RCEP: The creation of the world’s largest trade block

November 30, 2020

Asia

Can anything be more important than the vaccine prospects at the moment? Clearly not, as the global economic recovery depends on it… with the exception possibly of the Asian-Pacific region which until now has managed to protect its economic recovery thanks to a rigorous capacity to control the spread of the pandemic. This same region has recently signed an 8-year in the making Regional Comprehensive Economic Partnership (RCEP) covering nearly a third of the global economy.

 

The RCEP trade bloc is made up of 10 ASEAN countries, as well as South Korea, China, Japan, Australia and New Zealand. The notable exclusion of the US, is replaced by the notable inclusion of China. This is the first time the latter has signed a regional multilateral trade pact.

The new trade bloc mainly includes:

  • An immediate elimination of tariffs on imports on approximately 65% of the goods traded within the bloc, which should climb to 90% over 20 years.
  • A newly established common rules-of-origin framework (RoO), which officially defines where a product comes from. 
  • Provisions on intellectual property, telecommunications, financial services, e-commerce and professional services.

 

Why is it important?

To start it is an important political milestone, especially as protectionism spreads around the globe, that global trade be promoted and Asia further develop its regional cohesion. 

Secondly, the RCEP will streamline existing overlapping trade arrangements. The direct economic impact is not expected to be massive. Euler Hermes estimates that the average tariff of ASEAN countries on imports from RCEP partners had already dropped from 4.9% in 2005 to 1.8% to date.

The biggest impact on the RCEP members actually has to do with reducing non-tariff barriers. By harmonising the information requirements and local standards for businesses to be eligible to the preferential terms of the agreement, the RCEP stabilises the environment and reduces the costs of trade. 

As a result, the region will increase regional trade integration and incentivise local companies to look within the trade region for suppliers. Manufacturing foreign direct investment to ASEAN countries from Japan, South Korea and Taiwan has been increasing as labour costs rise in China, a phenomenon that should continue as China’s 5-year investment plenum clearly aims to increase GDP per capita and domestic demand. Finally, as manufacturing investment rises in ASEAN, other Asian countries can diversify away, from what the Brussels think tank Bruegel calls “an excessively China-centric value chain”.

The Peterson Institute projects that the new deal could add 0.2% GDP growth to its member state economies.  However, it may take time before any country sees the benefits, as nine member nations still need to ratify it before it takes effect. The platform could also evolve as members like India, that pulled out last year, could also be reintegrated going ahead.

 

And for the rest of the world?

For the rest of the world the deal represents an increased long-term competitive advantage of the Asia Pacific region. For exporters such as India and the US where exports to these 15 countries represent a strategic importance of over 20% of their exports (see graph), this deal may put them at a trade disadvantage.

Inversely, from an importer perspective, foreign businesses could benefit from lower prices and easier regional supply production facilities.

 

How can it impact investors?

The RCEP is not a game-changer for growth in Asia, but it increases the overall attractiveness of the region. By lowering tariff and non-tariff barriers, the deal represents greater efficiency and long-term growth potential for a region that is already one-step ahead in the current recovery process.

 

% of total exports to RCEP member countries (2019)

201130-MP-Figure1.png

Sources: COMTRADE, ITC Trademap, Indosuez Wealth Management

November 30, 2020

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