ASEAN Vibration On Chinese Heat In RCEP: Challenge To Japan For Its Stake In ASEAN – Analysis

With India decoupling from RCEP (Regional Cooperation of Economic Partnership), China became the behemoth in exerting influence in the largest trade block in the world. World opinion leaders termed it a  geopolitical win for China. With Japan rejoining the block, after earlier exiting following India, Japan seemed to have waded into controversy for its stake in ASEAN.

Japan has a big stake in foreign direct investment in ASEAN. China is behind Japan. Japanese investment helped to establish a major supply chain base in ASEAN for Japanese corporate at home and overseas. Toyota‘s Asian Car model is a case in point. Given China’s rising influence in RCEP minus India – who happened to be a major counterbalance to China - ASEAN is likely to see a slide in trade and investment power in the block. This will have a cascading impact on Japan-ASEAN investment relation, which, in turn, will be a leg up for China to be an aggressive investor in ASEAN. 

Japan-ASEAN trade relations have been dwindling for the past decade. In  contrast, China-ASEAN trade witnessed a surge during the same period. The factor impeding the growth was China-ASEAN FTA and the combined effects of the US-China trade war and the COVID 19 pandemic. Against these backdrops, RCEP is unlikely to ensure a hey day for Japan. RCEP may act as double whammy for Japan, given the combined impact of China-ASEAN FTA and Common Rules of Origin in the trade block, which will act more favorably to China.  

Since China and ASEAN were engaged in the FTA , ASEAN–Japan trade has plateaued. In 2010, when ASEAN entered the FTA with China, ASEAN’s share in Japan‘s global trade was 14.5 percent. In 2019, after nine years, the share increased marginally to 15 percent. This manifests that the China–ASEAN FTA played an important role to hamstrung  the trade growth between Japan and ASEAN.   

RCEP will reinforce the economic integration in Asia. It will reduce bureaucracy, red tape and transaction costs. China’s ebbing dominance in supply chain, rising labour costs and the US-China trade war have led many advance nations’ investors to shift to ASEAN members like Vietnam, Thailand, Malaysia and Indonesia. Eventually, the economic integration in RCEP should result in the reinforcement of supply chain in ASEAN. 

But, there is another side of the leg up. The process of shifting MNCs to ASEAN will accelerate interdependence between China and ASEAN. In the first half of 2020, ASEAN outplayed the EU as the largest trading partner of China. Thus, RCEP will pave the way for China to consolidate more power and  play the leading economic actor in the ASEAN  by this process. 

China is the key supplier of imports of RCEP member nations. Given more power disposed to China, it will have a larger stake in RCEP, including ASEAN. At present, more than one-fifth of ASEAN imports is from China. Before the ASEAN–China  FTA, China’s share was only one-tenth. Given this piggyback growth in imports from China in the post FTA, ASEAN tends towards a delicate orbit of China’s trade and investment power. This bodes a challenge to the Japanese investors in ASEAN, as this trend will trigger China’s investment in the region.  

Japan has long supported ASEAN in helping integrate the supply chain in the region. ASEAN is the third  largest trading partner of Japan, following China and USA. Japan is the fourth largest trading partner of ASEAN and is the third biggest foreign investor in the region, following USA and EU.  

Japanese investors reaped considerably higher rate of returns in ASEAN than from FDI in traditional markets, like USA and EU, making the region most attractive destination for Japanese markets. 

Perceiving the threat for a supply chain risk during the Covid pandemic, Japan decided to splurge big  on subsidies to promote Japanese supply chain in ASEAN. The new Prime Minister Yoshihide  Suga was upbeat and said “Japan will further strengthen cooperation with ASEAN to increase the resilience of supply chain and build economies in Asia that are resilient to crisis”.   

Japan has called on domestic companies to manufacture domestically or look towards South East Asia, in an effort to revamp the supply chain. Under the subsidy scheme, Japanese government will cover up half of the costs within ASEAN for large companies and two third for smaller business enterprises. 

Peterson Institute of International Economies  (PIIE) described RCEP as a China-centric East Asian economy. After the USA decoupled from TPP and India withdrew from RCEP, East Asian economy turned inward looking. The block originally sought to limit China’s influence by India and USA. But, now it will enhance China’s influence in regional decision making.

Concern rises over Japanese supply chain risk in ASEAN with China centric supply chain outplaying the Japanese. Given the increase in interdependence between ASEAN and China as a result of shifting of investment, a Japanese subsidy alone is not enough to override China's supply chain escalation and Chinese political clout in the region. To this end, a political outreach is imperative to develop the relation with ASEAN, such as through ODA loans (Overseas Development Assistance) and others.