With India’s decoupling from RCEP (Regional Economic Partnership Cooperation), China has become the giant by exerting influence in the world’s largest trading bloc. World opinion leaders have called it a geopolitical victory for China. With Japan having joined the bloc, having withdrawn earlier after India, Japan appeared to have plunged into controversy over its participation in ASEAN.
Japan has a big interest in foreign direct investment in ASEAN. China is behind Japan. Japanese investment has helped establish a major supply chain base in ASEAN for Japanese companies at home and abroad. Toyota’s Asian car model is a good example. Given China’s growing influence in RCEP minus India – which has proven to be a major counterweight to China – ASEAN is likely to see a decline in trade and investment power in the block. This will have a cascading impact on the investment relationship between Japan and ASEAN, which, in turn, will be of benefit to China as an aggressive investor in ASEAN.
Japan’s trade relations with ASEAN have weakened over the past decade. In contrast, China-ASEAN trade has seen a sharp increase over the same period. The factor hampering growth was the China-ASEAN FTA and the combined effects of the US-China trade war and the COVID 19 pandemic. In these contexts, the RCEP is unlikely to ensure a bright day for Japan. RCEP could be a double whammy for Japan, given the combined impact of the China-ASEAN FTA and common rules of origin in the trade bloc, which will work more favorably for China.
Since China and ASEAN joined the FTA, trade between ASEAN and Japan has leveled off. In 2010, when ASEAN concluded the FTA with China, ASEAN’s share in Japan’s world trade was 14.5%. In 2019, after nine years, the share increased slightly to 15%. This shows that the China-ASEAN FTA has played an important role in crippling the growth of trade between Japan and ASEAN.
RCEP will strengthen economic integration in Asia. This will reduce bureaucracy, paperwork and transaction costs. The decline of Chinese dominance in the supply chain, rising labor costs and the trade war between the United States and China have led many investors from advanced countries to turn to members of the ASEAN like Vietnam, Thailand, Malaysia and Indonesia. Ultimately, economic integration into RCEP should result in the strengthening of the supply chain in ASEAN.
But, there is another side of the leg up. The process of transferring multinationals to ASEAN will accelerate the interdependence between China and ASEAN. In the first half of 2020, ASEAN dominated the EU as China’s biggest trading partner. Thus, RCEP will pave the way for China to consolidate more power and play the role of ASEAN’s leading economic player through this process.
China is the main supplier of imports to RCEP member countries. Given the increased power that China has, it will have a larger stake in RCEP, including ASEAN. At present, more than a fifth of ASEAN’s imports come from China. Before the ASEAN-China FTA, China’s share was only one tenth. Given this growth in imports from China in the post-FTA period, ASEAN is moving into a delicate orbit of China’s trade and investment power. This bodes well for Japanese investors in ASEAN, as this trend will trigger China’s investment in the region.
Japan has long supported ASEAN by helping to integrate the supply chain in the region. ASEAN is Japan’s third largest trading partner, after China and the United States. Japan is ASEAN’s fourth-largest trading partner and third-largest foreign investor in the region, after the United States and the EU.
Japanese investors have reaped considerably higher rates of return in ASEAN than FDI in traditional markets, such as the US and the EU, making the region the most attractive destination for Japanese markets.
Perceiving the threat of a supply chain risk during the Covid pandemic, Japan decided to splurge on subsidies to promote the Japanese supply chain in ASEAN. New Prime Minister Yoshihide Suga was optimistic and said that “Japan will further strengthen cooperation with ASEAN to increase supply chain resilience and build crisis-resistant economies in Asia.”
Japan called on domestic companies to manufacture locally or look to Southeast Asia, in a bid to revamp the supply chain. Under the grant program, the Japanese government will cover up to half of the costs within ASEAN for large companies and two-thirds for small companies.
The Peterson Institute of International Economies (PIIE) has described RCEP as an East Asian economy centered on China. After the United States decoupled from the TPP and India pulled out of RCEP, the economy of East Asia turned inward. The bloc was originally aimed at limiting China’s influence by India and the United States. But now it will strengthen China’s influence in regional decision-making.
Concerns are growing about the risk to Japan’s supply chain in ASEAN, with the China-centric supply chain overtaking that of the Japanese. Given the increasing interdependence between ASEAN and China due to the shift in investment, a Japanese subsidy alone is not enough to neutralize China’s escalation of supply chain and weight. Chinese policy in the region. To this end, political openness is imperative to develop the relationship with ASEAN, for example through Overseas Development Assistance (ODA) and other loans.