Asia-Pacific Regional Economic Integration and Taiwan’s Exclusion from RCEP

I-wei Jennifer Chang is a research fellow at the Global Taiwan Institute.On November 4, 10 member states of the Association of Southeast Asian Nations (ASEAN) and five regional nations announced at the 35th ASEAN summit in Bangkok that a major regional free trade agreement—the Regional Comprehensive Economic Partnership (RCEP) (區域全面經濟夥伴協定)—will be signed next year. RCEP will establish the largest free trade area in the Indo-Pacific region, comprising 10 ASEAN countries, China, Japan, South Korea, Australia, and New Zealand—and notably without the United States. [1] Since RCEP negotiations began in 2013, Taiwan has expressed interest in joining the regional trade pact, as well as other multilateral agreements such as the Trans-Pacific Partnership (TPP) and its successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), as part of broader efforts to participate in multilateral economic cooperation and free trade negotiations, as well as to institutionalize bilateral and multilateral cooperation with ASEAN countries.

As the most economically dynamic region of the world, the Indo-Pacific region has been the focus of several multilateral trade negotiations over the past decade, most notably the TPP, CPTPP, and RCEP. Southeast Asian countries occupy important nodes in the supply chains connected to the more industrialized economies of Taiwan, China, South Korea, and Japan. Over the last few decades, there has been a consistent push within the region towards economic integration and greater connectivity, sometimes led by the United States, and other times by regional economies. Once the economic anchor of the Barack Obama administration’s Pivot/Rebalance to Asia, the TPP—which did not include China—was already losing steam before and lost US support soon after Donald J. Trump assumed the American presidency. Indeed, a major impetus towards a final agreement on RCEP has been attributed to the US-China trade war, US protectionism under President Trump, and their negative spillover effects onto regional economic growth. The United States is not a participating member of either CPTPP nor RCEP, leaving major regional economies such as China and Japan (and sometimes India) and rapidly growing Southeast Asian countries to play larger roles in forging and institutionalizing these multilateral trade mechanisms in the Indo-Pacific region. Contrary to the common perception that RCEP is led by China, ASEAN’s involvement helped steer multilateral cooperation under RCEP. A proclaimed objective of RCEP is to “significantly contribute to an open, inclusive, and rules-based international trading system and expansion of value chains.”

After seven years of negotiation, 15 of the 16 countries said they “have concluded text-based negotiations for all 20 chapters and essentially all their market access issues; and tasked legal scrubbing by them to commence for signing in 2020.” The RCEP participating countries will also work with India, which opted out of the final negotiations in Bangkok, to resolve all outstanding issues. India declined to join RCEP, pointing to “significant issues of core interest that remained unresolved.” Some analysts argued that India remained concerned about the potential surge of Chinese imports and lack of progress on service market access. India’s decision to not join RCEP at the moment due to domestic protectionist concerns came as disappointing news. Japan and other countries saw India’s presence as a counterweight to China, which is likely to play a major role in Asia-Pacific connectivity.

China, meanwhile, lauded RCEP’s announcement, with Chinese state media calling RCEP a boost to its international campaign to preserve economic globalization against protectionism and unilateralism, namely from the United States. A Chinese editorial said that RCEP’s progress may quicken the pace of a potential China-ASEAN Free Trade Area and China-Japan-South Korea Free Trade Area. In addition to RCEP, the China and ASEAN countries issued a joint declaration in Bangkok on synergizing China’s Belt and Road Initiative and the Master Plan on ASEAN Connectivity 2025, further seeking to strengthen economic and trade relations between the two sides.

For Taiwan, exclusion from RCEP could have significant implications for its economy, which is heavily dependent on foreign trade. RCEP countries, which account for nearly 60 percent of Taiwan’s foreign trade (with China constituting 25 percent of the island’s foreign trade), and Taiwan’s major trade partners and investment centers—China, ASEAN, and Japan—are also RCEP member countries. In response to the announcement on RCEP, Taiwan’s Minister of Economic Affairs Shen Jong-chin (沈榮津) downplayed the impact on Taiwan, arguing that 70 percent of trade between Taiwan and RCEP countries are already tariff-free. Taiwan also has two free trade agreements (FTAs) with New Zealand and Singapore, signed in July and November 2013, respectively. At the 2013 signing of the Agreement between Singapore and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu on Economic Partnership (ASTEP), Taipei said that such an FTA “demonstrates Taiwan’s commitment to trade liberalization and internationalization” and “will pave the way” for Taiwan’s entry into the TPP and RCEP.

After RCEP is formally inaugurated in 2020, taxes levied on Taiwanese exports to RCEP countries could weaken the competitiveness of Taiwanese products in RCEP countries. The Taiwanese industries most likely to be affected include textiles, petrochemicals, and automotive components. Minister Shen said these potential effects of the RCEP agreement could be mitigated by industrial changes, and that Taiwan’s government will assist traditional industries to enhance their services. Another potential impact is that Taiwanese and foreign capital may be channeled towards the RCEP countries and diverted away from Taiwan.

In 2014, Taiwan said it would like to join RCEP because the countries covered by the agreement are also Taiwan’s main export market and investment region. Also, Taiwan’s entry into RCEP could bring additional benefits, including improving Taiwan’s industrial structure, attracting foreign trade and investment to Taiwan, and strengthening the industrial supply chain links between Taiwan and RCEP members, thereby enhancing Taiwan’s competitiveness and assisting Taiwanese manufacturers to achieve a more level playing field in the international market. Furthermore, given that Taiwan lacks the experience in participating in regional FTAs and liberalization with many countries, Taiwan’s participation in RCEP could help its laws and regulations conform to international standards.

Once the RCEP completes negotiations, it will definitely have a major impact on Asia-Pacific economic integration and the global economic situation, according to Taiwan’s National Development Council. The regional economic integration of major trading partners under RCEP will create an uneven playing field for Taiwanese businesses to compete in the international market, said the National Development Council. Taiwan could potentially apply for RCEP membership after the RCEP negotiation is completed in 2020, as long as it is an ASEAN FTA partner and a trade partner who has not participated in the RCEP negotiations and is subject to the consensus of RCEP members.

Taiwan’s President Tsai Ing-wen (蔡英文) has long supported Taiwan joining RCEP, though with China’s participation as a member state, that would be a long shot. In her inaugural address in May 2016, Tsai mentioned joining RCEP: “The first step of reform is to strengthen the vitality and autonomy of our economy, reinforce Taiwan’s global and regional connections, and actively participate in multilateral and bilateral economic cooperation as well as free trade negotiations including the TPP and RCEP.” Under Tsai’s “New Southbound Policy” (新南向政策), Taipei seeks to pursue institutionalized bilateral and multilateral cooperation with ASEAN and South Asian countries. One of the main economic and trade objectives of the New Southbound Policy is to make progress on signing bilateral investment and taxation agreements with ASEAN countries, South Asia, New Zealand, and Australia, for doing so would strengthen Taiwan’s efforts to join TPP and RCEP.

After the recent RCEP announcement, Taiwan’s Foreign Minister Jaushieh Joseph Wu (吳釗燮) pointed out that since China is a RCEP member, Taiwan’s chances of joining the trade agreement are not very high. Foreign Minister Wu said the RCEP mechanism is not a friendly mechanism for Taiwan, but Taiwan will seek to seriously participate in other regional economic integration mechanisms such as CPTPP. Wu said the island has a higher chance of entering CPTPP, comprised of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, and notably without Chinese participation, than RCEP. From a comparative standpoint, CPTPP admission is more open politically towards Taiwan than RCEP, though RCEP countries account for 59 percent of Taiwan’s trade compared to CPTPP at 24 percent. In terms of investment, RCEP accounts for 65 percent of Taiwan’s foreign investment, while CPTPP only accounts for 14 percent (due to China’s inclusion in RCEP). Therefore, RCEP is economically more beneficial to Taiwan than CPTPP.

The inclusion of China, coupled with the current absence of the United States and India, in RCEP may serve to weaken the US Indo-Pacific Strategy and create a bigger space for China to set the rules and norms of regional economic integration. Alongside China’s massive Belt and Road Initiative (also known as “One Belt, One Road”) and its extensive economic outreach to Southeast Asian countries, RCEP may further strengthen China’s role in Asia-Pacific connectivity, particularly in Southeast Asia.

Meanwhile, Taiwan’s exclusion from RCAEP could make Taiwanese exports less competitive than other economic competitors such as South Korea who are participating members of RCEP. A weaker Taiwanese economy relative to RCEP countries could also hurt Taiwan’s political standing in the region and affect its foreign relations. While the economic benefits of Taiwan joining RCEP are clear, under pressure from Beijing it may only realistically be able to join CPTPP as the next best option.

The main point: Once RCEP is formally established in 2020, Taiwan’s exclusion from RCEP will likely impact the island’s competitiveness and trade and investment with RCEP countries. Taiwan has expressed an interest in joining RCEP, but this may be a long shot given China’s presence as a participating member in the regional free trade agreement.

[1] The ten members of ASEAN are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.