China immediately seized upon President-Elect Trump’s victory to offer its proposed Regional Comprehensive Economic Partnership (RCEP) as an alternative to the TPP. Russia backing the proposal signals a call for a broader Asia Pacific free trade zone as well.
Never let a crisis go to waste
Trump’s victory has become an advantage for China and talk of free trade is focusing on the Association of Southeast Asian Nations (ASEAN), a few Pacific Rim economies, and members of the Shanghai Cooperation Organization (SCO). China and Russia could potentially take the lead on trade agreements going forward, yet their moves contradict domestic economic challenges and a need to revive trade.
Current political unity masks divergent economic interests as Russia attempts to shift its economic interests east to Eurasian and Asian markets. In particular, ASEAN will be a hotspot for economic geopoliticking. China’s interest in ASEAN is in expanding trade in manufactured goods whereas Russia is seeking investments and supply chains that run through the Indian Ocean.
These differences suggest that Russia is attempting to “slipstream” its trade interests behind China’s efforts, as a common market between Russia and China will certainly protect Russian manufacturers from competition. China’s politically aggressive behavior will not comfort partners in Southeast or Northeast Asia, casting doubt on the political feasibility of a trade bloc led by China.
China, ASEAN, and stagnant trade
Sino-ASEAN trade grew to 20% for a decade until it hit a snag in 2014. In 2014, China’s imports from ASEAN only grew 4.4%. In 2015, China’s imports from ASEAN dropped 6.5% and fell another 5.3% in September of 2016. For the last two years, weak performance for the Purchasing Managers’ Index (PMI) in ASEAN states has grown due to a measure of the strength of the manufacturing sector and imports of cars.
At the same time, China’s labor costs have risen significantly and other regional players like Japan began shifting their focus on investments in Vietnam and broader Southeast Asia, most visibly with Mitsui’s $1.2 billion invested into a container port expansion in Haiphong. Despite growing imports, regional trade has been stagnant for several years now.
China needs a trade deal to minimize current manufacturing losses as its economy transitions toward a different path. Of the ASEAN states, only Singapore provides a significant source of Foreign Direct Investment (FDI) into China and with higher labor costs, it is China’s manufacturing sector—roughly 30% of China’s GDP—driving its trade in hopes of selling to ASEAN’s growing middle class. Furthermore, Chinese firms will be able to sell value-added goods and services as Southeast Asia becomes a prime consumer of goods and the trade within ASEAN strengthens.
Russia, ASEAN, and the Indian Ocean
Both, Russia and ASEAN, need to diversify trade in order to cope with stagnant economies and weak economic growth. A potential ASEAN trade deal with Russia and the Eurasian Economic Union (EAEU), will be considered as a political coup, could unlock FDI opportunities for Russia’s capital-starved economy. The physical volume of trade turnover between Russia and ASEAN grew 20% the first quarter of this year and continued growing due to ASEAN food exports to Russia.
In terms of food security, Thai and Vietnamese firms signed agreements to collectively invest $3.7 billion into Russian dairy ventures this May. Energy dominates elsewhere. Rosneft began exploring offshore oil and gas deposits in Vietnam, expanding production. Rosneft partnered with Indonesia’s state oil firm Pertamina for a refinery project and mulled over giving Pertamina access to upstream projects in Russia. Bilateral diplomacy can push forward bloc-based negotiations.
Vietnam has an agreement with the EAEU, providing Russian manufacturers access to ASEAN’s market and Singapore is considering a similar agreement. Bilateral agreements aside, Russia’s economic interests in India and need for financing were partially behind President Putin’s overtures for an ASEAN trade deal in May.
ASEAN and India’s trade peaked at $67.7 billion in 2014, well short of their $100 billion goal, and declined to $58.7 billion in 2015. For Russia, Singapore is a vital financial hub not under Western and Japanese sanctions, through which billions in investment for India are routed. Russia’s current talks for an EAEU-India trade deal will link its search for international financing and the logistics of trading with Southeast Asia.
Singapore has recently been on the receiving end of retributive actions on behalf of China, makes Russia a more attractive partner. If Russia can sign agreements with ASEAN, it will create new supply chains for Indian trade via the North-South Transport Corridor.
The North-South transport corridor
The North-South Transport Corridor (NSTC) is an ongoing project between Russia, Azerbaijan, Iran, and India to link the Iranian port of Bandar Abbas by rail to Moscow, cutting transport times between Moscow and Mumbai from 45 days through the Suez Canal to roughly 16-20 days.
Agreements reached to finance construction of the final rail segment from the Iranian town of Rasht to the Azeri border town of Astara and the first real cargo haulage along the route was completed on November 2, 2016. India and Russia pledged to use the route, critical to their pursuit of new consumer markets. Bandar Abbas is several hundred kilometers from Singapore than Vladivostok but much closer to Russia’s manufacturing base.
Shipping, by rail to either Vladivostok or the Baltic and then by ship, takes longer and reduces the competitiveness of Russian goods for most ASEAN markets. China’s push for a regional free trade agreement helps give life to Russia’s various bilateral initiatives as well as different potential ways to make further use of the NSTC and deepen trade with Iran and India on the way to ASEAN
The dream of an EAEU-China rade zone
The first round of talks between EAEU and Chinese representatives took place in Moscow in mid-October 2016 to little fanfare. Prime Minister Medvedev met with Chinese counterparts in St. Petersburg on November 7 and November 8, as the US election results came through, to discuss promoting a mega-Eurasian trade zone.
While some level of trade integration is inevitable—Central Asia can only link Europe and Asia if intra-regional trade blossoms—Russia’s manufacturers are significantly less competitive than those in China. Manufacturing accounts for about 15% of Russia’s GDP, subsidized and propped up by hydrocarbon exports and protectionist controls.
The industrial lobby is very powerful and relies heavily on Russia’s energy and defense spending, yet Putin has called on defense firms to diversify into consumer goods as the current military modernization program winds down. Russia’s primary goal is unlocking investment, improving political trust, and tempt international firms into joint ventures to acquire industrial expertise, share costs, and play catch-up with more competitive manufacturers.
China failed to reach a free trade agreement with South Korea and Japan due to territorial disputes and increasingly nationalist domestic politics in the region. Russia faces the same obstacle with Japan and is seeking an EAEU deal with South Korea.
China’s bold move will likely meet with skepticism across the region, but Russia can offer itself as a friendly alternative because it has much less at stake and conducts a largely pragmatic policy based on its perceived interests. Russia will let China do the work to bring countries together to discuss trade while reaping the political benefits and pursuing its own agenda behind symbols of unity with Beijing.