Eight years in the making, the RCEP is not a regional game-changer but it does reassert Asia's attractiveness and capacity to control the pandemic. A large wealth manager in the region looks at what the deal means for investors as the first multilateral trade pact signed by China.

Earlier this month, 15 Asian states, including China, signed the Regional Comprehensive Economic Partnership (RCEP). The agreement unites several of the world's largest economies, including China, South Korea, and some uncomfortable bedfellows for China, namely Australia and Japan. The timing is interesting, coming at a time when the Trump administration has turned the trade screws on China, and continues to do so.  

Senior investment officer at Indosuez Wealth Management Benedicte Kukla looks at the implications for regional investors and the rest of the world in creating the world’s largest trade bloc. Such commentary is welcome, where the usual disclaimers apply. Emails to tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com.

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 eight-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 per cent of the goods traded within the bloc, which should climb to 90 per cent over 20 years; 
-- A newly-established common rules-of-origin framework (RoO), which officially defines where a product comes from; and 
-- 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; it allows global trade to be promoted and enables Asia to 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 per cent in 2005 to 1.8 per cent to date.

The biggest impact on the RCEP members involves 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 five-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 per cent 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 such as India, which pulled out last year, consider reintegrating in the future.

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 per cent 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.

Sources: COMTRADE, ITC Trademap, Indosuez Wealth Management

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.