15 nations including China, Indonesia and Vietnam, have united under the largest Asia-Pacific trading bloc in history. Despite historically tenuous political relationships between some member states such as China and Japan, the Regional Comprehensive Economic Partnership (RCEP) aims to promote peace and friendship between 2.2 billion people (30% of global economic output). It aims to do this through a multilateral free trade agreement, a first of its kind to include China. Signed in 2012, the RCEP has improved cross-border investment and introduced new policies for increasingly important areas such as electronic commerce and intellectual property. Investors are excited by the prospect of this trading bloc spurring a recovery from the effects of the global pandemic, which have significantly impacted many of the members, especially the Philippines and Indonesia. However, investors also remain cautious of the potential for China to extend influence over the region with this agreement.
There are numerous benefits to members. Malaysia’s trade minister has claimed that negotiations over the past 8 years used ‘blood, sweat and tears’ showing both the challenge that reaching the trade deal constituted as well as highlighting the importance of this trade deal to its constituents. ‘Rules of Origin’ reducing non-tariff barriers mean that nations will be able to showcase products they produce, ensuring high-quality standards of production, impacting the everyday consumer. This would reduce transaction costs for trading with multiple countries in the wider region, and boost merchandise exports among signatories by around 90 billion USD according to Insurance firm Euler Hermes. According to Japanese bank Mizuho with the RCEP looking to abolish some 92% of traded goods tariffs, this will be critical in deepening supply-chain linkages between member states by opening up approximately 65% of the service sector.
However, unlike the 11 nation Trans-Pacific partnership of 2016 which aided politically protected products, specifically agricultural commodities, the RCEP doesn’t provide this. As such, nations like Japan, will maintain high import duties on their goods (On rice it is 777.7%, on butter is 360%, and on sugar is 328%). Investors speculate that this lack of transparency may become commonplace once tariffs expire in 20 years, leading to more short-term investment opportunities where certainty on trade security is greater.
Importantly, China stands to likely be the greatest beneficiary of this agreement. Joining its first multilateral trade agreement, the country can take advantage of trade with reduced tariffs to around 675 million people in the member states. This deal could also replace much of the current US trade lost or highly tariffed due to the trade war. Li Keqiang, China’s prime minister, revelled in the signing, calling RCEP ‘a victory of multilateralism and free trade’ and, more lyrically, ‘a ray of light and hope amid the clouds’. After the signing of the agreement, China’s factory output has been rising faster than anticipated. The Purchasing Managers’ Index, an index of the prevailing direction of economic trends in the manufacturing and service sectors returned to 50.2 in November, its highest since March, according to China’s National Bureau of statistics. As such China has clearly been preparing for this deal, with the certainty that their exports will increase despite the current global trade limitations from the virus.
There are implications of the RCEP for Emerging markets. The prosperity of China and Japan has been reflected in their recent equity market growth, with both countries gaining close to 1% in growth and Thai markets achieving 3% market capitalization. Smaller regions within the RCEP, including Singapore and Taiwan, have experienced 1-2% growth respectively, in their currency value since October, with the Taiwanese dollar making the largest increase of all currencies on the US dollar. This echoes a positive economic situation. However, Morgan Stanley has suggested that China will outperform other emerging indexes more in 2020 than in 2021, putting into question the overall effectiveness of the RCEP for China, given that 2021 was expected to be the year that China reaps the benefits of the trading pact.
It seems that trade liberalisation will have numerous positive impacts in the region, above all leading to more cost-effective trade between member states, thanks to the absence of tariffs. However, whether this will improve global trade is yet to be discovered. India, which withdrew in fear that China will ‘dump’ cheap exports in the country, ruining domestic markets, is a prime example of the complex implications of this deal. Economic powerhouses like China may use this plurilateral framework to improve their economic positions at the expense of their “trading-partners”.
By Tarun Odedra
Sector Head: Jared Gibson