Source: YI CAI 

Authors: Feng Difan ▪ Gao Ya

"Joining RCEP is probably the most suitable choice for China at the moment."

Will China achieve as much success in international trade negotiations in 2021 as it did in 2020?

What are the prospects for negotiations on the China-Japan-South Korea Free Trade Agreement and China's accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)?

How can we interpret the benefits brought to international trade by the Regional Comprehensive Economic Partnership (RCEP), whose conclusion was promoted in 2020?

In an exclusive interview with a Yicai reporter, Dr. Guan Jian stated that the most important "first" in RCEP is the first bilateral tariff reduction arrangement between China and Japan.

Meanwhile, under the RCEP framework, the bilateral tariff concession level between China and South Korea is about 90%, and between China and Japan it is about 88%. If a trilateral free trade agreement could be reached among China, Japan and South Korea, the tariff concession level would certainly be significantly increased, likely reaching 96%-98%. He explained, "The gap between these figures represents the space for truly comprehensive trade liberalization between China, Japan and South Korea—that is, moving from 88% to 98%."

Looking ahead to the possibility of China joining the CPTPP, Guan stated that when it comes to negotiating high-quality, high-standard trade agreements, China has no issues, whether under RCEP or in future free trade area negotiations. He added, "The CPTPP will certainly bring greater economic benefits to China."

Significant Room for Comprehensive China-Japan-South Korea Free Trade Area

Yicai: RCEP includes many "firsts." What do you think is the most remarkable and important among them?

Guan: RCEP does indeed include several "firsts." If I had to choose the most important, I would say it is the first bilateral tariff reduction arrangement between China and Japan. In other areas, such as China's first commitment to the investment sector using a negative list approach, this actually reflects the comprehensive negative list management for foreign investment already implemented domestically. This time, the outcome of this opening-up is simply being demonstrated through an international treaty.

For China, being able to reach a bilateral tariff reduction arrangement with Japan through RCEP is a historic breakthrough. Among the 10+5 members of RCEP, we already have bilateral free trade agreements with ASEAN, South Korea, Australia and New Zealand, but not with Japan. Adding to this the difficulty of negotiating a separate tariff reduction agreement with Japan, the fact that China and Japan have reached a bilateral tariff reduction arrangement on the RCEP platform is indeed a historic breakthrough.

Yicai: Under the RCEP framework, how much room is left for continuing negotiations on the China-Japan-South Korea Free Trade Agreement?

Guan: The level of economic and trade rules and openness under RCEP is far greater than that under the WTO framework. However, overall, RCEP still leans more towards being a traditional trade agreement and still has some distance to go before becoming a so-called modern trade agreement. This gap precisely represents the biggest highlight or potential space for a trilateral free trade agreement among China, Japan and South Korea.

First, in terms of tariff levels on goods, the tariff concession level in the bilateral free trade agreement between China and South Korea actually reached 95%-96%, but under the RCEP framework, the bilateral concession level between China and South Korea is only 90%. Meanwhile, the tariff concession level between China and Japan under RCEP is about 88%. If a free trade agreement could be reached among China, Japan and South Korea, this level would certainly be significantly increased, likely reaching 96%-98%.

The gap between these figures represents the space for truly comprehensive trade liberalization between China, Japan and South Korea—that is, moving from 88% to 98%. This is a significant space. We can also well imagine that if a China-Japan-South Korea Free Trade Area were achieved, it would inevitably establish the leading position of the entire East Asian region.

Furthermore, in terms of opening up in the investment and services sectors, under the current RCEP framework, China has made more opening-up commitments in these areas, which aligns with our current opening-up policies. However, if a free trade agreement could be reached among China, Japan and South Korea, I believe there will certainly be greater room for opening-up and cooperation in the services and investment sectors. This is something worth anticipating.

Yicai: The tariff concession level in the China-South Korea FTA is higher than that achieved under RCEP. Does this mean it is more convenient for Chinese and South Korean companies to use the China-South Korea FTA for trade?

Guan: Yes. This is something many people find difficult to understand: why is the tariff concession level under RCEP lower than that under bilateral agreements between China and other countries? For example, the tariff concession levels in the bilateral free trade agreements between China and South Korea and between China and Australia are around 96%-98%, but under RCEP, our tariff concessions with South Korea and Australia are only around 90%. In other words, RCEP represents a smaller degree of openness than these bilateral trade agreements.

Here is an apt analogy. If we think of the WTO as a "cafeteria-style meal," then RCEP is like a "set meal," and bilateral trade agreements are like "a la carte." Currently, perhaps only 60%-70% of goods are at zero tariff in the WTO, 80%-90% are at zero tariff in RCEP, and in the bilateral context, the level actually reaches 96%-98%.

With these rules coexisting, it is a matter of choice for enterprises. For instance, if a South Korean company wants to export to China, it might not benefit from zero tariffs under RCEP, but it could benefit from zero tariffs under the China-South Korea FTA. So the company can freely choose.

Yicai: Some major categories between China, Japan and South Korea, such as cosmetics, are not covered by RCEP. Is this also intended to be negotiated separately within the China-Japan-South Korea Free Trade Agreement?

Guan: The background of the RCEP negotiations was that customs authorities, together with various ministries and commissions, negotiated the level of tariff openness industry by industry. In the cosmetics sector, China might be in a relatively weaker development position, so we would prefer more protection. For Japan, similarly, at an 90% openness level, Japan might want to protect industries it considers vulnerable, such as agriculture, while opening up industries it considers unproblematic. This is essentially a result of negotiation.

In the actual decision-making process, it is also possible that these issues are being reserved for negotiation in the China-Japan-South Korea FTA. Because if all tariffs were resolved within RCEP, there might be less bargaining chips for future China-Japan-South Korea negotiations.

RCEP Is a Model of Regionalization, CPTPP Is the Future of Globalization

Yicai: Japan tends to refer to the CPTPP as a high-quality agreement. What do you see as the gap between the CPTPP and RCEP?

Guan: Some opinions hold that RCEP's overall openness is not high. However, this may be because during the early stages of negotiation, some participating countries made insufficient commitments regarding openness and rule standards. Given this situation, the level of ambition in negotiations decreased. Some least developed countries might have only intended to open up 80% because their development levels varied, and consequently, their commitment levels also varied. Ultimately, a general conclusion was reached: an average openness level of 90% could be achieved. This was a result of compromise. For China, of course, planning had to be done according to this baseline.

In reality, when it comes to negotiating a high-quality, high-standard trade agreement, China has no issues, whether under RCEP or in future free trade area negotiations. Take the free trade agreement between China and Australia, for instance: Australia grants 100% zero tariff to China, while China grants 98% zero tariff to Australia. China's limitations are on about 2% of products, such as bulk commodities like grains, oils and sugar, which cannot be at zero tariff, but everything else is fine. In future negotiations on the China-Japan-South Korea FTA, whether committing to 98% zero tariffs or opening up in the services and investment sectors, China will not have a problem.

Yicai: Not only can 98% tariff concessions be achieved in the goods trade sector, but can China also open up in the services trade sector?

Guan: Yes. In the past two years, China's openness in the investment sector has been very high, with an increasingly shorter negative list. When the list becomes short enough, it can be directly adopted when negotiating international treaties and free trade areas. I believe other countries would not find China problematic in this regard.

In the services trade sector, China's overall openness level is currently relatively low. There is not yet a formal national cross-border services trade negative list, and we may need to further open up. However, based on my understanding, China certainly has no issue with introducing a negative list in the services trade sector. Whether it involves compressing the negative list to a certain level or opening up the financial services sector, there will be no problem.

China just needs a better platform to showcase its opening-up achievements in exchange for greater market access in other countries. Take the CPTPP, for example. When the time comes, whether it is 98% tariff concessions or opening up in the services and investment sectors, we will not have a problem.

Yicai: Some reports suggest that the economic benefits for China joining RCEP are greater than those of joining CPTPP. What are your views on the differences between these two agreements?

Guan: Regarding whether joining RCEP yields greater economic benefits for China than joining CPTPP, I am not an economist and haven't calculated the figures. However, joining RCEP is probably the most suitable choice for China at the moment.

Although RCEP is more like a traditional trade agreement, it is a very inclusive agreement that truly suits the development level of this region. If we were to forcibly incorporate some of the high-standard rules and openness levels from CPTPP into RCEP, the RCEP members might find it hard to adapt. This is because there are many least developed countries in RCEP, such as Laos, Cambodia and Myanmar. Forcing these countries to accept such rules or make such openness commitments would essentially be making things extremely difficult for them.

Therefore, if these countries are to be included, the rule standard and openness level of RCEP are probably just right. For China, this rule standard and openness level are also acceptable, and it allows us to further strengthen cooperation with other countries on this platform. Building on RCEP, it is enough to make these members the first-tier close cooperation circle in China's external circulation.

I have a metaphor that might not be entirely appropriate: RCEP is a model of regionalization, while CPTPP is the future of globalization. I believe that joining CPTPP should bring greater benefits to China. If joining RCEP brings regional benefits to China, then joining CPTPP should bring globalization benefits. This is because CPTPP represents the future direction of international economic and trade rules. Its openness level and rule standard will certainly be much higher than those of RCEP to a large extent, and it also represents the future direction of change for international economic and trade rules as a whole.

I believe that besides the economic benefits brought by joining CPTPP, the benefits in terms of pushing and compelling deeper domestic reforms would also be very significant. So, my view is that joining CPTPP will certainly bring greater economic benefits to China, not less than the benefits brought by RCEP.

Benefits of Rules of Origin

Yicai: What are the benefits of rules of origin for the regional economy?

Guan: The conclusion of RCEP has yielded many gains. But if I had to rank them, I would place the regional cumulative rules of origin at the top. The regional cumulative rule of origin means that manufacturers can source raw materials from within the region. As long as the proportion of regional sourcing reaches 40%, the product can be considered as originating in the region, thereby enjoying preferential arrangements and free circulation, eliminating the need to source from outside the region.

In effect, the regional cumulative rule of origin creates a certain exclusivity effect. Some industries from outside the region may gradually be excluded, as there is a greater preference for production and procurement within the region. An incidental consequence of this is that there is a greater willingness to invest within the region. For example, if I am considering investing in a company, given the zero tariffs within the region, I would be more inclined to place the investment within the region. The most significant positive effect of the regional cumulative rule of origin is driving growth in trade and investment within the region. This is the greatest benefit that a regional trade agreement brings to each economy within the region.

On the other hand, after RCEP was concluded, the greatest concerns were probably in the automotive industry, especially in Germany and the United States. These companies worry that the East Asian region may gradually reduce its need for them in automotive production, choosing instead to produce locally and trade within the region. In such a scenario, as production shifts to within the region, companies from outside the region are gradually crowded out. This effect can be very pronounced.

Another typical example is the electronics industry. The entire East Asian and Southeast Asian region accounts for a very large proportion of intermediate goods production in the electronics industry, with over 70% of global intermediate electronics products being produced in this region. In this context, RCEP's regional cumulative rule of origin will further integrate the production of intermediate goods.

Yicai: Through RCEP, will Japanese manufacturers reconcentrate their industrial chains towards Southeast Asia?

Guan: Yes, everyone can benefit. From the perspective of industrial chain layout, some RCEP members can relocate their industries to members with relatively lower costs. That is, Japan does not necessarily have to produce domestically because production costs are very high there. Relocating to other countries without tariff and non-tariff barriers would certainly be more advantageous for Japan.

If RCEP takes effect, the relocation of these mid-to-low-end industries to other countries will be more convenient and cost-effective. As long as there are no barriers to circulation within the region, they will certainly be more willing to invest and develop in other countries.