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Pacific Mega Trade Deals: RCEP, CPTPP, and China

Updated: Jan 15, 2021

2017 RCEP Leaders' Meeting © Presidential Communications Operations Office of the Philippines / Public domain / Wikimedia Commons

After close to a decade of negotiations, a breakthrough for regional cooperation took place on November 15, 2020, in the shape of 15 countries from the Asia-Pacific region signing what could possibly be the biggest free-trade deal in history. As such, the Regional Comprehensive Economic Partnership’s (RCEP) economic effects will likely be accompanied by major long term strategic and geopolitical implications, both for its members and beyond. In this sense, it has become the second major multilateral free trade agreement signed in the Trump era, after the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). For China, however, the significance of each of these deals differs, as does their potential.

The CPTPP evolved from the original Trans-Pacific Partnership (TPP), which never entered into force due to the withdrawal of the US in 2017. The remaining states negotiated a new deal that incorporated a large percentage of the original TPP provisions and entered into force in 2018, with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam as signatories (Rana and Ji, 2019). The negotiations for the CPTPP’s predecessor began in 2015, making them about three times as quick as those of the RCEP. However, the RCEP, with the 10 ASEAN States as well as Australia, China, Japan, New Zealand, and South Korea as members, accounts for 30% of global GDP, over double that of the CPTPP (Cali, 2020). The RCEP may be broader, but it does not go as deep as the CPTPP in areas such as tariff elimination or environmental protection, or when it comes to providing a thoroughly comprehensive coverage of trade in goods and services (Wong, 2018).

The two agreements are not mutually exclusive. In fact, seven CPTPP members have also undertaken membership in the RCEP. However, China is not among those who are benefitting from both trade deals. Chinese participation in the original US-led TPP was always a long shot, especially since part of the vision behind the original proposal was to gain enough clout to balance out China’s trade network in the Pacific (Hufbauer et al., 2020). The Asian giant would have had to transform its economy to meet a series of conditions at a speed much swifter than its preferred gradual economic reform style in order to be able to join. However, when the US stepped away from the TPP, it opened the possibility of a Chinese membership under renegotiated terms, and it seems that this has emboldened China who, through the conditions included in the RCEP, is closer to meeting the terms for joining the CPTPP than ever before. In fact, President Xi Jinping mentioned at a recent APEC summit that China would “consider favorably” the possibility of joining the CPTPP (Global Times, 2020).

The significance of the RCEP for China goes further than expediting their potential membership of the CPTPP. China’s remarkable economic growth during the last decades has yet to be matched by a proportionate increase in the Asian giant’s ability to set the regional rules when it comes to areas such as trade. Despite geographical distance, the US has enjoyed for many years the privileges resulting from its position as “top dog” in terms of both economic weight and institutional power (Rowley, 2020). However, the entry into force of the RCEP could mark the start of a significant change in this sense. Moreover, the RCEP aligns with various core principles of China’s dual circulation model which, in the wake of the trade war with the US, aims to reduce Chinese dependency on overseas markets by boosting internal circulation and diversifying its participation in global markets. By lowering the cost and the complexity of cross-border trade, the RCEP will enable Chinese companies to optimize the distribution of their resources between the domestic market and the rest of the region, as well as boosting China’s position as a destination for regional exports, which will foster further increases in domestic consumption as well as balancing trade dynamics within the pact by offsetting the sheer amount of exports leaving the People’s Republic (Huiyao, 2020). Furthermore, China has chosen to implement the agreed-upon tariff repeals by mixing immediate tariff removals with longer phase-out periods that last over a decade, which allows it to shield growing sectors from international competition (Gakuto, 2020).

The meaning of membership in both the CPTPP and the RCEP for China is also influenced by the states with whom it shares the status of member, as well as by those who have opted to remain outside of the deal. The RCEP also provides the first precedent in terms of free-trade blocs that include China, Japan, and South Korea, and could therefore aid in overcoming the concerns that have so far precluded the signing of a trilateral free-trade agreement between these three states (Lo, 2020). On the other hand, India announced in July that it had decided not to join the trade deal, arguing that China had an advantageous position over other members, and choosing instead to engage in a process of economic de-sinicization. Although the RCEP includes a clause that would allow India to become a member later on, the terms for joining may increase, leaving India lagging behind and possibly even sealing the South Asian state’s fate by rendering it unable to integrate into the process of trade liberalization (Zongyi, 2020). For China, this means an edge over India when it comes to competing geopolitical and economic interests in the region. The US is also not an RCEP member, further confirming its general retreat from mega trade deals initiated when it backed out of the CPTPP. Its absence in either of these deals could help establish China’s image as the main economic power of the region (Bradsher and Swanson, 2020). The recently published 2020 Lowy Institute Asia Power Index shows the United States as the country with the largest decrease of relative power in the Asia-Pacific region, with the biggest loss pertaining to the subarea of economic relationships, which the Institute defines as “the capacity to exercise influence and leverage through economic interdependencies; measured in terms of trade relations, investment ties and economic diplomacy.” (Lowy Institute, 2020). In fact, it could even be argued that the US withdrawal from the TPP opened the way for China to strike its own deals in the region (Northam, 2016), making it partially responsible for the success of the RCEP and, subsequently, for bringing China closer to becoming part of the CPTPP.

The influence of these two Pacific mega trade deals is, despite their name, not limited to the Pacific region. International actors further abroad have also felt the changes brought on by them and have sought to react adequately. The European Union is not an exception: it is the third largest exporter to and importer from CPTPP states and either has or is negotiating free trade agreements with every member (Tobin, 2019). The China-US trade tensions could tip the scales in favor of the restructuring of supply chains, increasing the chances of further economic integration between Asia and Europe. The same goes for the RCEP, which has already affected Europe in more ways than one: mild economic effects, such as the possible displacement of EU exports to RCEP members or a slight disadvantage of European firms vis-à-vis RCEP firms, are accompanied by the geopolitical implications of Pacific states signaling an unwillingness to cut economic ties with China (Dadush and Darandary, 2020). As such, it is likely that the EU will have to consider defining an improved commercial strategy for the region, aiming to increase its presence there via the acceleration of bilateral agreements, joining the CPTPP, or even seeking closer ties with China, where the risk of trade diversion is the greatest.

When the TPP was first proposed, many observers saw it as an attempt to balance the weight China had been acquiring in international trade. However, the changes in the international sphere since the first negotiations of this Pacific Rim free trade agreement may mean that joining it would now garner serious benefits not only for the Asian giant, but also for the eleven current CPTPP members. According to Petri and Plummer (2019), if China were to join the deal, the global income gains it currently generates would quadruple, leaving them at a quarter more than in the original deal with the US, and the gains could increase even further if China’s involvement encouraged other Asia-Pacific economies to join. Petri and Plummer also argue that membership in the CPTPP could provide an international framework for outward-facing Chinese economic reform such that the State would gain a buffer of sorts against the effects of the Trade War it is currently engaged in with the United States by addressing US structural critiques of its regime via the terms required to join the CPTPP itself.

The RCEP has accelerated a reshaping of the Asia-Pacific trade landscape that was already underway thanks to the CPTPP. It is a win not only for China but for Pacific and South-East Asia as a whole. For China, the RCEP provides an opportunity to expand its regional influence while furthering domestic economic goals, as well as a stepping-stone from which to consider joining the CPTPP, which would have further economic benefits for China and for the rest of its members. President Xi’s comments at the APEC summit should be understood as a sign of willingness to allow for increased market access, multilateral negotiations, and general economic integration, an important step in reversing destructive global trade trends intensified by the pandemic. The situation will continue to evolve: RCEP members are already holding conversations on e-commerce and further liberalization of services (Au and Wilhelm, 2020), and joining the CPTPP could also be a Biden administration goal as part of the US need to address the changing realities of the Asia-Pacific Region, despite entailing hard work in terms of gathering sufficient domestic support and persuading current members to welcome it again (Le Miere, 2020). It will take some time for RCEP ratification to trigger entry into force, but the world will be watching.

Blanca Marabini San Martín holds a Double BA in International Relations (with a focus on international security and foreign policy) and Translation and Interpreting. During her studies, she gained research and editing experience through internships in various Think Tanks and policy observation institutions in Madrid and Brussels. She is currently a graduate research intern at the Spanish Chinese Policy Observatory, as well as a member of the European Student Think Tank editorial team and head of the EU Foreign Policy Group at the Madrid chapter of Equipo Europa, a Europeanist Spanish youth group. You can follow her on Instagram or Twitter, or find her on LinkedIn here.

The opinions expressed here are those of the writer and do not represent the views of European Guanxi.

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