The Forum for Partners in Iran's Marketplace

June 2021, No. 97

Business Excellence

Alliance of 3 Prominent East Asian Economies
(China, Japan, South Korea)

China, Japan and South Korea will play a key role in the supply chain of raw materials and products in this market, which has more than two billion consumers.

In recent days, as the world economy experiences a complex situation affected by the global corona epidemic, China, together with 14 countries around the world, has taken the lead in one of the largest economic alliances in world history, focusing on the Asia-Pacific region. It was supposed to take shape from the time of former president Barack Obama in the United States and focus on the Pacific countries to control China as much as possible, but with the presence of Donald Trump and the withdrawal of the US, it was gone. China appreciated this golden opportunity and set out on a path in which it would probably be able to exercise its hegemony over the world with economic growth stemming from the alliance opportunity. Ali Dadpay, a professor of economics at the University of Dallas, believes the alliance will change the political economy of world trade and give a new dimension to Chinaís economic role in 21st century world trade. 

In general, how are regional economic treaties formed, such as the RCEP, which is called the largest free trade bloc in the world? How can the process of establishment and participation be described?

On 15th of November, 15 member states of the Association of Southeast Asian Nations (ASEAN) and their five regional partners signed a comprehensive regional economic cooperation agreement, known to the media as Regional Comprehensive Economic Partnership (RCEP). Both the US and India were supposed to join the treaty, but one, led by the isolated Trump and the other, led by Modi, withdrew from the talks. The most important feature of this agreement is the emphasis on the Japan-China axis in the regional and international trade of its members. Thus, a market with a population equivalent to one third of the worldís population has been formed. The Brookings Institution estimates that the deal will increase global revenue by $209 billion by 2030 and increase global trade by $500 billion.

This treaty is one of the newest examples of the evolution of the global economy, moving from a set of bilateral regional agreements to multilateral regional accords. There are various reasons for forming such treaties. In a 1991 paper, Paul Krugman argues that if transportation costs are too high, countries on a continent would naturally tend to form a regional union to increase the public welfare of their communities. If these costs are zero, then independent countries can maximize the welfare of society by setting low tariffs. Most countries in the world are somewhere between these two extremes. The General Agreement on Tariffs and Trade (GATT) stipulates that its members must remove all barriers to trade between the two countries in order to reach multilateral regional agreements.

Regional Economic Partnership Treaty is that it has extended the usual borders of Southeast Asia to include the economies of Australia and New Zealand.

A look at the members of this treaty shows that each member state has its own advantages in different areas. This is the first agreement to include three prominent East Asian economies: China, Japan and South Korea. Countries around the world are trying to reduce trade costs and increase trade volume by agreeing to multilateral regional accords. It is natural that in such treaties the comparative advantages of technology, the capital and labor markets of the member countries, together with their commodity markets, would be the result of a new economic entity. The success of the Regional Comprehensive

Regional Economic Partnership Treaty is that it has extended the usual borders of Southeast Asia to include the economies of Australia and New Zealand. The absence of the United States from the treaty means that the comparative advantage of American companies for doing business with Asian countries will be measured by the comparative advantage of companies that do not stand in the way of the region. 

What impact will the RCEP agreement have on the future state of the global economy, and what developments will take place in this new arrangement of economic powers?

The RCEP reduces regional trade tariffs of its members and facilitates regional trade. But to take advantage of these benefits, members must follow certain rules at the source of the parts and materials used to produce the final product. A Malaysian manufacturer, for example, can no longer use American parts to produce products for sale in the Japanese market. Such a product is an American product under the treaty, and the manufacturer must pay the usual tariff for an American product. If he wants to benefit from the low RCEP tariff, he must have supplied at least 40% of the parts from member countries. In this way, a Malaysian company can offer its product as a Malaysian product if 40% of the parts required for the production of that product are supplied from countries such as China, South Korea and other member countries. This definition means increasing demand for Asian parts and decreasing demand for products of non-member countries.

Thus, China, Japan and South Korea will play a key role in the supply chain of raw materials and products in this market, which has more than two billion consumers. The pact will change the political economy of world trade and give new dimensions to Chinaís economic role in 21st century global trade. RCEP member countries will soon begin bilateral talks to get the most out of it. What was signed recently is the beginning of a regional transformation in the worldís most important trade bloc, in which the role of the United States as the axis of global and regional free trade is diminished and other countries play a more important role. The Communist China has played the role of a major supporter of free and competitive market by using market laws and recognizing the importance of regional markets for maintaining sustainable economic growth. For China, the RCEP is another sign of the emergence of an Asian capitalist country and its role in the global arena. 

Basically, why does Iran not join or participate in any such unions in which not even the United States is present? How can Iranís absence from such agreements be analyzed?

Accords such as the RCEP reinforce the current framework for global trade, as it has paved the way for their formation. The RCEP would not have been possible without the agreements that led to the formation of the World Trade Organization and the various common markets. The fact that the economic diplomacy apparatus of Asian countries can interact with each other to reach a comprehensive agreement on regional trade is largely due to decades of negotiations with developed countries and their presence in the global economy. What is changing is the balance of economic forces that interact with each other within the framework of international treaties and shape the course of the global economy. Iranís absence from the global economy has made it an unpopular member and reduced its ability to take advantage of such opportunities.

If Asian governments, many of which experience less than seven decades of national independence and are the product of leftist and even Marxist independence movements, have reached a point today where market rules, increasing regional markets for their products, and attracting foreign investment can act main economic players.

We have to ask ourselves why Iran has not been able to experience such a change so far and why the countryís economy is becoming more and more state owned and monopolistic? Is not the interest of different political factions in controlling all economic aspects of Iranís social life the main obstacle to opening up the economic space and Iranís presence in similar regional agreements? The fact is that we are all witnessing the formation of a new economic bloc in East Asia. Due to the demand of two billion consumers, it will give direction to the flow of world trade. The many economic and trade barriers that the Iranian economy is experiencing to expand regional cooperation only mean that Iranís economic isolation is deepening.

None of the countries that have joined the RCEP has a national government economy. Domestic markets of all members of the pact are competitive. The bilateral trade and joint ventures of these countries have been significant before this treaty. The past decades have been decades of shaping this common market; A market that member countries have been steadily expanding through bilateral agreements within the framework of global agreements and WTO regulations. Meanwhile, Iranís markets and the countryís economy are still far from a competitive economy, and this gap is widening every day with rent-seeking behaviors, political interference in the economy, and the expansion of government linked corporations.

Iranian observers must not forget that the RCEP deal is the product of market-driven forces, not governments agreement. Governments affirmed only what their economies and the economic forces of their countries had built. The East Asian economic sphere is now taking on a new shape, but this sphere already existed before the treaty. For Iran, the main lesson of the RCEP is the need to accept the economic realities and leave the private sector open, meaning a set of real persons in the countryís economy. Otherwise, in the current economic climate, the country has fewer neighbors willing to reach a regional agreement for a common market with Iran. 

Some argue that given that India has refused to participate in the RCEP, Iran could take advantage of this opportunity as an economic breathing space and launch a special partnership plan with the country. Would this situation compensate for Iranís absence from collective agreements?

 The Iran-India relationship is beyond the India-East Asia relationship. Iran is an 80-million-market with less than 10% of Indiaís Gross Domestic Product. Iranís GDP is much lower than Indiaís, but at the same time, Iran has more per capita, which means that Iran can have more options in the consumer market. But it remains to be seen how the elimination of tariffs between Iran and India will help the Iranian producer in production, which is a very important issue requiring an independent discussion. It should be noted that the motivation for the formation of such markets should be considered along with bilateral markets. Iran is neither a member of FATF, nor an active member of the WTO, nor a member of the GATT. Iran is a neutral country in the world trade debate and is basically incapable of making argument at RCEP.


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  June 2021
No. 97