dozen formal ministerial sessions and multiple leader’s meetings, it is time for RCEP officials to take a deep breath and move forward.  Nearly all possible issues have been explored as much as they can, with most avenues already examined and most options tabled over the years.

Officials are preparing to head into the 28th round and yet another ministerial for RCEP.  It is past time to put aside differences and lock down the final commitments needed to bring the agreement into reality.  The clock is rapidly ticking.  November is just around the corner.  Asia needs RCEP to become reality.

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Dr. Deborah Elms is Head of Trade Policy at the Hinrich Foundation in Singapore.  Prior to joining the Foundation, she was the Executive Director and Founder of the Asian Trade Centre (ATC). She was also President of the Asia Business Trade Association (ABTA) and the Board Director of the Asian Trade Centre Foundation (ATCF).

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