Can the Regional Comprehensive Economic Partnership minimise the harm from the United States–China trade war?

• Author: Anda Nugroho,Renuka Mahadevan
• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1111/twec.12851

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:3148–3167.

© 2019 John Wiley & Sons Ltd

Received: 28 January 2019

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Revised: 15 June 2019

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Accepted: 5 August 2019

DOI: 10.1111/twec.12851

ORIGINAL ARTICLE

Can the Regional Comprehensive Economic

Partnership minimise the harm from the United

States–China trade war?

RenukaMahadevan1

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AndaNugroho2

1School of Economics,The University of Queensland, Brisbane, Qld, Australia

2Fiscal Policy Office,Ministry of Finance of the Republic of Indonesia, Jakarta, Indonesia

KEYWORDS

Asia mega trade bloc, computable general equilibrium, trade war

1

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INTRODUCTION

Regional trade agreements are sweeping the multilateral trade system like wildfire (Sorgho, 2016),

and to date, there are about 470 such agreements.1 It is likely that regional trade agreements will con-

tinue increasing especially in the current uncertainty surrounding the global trade environment.

Following the US presidential takeover by Donald Trump, trade openness has taken a hit with the

‘America First’ stance. This is seen in the recently signed November 2018 United States–Canada–

Mexico trade agreement, the 2017 withdrawal of the United States in the Trans‐Pacific Partnership

and, more recently, the United States–China trade war. So far, the United States has slapped tariffs on

US$250 billion worth of Chinese products and has threatened to impose another US$267 billion more

on tariffs. China, for its part, has set tariffs on US$110 billion worth of US goods and is threatening

qualitative measures that would affect US businesses operating in China.2 While these have under-

mined the global trade rules of WTO, the onset of Brexit and the UK now having to make trade deals

with individual countries has added greater concern in the global trade scene.

These events have once again brought to the forefront the rising potential of regional trade agree-

ments. An example is the negotiation towards an agreement in 2019 of the Regional Comprehensive

Economic Partnership (RCEP) which is a 16‐country deal that includes the entire ASEAN region of

10 economies, China, Japan, South Korea, India, Australia and New Zealand. This partnership has

been touted to be an alternative to the withdrawal of the United States from recent trade agreements

(Petri, Plummer, Urata, & Fan, 2017) and the mounting United States–China trade war (Geducos,

2018). In fact, Petri et al. (2017) suggest that creating stronger Asian economies and markets in the

process of regional integration may eventually encourage the United States to revisit its engagement

1 Accessed from http://rtais.wto.org/UI/Publi cMain tainR TAHome.aspx

2 Accessed on 2 June 2019 from http://www.china-brief ing.com/news/the-us-china-trade-war-a-timel ine/

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MAHADEVAN AND NUGROHO

with the Asia‐Pacific. The RCEP is a significant trading block with a population of 3.4 billion and

purchasing power parity GDP of US$49.5 trillion which makes up about 39% of the world GDP.3

Against this setting, this paper examines: (a) the impacts of RCEP if it is concluded in 2019; (b) the

effects of RCEP in the wake of the ongoing United States–China trade war. Although this trade war is

a bilateral dispute, with the United States and China being the world's largest economies whose com-

bined GDP is about 40% of global GDP,4 it could have massive impact on other economies; and (c)

the effect of RCEP if India one of the largest Asian economies is excluded. India is not comfortable

with the RCEP given its concerns about the RCEP tariff concessions on goods as it can derail India's

yet‐to‐take off Make in India programme, a protectionist policy used as an election strategy to develop

the domestic market and create jobs.5

This paper uses a dynamic computable general equilibrium (CGE) modelling framework, more

specifically the Global Trade Analysis Project (GTAP) model for analysis. Using this widely used

instrument in trade policy analysis (Nilsson, 2018), this paper adds to the existing literature in three

ways. First, studies on the impacts of the RCEP such as Cheong and Tongzon (2013), Lee and Itakura

(2018), Li, Wang, and Whalley (2016), Kikuchi, Yanagida, and Vo (2018), Petri et al. (2017) and

Rahman and Ara (2015) have used ad hoc assumptions and conjectures about tariff reductions. Here,

the content of the actual discussions as of 12 November 2018 is used in the simulations. For instance,

real‐time data on tariff reductions on the list of products disaggregated at the 6‐digit harmonised tariff

schedule (HTS) level of the RCEP member countries are simulated.

Second, this paper considers all four rounds of the tariffs actually imposed in the United States–

China trade war since July 2018. To date, Dong and Whalley (2012), Li, He, and Lin (2018), Noland

(2018), and Rosyadi and Widodo (2018) have considered the potential consequences of a United

States–China trade retaliation scenario, again based on ad hoc tariff assumptions. Third, we simulta-

neously consider the impacts of the RCEP and the United States–China trade war.

Thus, this paper fills the gap in analysing both the RCEP and the current United States–China trade

war using ex post import tariff changes. In addition, the extent to which RCEP could compensate for

the growing trade rift between the two largest economies which are closely integrated with the RCEP

member countries is examined. Lastly, the paper sheds light on the current possibility that India may

not be part of the RCEP due to mounting domestic political pressure within its economy.

2

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THE RCEP, TRADE WAR AND TRADE SCENARIOS

This section provides a brief overview of the RCEP and the United States–China trade war and ex-

plains the trade scenarios considered for simulation.

2.1

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The Regional Comprehensive Economic Partnership

The ASEAN‐led initiative of the RCEP is a mega‐regional free trade agreement (FTA) that was first

launched in November 2012. Its aim is to achieve a modern, comprehensive, high‐quality and mutu-

ally beneficial economic partnership (ASEAN, 2012). Although the RCEP was scheduled to conclude

3 Accessed from http://saudi gazet te.com.sa/artic le/542494, Saudi Gazette 2 September 2018.

4 See http://stati stics times.com/econo my/proje cted-world-gdp-ranki ng.php for projected GDP ranking for 2018–2023.

5 Accessed from https ://www.busin essto day.in/opini on/persp ectiv e/rcep-is-good-for-regio ns-but-not-for-india-at-least-not-in-

prese nt-form/story/ 291375.html, 15 November 2018.