Sino-Japanese Relations After RCEP

Author: Hiroaki Richard Watanabe, Ritsumeikan University

On January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP) came into effect. RCEP has significant economic significance as it is the first comprehensive economic partnership in East Asia to include the three major countries in the region: China, Japan and South Korea.

RCEP is expected to deepen economic interdependence in East Asia by creating more integrated supply chains. Although RCEP’s 91% tariff reduction is a lower level of liberalization than the 98% tariff reduction estimated in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), RCEP more than makes up for this drop in volume. Encompassing approximately 2.3 billion people and a combined GDP of approximately US$29 trillion, RCEP is the world’s largest free trade agreement and accounts for approximately 30% of the world’s population and GDP.

RCEP could encourage China and Japan to cooperate in their investments and create win-win situations in the region, such as in Southeast Asia. Japan’s most influential trade association, Keidanren (the Japan Federation of Enterprises), has sought to expand the activities of Japanese companies in the huge Chinese market and RCEP is likely to provide more opportunities.

But integration is also likely to intensify Sino-Japanese competition for economic leadership in the region, especially after the United States’ withdrawal from the CPTPP. China has already invested heavily in infrastructure construction through the Belt and Road Initiative (BRI) and promoted its economic and political interests in Southeast Asia and other regions. Economic integration through RCEP is likely to enhance China’s influence in these regions, with greater opportunities to engage in investment and other related activities under the BRI.

After the withdrawal of the United States, China surprisingly applied for membership in the CPTPP. Its membership would shift the economic balance of power in Asia-Pacific towards China. But there are still several obstacles. The Chinese government provides large subsidies to state-owned enterprises (SOEs), which have deep political relationships with the government. It may be difficult for China to meet CPTPP entry requirements by reducing these subsidies. Another obstacle is the forced labor conditions in China, as well as the requirements for free flow of data and environmental protection. It is unclear how China’s authoritarian government can resolve these issues in a way CPTPP members find acceptable.

But original member states like Vietnam also had the problem of large subsidies to state-owned enterprises and were given exemptions to join the CPTPP. In this sense, China’s entry is not impossible. Moreover, China has already conducted skillful negotiations with some CPTPP member states and may obtain concessions to join the CPTPP.

Whether or not there is a real prospect of China joining the CPTPP, China’s application for membership provides a means to gauge US intentions to regain a leadership role in the Asia-Pacific region. Although the United States has sought to promote the free and open Indo-Pacific to contain a rising China and has proposed an economic framework called the Indo-Pacific Economic Framework (IPEF), the IPEF is not a binding free trade and does not provide a sufficient economic framework for US-led engagement in the region. Moreover, the Blue Dot Network launched by the United States, Japan and Australia to promote “quality” investments in infrastructure has seen much less progress than the BRI.

Without a significant US commitment to regional economic integration, Japan reacted to the rise of China by playing a leadership role in the creation of the CPTPP. But Japan’s leadership position could be threatened if China’s membership application is accepted. India’s withdrawal from RCEP could also undermine Japan’s efforts to retain its leadership. Eventually, China could become the dominant economic power in the region by establishing trade and investment rules that benefit it.

While Japan tends to consider competition with China when promoting regional economic integration, Japan could also reap significant benefits. In addition to easier access to the huge Chinese market with reduced or zero tariffs on its exports, Japan may also be able to induce China to observe more liberal rules in international trade and ‘investment. Ultimately, economic cooperation with China could enhance security in the region.

Hiroaki Richard Watanabe is a professor in the Department of International Relations at Ritsumeikan University. He is the author of The Japanese economy (Agenda Editions, 2020).