US-China Economic Competition in the Indo-Pacific and Beyond

US China flag
Image credit: Sgt. Mikki Sprenkle, Public domain, via Wikimedia Commons

During the pandemic, the world increasingly sought to review and renegotiate economic trade agreements. This held implications for India, whose ties with ASEAN nations came under a wave of change with New Delhi’s refusal to join the Regional Economic Comprehensive Partnership (RCEP) — encompassing ASEAN nations and Australia, China, Japan, New Zealand, South Korea, and Vietnam. This raised questions over India eventually having to turn to its “natural allies” — the United States of America and Europe. 

Furthermore, while the World Bank put forth a negative view of the future in terms of Free Trade Agreements (FTA), several nations have been successful in securing other economic agreements. Beyond RCEP, this mainly included the EU-China Comprehensive Agreement on Investment (CAI). While this was disappointing for countries like India and the US, it reflected Brussels’ candour to continue cooperation with China, even under a full blown pandemic.  

China emerges as the winner

China’s wide access to markets around the world and its infamous unfair trade practices were concerning even before the pandemic. India’s refusal to join the RCEP was influenced by these concerns along with non-economic issues such as the ongoing tensions at the Line of Actual Control

However, with RCEP and CAI, China stands in an advantageous position. Even as the world continues to reel under the effects of the pandemic, RCEP has the potential to significantly alter the strategic landscape of the Indo-Pacific. This is specifically true with regards to China emerging as a clear winner during a time when nations like India and the US appeared to be reluctant negotiators with China. The RCEP is a significant win for China, more than it being beneficial for ASEAN, since Beijing is the largest trading partner of most of RCEP’s member countries. In addition, this multilateral deal which covers 30 percent of the global GDP and population, would aid countries like Japan, South Korea and China itself more than the ASEAN nations. Leading the pack would be China, since its exports are forecasted to increase by $248 billion. Whereas, Japan’s exports are expected to rise by $128 billion and South Korea’ exports could increase by $63 billion, according to the U.S.-based Peterson Institute for International Economics

The RCEP could even speed up negotiations for China-Japan-South Korea FTAs. However, all is not lost for the ASEAN nations as while they already have FTAs, RCEP will lead to lower import costs and considerable competitiveness. Even during the pandemic, despite slowing economies, trade and investments by China into ASEAN countries increased.

Despite China’s economic and even military aggression with territorial disputes over the Senkaku islands in the East China Sea, trying to control resources in the South China Sea against protests by Vietnam and Philippines, RCEP proved to be a way for Beijing to gain economic control in the region. Thus, RCEP would not only prove to be effective in lowering tariffs and helping countries bounce back from economic depressions, but also assist Beijing  in positively influencing its reputation in the Indo-Pacific. 

China and the CAI

Amidst the US-China trade war over the past few years, China seemed to struggle with maintaining its stature as a “critical business partner”. The finalisation of CAI however, aids Beijing’s image. The CAI is a substitute for the 26 existing bilateral investment treaties between China and the EU, to provide a constructive legal framework for the bilateral relationship. The deal with Europe has proven to reflect the rudimentary nature of Europe’s priority to make money even over their vocal protests against Chinese transgressions over trade and the realm of civil-liberties. Although Europe has cracked down on China’s poor labor and environment protection mechanisms in return for a deal, it is not entirely certain how effective that will be. 

The CAI is a lot like the deal the Trump administration attempted to get but could not. The deal came in contrast to Biden’s subtle indication to have America reenter the  Trans Pacific Partnership (TPP), presently called the Comprehensive and Progressive Trans Pacific Partnership (CPTPP). The Partnership was originally supported by the Obama administration but the Trump administration abandoned it in 2017. Although the Trump administration did end up securing a trade deal with China involving agriculture and intellectual property, the same stood in contrast with China establishing favourable provisions on e-commerce and digital trade, low environmental and labour regulations, change in base rate of customs duty and potential circumvention of rules of origin under RCEP. 

However, an upside of the US-China deal is the establishment of dispute resolution mechanisms, with the Bilateral Evaluation and Dispute Resolution Offices to receive and evaluate complaints, as well as access to the USTR and China’s vice premier for complaints. This is sure to be welcomed by the Biden administration, given the devastation that the trade war with China has had on US’ manufacturing sector

Going forward, the Biden administration is looking to work with the EU and Japan to reduce Chinese subsidies in the steel and solar panel industries. Towards that aim, even as the US’ approach to deal with China has been more cautious and progressive, it might be a more effective way to deal with China over the path chosen by the Europeans. The Biden administration must consider a joint approach with Europe on China, and view the CAI as a component of broader negotiations.

Furthermore, as the Biden administration look to reestablish America’s relationship with Europe after four years of Trump, jointly dealing with China can help achieve that. A better transatlantic partnership could start with consensus on joint concerns. For instance, identification of technology transfers without harming national security is a common problem. Similarly, displacement of industries is also a fear among Americans and Europeans alike. Hence, the EU and the US’ common economic concerns towards China can serve as a foundation stone for a renewed transatlantic relationship.

Palomi Chaturvedi is Research Intern at ORF Mumbai.